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Q3'21 Supply Chain Outlook: The fallout from underinvestment in logistics

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Q3'21 Supply Chain Outlook: The fallout from underinvestment in logistics

This report is one of three looking at the prospects for supply chains in the third quarter of 2021 and beyond. In this note, we consider the outlook for the logistics sector resulting from underinvestment in physical infrastructure as well as the prospects for the peak shipping season. The others analyze the impact of short-termism in corporate planning, the prospects for medical supply chains and the results of geopolitical rivalry in trade policy in the U.S., Europe and globally, and can be found here.

Supply chains have had to deal with the stress of elevated demand against an essentially fixed supply of logistics services during the first half of 2021. The latter have, if anything, been reduced at the global level as a result of a series of congestion events, including the blocking of the Suez Canal — discussed in Panjiva's research of March 30 — and restricted operations at the southern Chinese port of Yantian in May and June.

The forthcoming peak season, with shipments typically peaking for deliveries in October and November into North American and Western European markets for their holiday shopping periods, comes as congestion levels remain high. Indeed, analysis shows that container shipping schedule reliability is at a record low, Offshore Energy reports.

Many ports have continued to operate at peak levels during what is normally the off-peak season. Panjiva's data shows average daily imports to U.S. seaports reached 93,300 twenty-foot equivalent units per day. That was 4.0% lower than the level in May and the lowest since February. Nonetheless, it was still close to the 2020 peak-season record of 94,100 TEUs per day, set in October.

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If container shipping rates are to return to normal and supply chains are to operate at sustainable levels, it is critical that existing backlogs at ports are cleared before the next peak-season wave. Traffic handled through the ports of Los Angeles and Long Beach, Calif., in June was equivalent to 116% of the average set in 2019 (as a pre-pandemic baseline), which was markedly down from the 136% level set in May. Further north, meanwhile, handling at Seattle and Tacoma, Wash., was 109% of 2019 levels but down from recent peaks.

While most of the press attention has been focused on queues of ships outside Los Angeles and Long Beach, East Coast activity in June reached 137% of 2019 levels, although there have been some improvements to capacity since then. There may also be challenges emerging in Houston, which set a new record of 130% of 2019 levels in June. And it could be more severe than that, given that the figures include only landed cargo, with vessels queued offshore also needing to be offloaded.

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There are no quick fixes to the availability of capacity for shipping that will make a meaningful difference in the remainder of 2021. Investment in new vessels, particularly large-scale container ships, has rapidly scaled up in the first half of the year. Further spending is likely in the second half, particularly once long-term rules for greenhouse gas emissions become clearer.

The new vessels will only start to be delivered in earnest from 2023 however, raising the prospect of another boom-and-bust cycle, should demand levels start to revert and older vessels are not removed. Panjiva's analysis of China Association of the National Shipbuilding Industry, or CANSI, data shows that orders for new shipping vessels received by Chinese shipyards in the first five months of 2021 already exceeded the annual totals for 2020 and 2019, returning the order book to the highest since April 2019.

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In the meantime, logistics firms are looking to increase their efficiency via the intertwined processes of increased integration of services and digitization. ZIM Integrated Shipping Services Ltd.'s extended joint venture with Alibaba Group Holding Ltd., which has echoes of A.P. Møller - Mærsk A/S's internal vertical integration and CMA CGM SA's prior purchase of Ceva Logistics AG. Similarly, a data-sharing agreement between Cosco Shipping Holdings Co. Ltd. and Tesla Inc. in Shanghai, reported by Nikkei Asia, may find new ways to improve efficiency in logistics during the second half of 2021.

Continued horizontal integration in the fragmented freight forwarding industry — exemplified by DSV Panalpina A/S's purchase of Agility Global Integrated Logistics and Kuehne + Nagel International AG's acquisition of Apex Logistics International (CN) Ltd. — has proven sporadic. New entrants are also working more closely together without exchanging ownership stakes: for example, the integration of services between Flexport Inc. and Convoy Inc. offering improved integration between the international and domestic legs of supply chains.

Following three years of underinvestment in logistics both by incumbent players and new entrants, there has been a flood of private capital and capital raises recently. Examples include a $200 million investment in Shipbob Inc. led by Bain Capital Venture Partners LLC at an implied $1.0 billion valuation, FreightWaves reports, and Forto GmbH receiving $240 million of funding led by SoftBank Corp., at a $1.2 billion valuation, according to TechCrunch.

Looking more broadly, capital raising in the transportation sector climbed 172.4% year over year in the first quarter, followed by a 79.1% rise in the second quarter through June 24, Panjiva's analysis of S&P Global Market Intelligence data shows. Notably, the average transaction size has increased to $67 million in the 12 months to June 24, from just $37 million in 2018. In part, that reflects increased access to capital markets including the IPO of ZIM Shipping and the share placement by Orient Overseas (International) Ltd.

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The fallout from poor investment in cybersecurity

Supply chains have had to deal with a wave of relatively novel exogenous shocks such as the COVID-19 pandemic, the U.S.-China trade war and logistics congestion events. On top of that, though, has been the background noise of ongoing cyberattacks, which have ranged from minor email-related events to full-scale, company-jeopardizing ransomware events.

Many of the events in the first half of 2021 brought home the vulnerability of many supply chains, including those of energy and agriculture. The attack against Colonial Pipeline Co. in May led to disruptions to ancillary functions, including logistics and billing, Reuters reports.

The attack on Colonial's refined products pipeline also likely required a rapid build-up in imports. Panjiva's data for U.S. seaborne imports of refined oil products showed imports in May climbed 87.4% year over year and 53.4% compared with 2019 to reach the highest since July 7, 2007. Imports were led by a surge in shipments linked to Valero Energy Corp., Exxon Mobil Corp. and Irving Oil Ltd., including a spike in deliveries to Newark, N.J., as well as to Houston.

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Another newsworthy breach was the hack of Brazil-headquartered meatpacker JBS SA, which disrupted operations across several markets, including exports from the U.S., as discussed in Panjiva research of June 3.

While there have been several high-visibility attacks — including the July 2 attack against Kaseya Ltd., reported by NPR — the overall prevalence of breaches may be declining. Panjiva's analysis of BitSight data shows that total incidents fell 45.1% in the first half of 2021 compared with a year earlier.

That was led by a 61.2% drop in incidents among healthcare firms and organizations as well as a 47.6% drop in attacks on financial firms. By contrast, the logistics industry has become more prone to attacks, with a 25.0% increase including a spike in the first quarter to 2.4 times the level seen in 2019.

This should be a wake-up call for supply chain operators: even if their own and supplier's technology are safe, their logistics provider could still face challenges, as indeed many of the shipping firms have over the past three years.

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Christopher Rogers is a senior researcher at Panjiva, which is a business line of S&P Global Market Intelligence, a division of S&P Global Inc. This content does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence. Links are current at the time of publication. S&P Global Market Intelligence is not responsible if those links are unavailable later.