The State of Trade: Is the Supply Chain Crisis Over?
The supply chain crisis was one of the most salient economic events of the pandemic. Looking back, we are left to wonder how we got to this point. In our upcoming State of Trade we ask:
- Was it was a single crisis or multiple things going wrong at once?
- Are we still in the crisis stage or is it behind us?
- Are there any early lessons to be drawn?
Join our panel of experts who will discuss the latest research and answer these questions. Speakers:
- Phil Levy | Chief Economist, Flexport
- Sanne Manders | Chief Strategy Officer, Flexport
- Florian Braun | Head of Ocean, EMEA, Flexport
Webinar Transcript The State of Trade: Is the Supply Chain Crisis Over?
Phil Levy: Hello everyone, and thank you for attending today's webinar, The State of Trade: Is The Supply Chain Crisis Over? We certainly been had it with us for a while, so we want to do a check in and see whether it's time to put this to bed.
Before we begin a few procedural points. At the end of the session will hold a Q & A as time allows, you can ask questions through the Q & A function on the right of your screen. Your questions will only be visible to you and the Flexport team. We will share a copy of the slide deck at the end of the presentation.
And now to make our lawyers happy, I would note that you should keep in mind all information provided in this session is based on the situation at the current time and it may not be customized to your specific business requirements. We always recommend reaching out to a Flexport expert to discuss your particular situation.
All right. I'm Phil Levy, I am, you can see what it would look like you mostly know anyways. I'm Chief Economist here at Flexport and I have with me two excellent guests who have really been in the thick of the supply chain crisis. I am joined by Sanne Manders, our Chief Strategy Officer. Hello Sanne.
Sanne Manders: Good morning.
Phil Levy: And also joining us on the panel from Hamburg, we have Florian Braun, our Head of Ocean in Europe. Florian, good evening.
Florian Braun: Good evening. Good morning to you. Yeah.
Phil Levy: All right. Let's jump right into our topic. The question of the day is, is the supply chain crisis over? We're going to start by looking back over the last two and a half years and think about what defined the crisis. I realize this might be kind of an academic exercise, but I think it actually helps in the sense of if we know what it was and what drove it. That'll make it easier to see are those things behind us or are we just in a lull. Then we're gonna go look at arguments for and against the crisis being over. I need to be clear here because I've been a little careless in my language. When I say things like signs of hope or signs of concern, we're talking very specifically about our stresses on the logistics system, it's important to make that distinction because one of the things that might be a sign of hope for less stress for logistics might be the broader economies are slowing down and demand is slowing down, which is not really a sign of hope for a bunch of other reasons. So hopefully, you'll take that just in the very narrow context. But that's what we'll do, we'll talk about what are we seeing that would lead us to think that it's over? And then we'll go in, we'll address, why might it not be and see where we come out on balance. And then we're going to conclude by seeing whether we've emerged from this recent period any wiser for it? Do we understand the system better? Are we better insulated from shocks like this in the future? Or are we just as vulnerable as we were before and conditions of just?
Before we start talking about all this though, as is our want, we wanna hear what you think? So I'm going to ask you to weigh in on our first poll, and you'll see the sort of poll thing to the right. Our first poll is going to ask you all this up here. Before we even define and I realize we haven't quite defined yet what the crisis is, but we're going to at the moment go with the whole Potter Stewart thing like you know a crisis when you see it.
So the question is, do you think the pandemic supply chain crisis was overblown? It was never really a crisis? Or is it still going on as bad as ever from your perspective, or it's still going on, but it's winding down? It was a problem, but now it's clearly behind us. Or not sure, that's why I tuned in.
So let me ask you to weigh in on where you think we are on this whole thing, and then we will discuss it with our experts. Thank you for those who have voted, we seem to be highly concentrated on one answer at the moment with the idea that spiking crests is still going on, but is starting to wind down. But there's actually a non-trivial group of you saying it's still going on, but it's as bad as ever. And just a couple percent who are with the now it’s behind us.
All right. This is great. Thank you very much for weighing in. This sets us up very nicely for our discussion. I think it seems like the vast bulk, the strong majority are of the view that the supply chain crisis is still going on, but is winding down, which I guess makes it somewhat timely that what we're talking about is over. When do we call an end to this whole thing?
All right. Thank you very much for voting. We'll come back with a couple more polls later on in our broadcast. Let's move on then and talk about you know, what was the supply chain crisis? And I'm going to take the lead mostly because I'm holding the microphone, figuratively speaking, and go with an indicator that we developed at Flexport and as for research team to try and answer that question, because we sort of knew it was a crisis when we're in the middle of it, but how could you measure that?
1 Ocean Timelines Indicator
Across this broadcast we're gonna talk about several ways we might measure it. But I'm just gonna put this one out to start. And I'm going to talk about the graph that's on the left. And this is focusing on how long did it take to move goods around the world? Now, we don't have the whole world represented here, but we have two major trade lanes.
So again, the left chart, which is measured in days, is asking, how long did it take to go from cargo ready date, to destination port departure and we go all the way back to the spring of 2019, which lets us sort of see what it was pre-crisis and therefore compare when we look along the TransPacific Eastbound from Asia to North America, and the Far East Westbound from Asia to Europe. And so TransPacific Eastbound in black or Westbound in blue. So I would put this forward as what it was intended to be a measure of the crisis.
So one of the things what can we take from this graph? First thing is, we need to see just how big delays got that you had. If you were looking at the TransPacific eastbound, you are somewhere in the 45 to 55 day range, there's movement across the year of course, it's a cyclical business, but essentially the 45 to 55 days.
By the time you got to the beginning of this year, you were more in the vicinity of 110 days. And remember, this is not just sailing across the ocean, this is the entire journey. And we saw delays on the entire journey. And so that's a dramatic difference and I'm sure those of you who are working on this all felt this, how easy was it to get stuff quickly if you were trying to work with just in time inventory, how challenging was that?
A couple of notes on this graph, in terms of how we look at this and so it will come back to this when we're sort of talking about signs of hope. So I'm gonna leave off the very tail here. But things that I would note, so first, both TPEB and Far East Westbound, this was not a specifically US problem, this was a global problem. And those are two enormous trade lines. And for some of you better able to put them in perspective than I am. but I know, TPEB is the largest. Hey guys, is far east westbound number two?
Sanne Manders: Pretty much yes.
Phil Levy: Okay, thank you. It’s either there for any ask a friend, parts while I'm doing the data.
So the other thing I would say is that when we look at this one reason why it's hard and what you all were probably right to be cautious in terms of is really over, is you'll see this did not go up as a straight line. There were parts that we had sort of spikes along the way, there were little relaxations, where things got better for a bit.
If you look at the pattern, those periods tended to be right around there late spring, early summer. Things got better and then as you got to late summer, things started getting worse again. We saw that in 2020, we saw that in 2021. And so that kind of left us with a question that we kept doing this. So I think certainly, as we went into early summer this year, you don't want to be getting a sort of false sense of security, because we did see numbers dropped from a peak initially. But, that's one of the challenges is that you saw things swinging.
Alright, so I would put this forward as evidence number one, that we certainly had a crisis and it's a way to characterize this. Before I turn it over to those with a sort of better logistics view, let me move on to the next slide.
2 Relative Personal Consumption Changes
And say a bit, where I thought some of the drivers were on that. This is not shipping times, this is looking at US real personal consumption expenditures. We've adjusted for inflation and this breaks down what US consumers consume into three major categories. The biggest category is services and here you see across the span of the pandemic era that the gray bar was that initial recession. Services dropped and then slowly made their way back.
One of the things I would argue that was a really distinctive part, and perhaps the driving force of the logistics crisis was we have this very unusual and persistent increase in demand for goods, especially durable goods. Durable goods being the ones that are supposed to last for three years or more. That's the blue line here. And what you see is after an initial very sharp drop of about 20%, I have normalized all these things. These aren't actual levels. This is setting the eve of the crisis February 2020 equal to 100. You see about a 20% drop in durables, but by the time you get to about May of 2020 it's recovered, by the time you get to the spring of 2021 we're consuming 35% more durables than we were just 14 or 15 months before. So that's an astonishing increase. And you look to the left of the recession, we never saw swings like this, this is extraordinary. This is many standard deviations outside of the norm. And actually non durable goods would look very impressive as well, if it weren't for the fact that they were sitting next to durables. So that's another thing that I would talk about as a driver and part of how we can see whether, in fact, the crisis is ongoing is it was characterized by really high levels of demand. My last sort of macro overview before I bring in our logistics expertise, as on the next slide.
3 Flexport Trade Activity Forecast
And that I'm going to talk about what happened with trade. So this is US imports and exports, we include the Flexport trade activity forecast there at the end. But what we saw was, that we saw elevated levels of trade volumes. So I would suggest you look at the solid lines here, black is for imports, blue is for exports, the solid lines are the ones that are adjusted for inflation, the dotted ones are not. And so we saw an initial dip, which may be relevant for some of the stuff we're going to talk about, that there was this initial dip at the, at the onset of the crisis. But then very quickly, we restored trade volumes, and especially on US imports, climbed up from there, where we were seeing something like six or seven percent a year, annual growth in volumes. At a time it would have been declining in the lead up to that. So that'll be another characteristic.
So if I were gonna say just before I hand this over, how do we know it was a crisis? Extraordinary delays in terms of moving goods around the world, and so this came from, I would argue a system that was overloaded because we had huge levels, unprecedented levels of consumer demand, which then meant lots of demand to move imports of the US .
Florian, when you think about why was this a crisis? We've had this discussion, I don't think it's kind of obvious that it was a crisis. But you're humoring me a bit on this. What is it, you look at that sort of characterize this, that made it a crisis?
Florian Braun: I would say so if you see the next slide, I think the crisis was characterized by highly volatile capacity.
4 Events Impacting Capacity
If you look at the very left of this on the slide, basically, on the very left, there's a chart that shows you the weekly capacity that has been blanked and percentage over time. And you can see here clearly, in January, in winter 2020, you can see a very strong spike here that more than 30% of the capacity, of the weekly capacity was taken out. This was the first Covid lockdown in China.
Then it's followed by another spike, basically, that's April, May 2020. This was the first lockdown in Europe and in the US. And that basically coincided with a sudden increase in demand that you showed earlier on your slide that people started buying a lot of goods. However, the capacity was taken out at that moment in time. And this volatility is a clear sign of a crisis in shipping.
Then, additionally, you had unforeseen events, like this little ship the Ever Given being stuck in the Suez Canal, which In consequence, a lot of vessels were bunching up around this loose canal, and once it opened again, all those lessons basically been through it roughly at the same time arriving at roughly the same time, at ports and then leading to pretty strong congestion at destination, because too much cargo was arriving at the same time.
This was followed then by several Covid outbreaks in China, which led to a port lockdown. And if forts are locked down, there's major ports in China like Yantian or Ningbo, then basically this also creates a lot of congestion.
So overall, they had the volatile capacity, followed by a spike in demand and then unforeseen events that basically compounded the event from my point of view. So all together made a pretty good crisis.
Sanne Manders: I think it's good to dig a little deeper here. You know, in a steady state situation, right. Normal global trade, let's say in 2019, capacity outstrips demand by a few percentage. Still, utilization levels are pretty high, because otherwise in the asset intensive industry, you can't make money. Then if demand goes up a little bit, and supply has a couple of these like disruptive events, all of a sudden you're getting into this traffic jam on Monday morning.
And only very little needs to happen then to get into a lockdown and have a lot of intuition to slow down. And if a lot of things happen at the same time, you get your scales and it takes a long time to recover from that chaos and little like blips like for instance, hurricane Ian right now in Florida will have local impacts, right? Ports are going to be closed for two days, they will reopen again, then trucking capacity will be under pressure for a couple of weeks, that will be more important into Florida because we have to rebuild part of Florida, etc.
So all these little effects in a system that is already strained will basically create chaos. I think, you know, the consensus in the poll was also we're growing out of it. So we are a little bit more resilient as a world right now against these disruptive events. But if there's a big disruptive event, then we go again, right.
I think the only thing that I see here, and Phil, we've been talking about this a lot, is the sustained high demand for durables, right. Durables is a smaller part of the total total consumer spends, right. But still, it's a sustained high demand, which means we're buying just more bicycles on TVs and couches. And it's something what we have been putting a lot of effort into understands, is driven by a certain category is driven by whatever, but what you actually see is that all categories have a sustained high demand on the durable sides. And this is still puzzling us. It's puzzling economists, you know, is this, there's just a step change, is this going to stay like this? Or is it going to come down at some point in time?
Phil Levy: Yeah I know. That's an excellent point and I think it's also, I would note, this crisis fed into a lot of macroeconomic policy. It fed into what the Fed was doing. And those puzzles that you mentioned, Sanne were key to that, because to the extent that one thought that this was some of the port closures or interruptions, it was a few supply chain problems, that one would get fixed. That was part of the rationale for calling it transitory. Some of the difficulties, some of the things that were leading to inflation. And similarly, with that durables puzzle that you put forward, we normally think you only need so many bicycles and, you know, sofas and appliances. And once you've bought you know, two years worth, then presumably, there's going to be a lull that comes afterwards, when you would have bought next year's refrigerator, but you already bought it. So that's a really tricky thing to watch. And it's a difficult one.
Before we leave this topic on what happened, son, I wanted to ask you, I think for a lot of people, by which I mean, myself and anybody like me, you didn't pay as much attention to supply chain things that, you know, before the pre Covid era, and certainly when it leapt into the news, how different for those who are relative newcomers to this, how different was the pandemic era from, say, the three, four or five years before? In terms of the way things operated? What do you see is the really salient differences?
Sanne Manders: Yeah, so I'm not 80 so I can't look too far back in time, right. But, if you're looking into the recent history, this was, you know, and that word has been abused in every possible way. It was unprecedented, right? We've had hiccups before, you know, port strikes, you know, bigger natural disasters, etc. But something like this, where both demand and supply were impacted at the same time, I haven't seen that much.
Typically, it's either demand or supply right to port strike. It's the supply side, it's not necessarily the demand demand side. Here it's both demand and supply, and as a result, where it normally is pretty balanced, you get a wedge because the demand goes up and supply goes down. And that wedge, it was too big for us to swallow and it all came to a standstill.
Phil Levy: Florian, let me pose a similar question to you. As you looked back, what you talked about sort of closures and blank sailings was there anything else that was sort of, especially what were what were normal times like and how do we know when we've returned to them?
Florian Braun: The big difference was, I think that it affected like globally affect? Usually you have it isolated to a specific country, region or whatever. But this basically really spread across the globe, the global topic. So that's why it was also so intense and it came in consecutive waves. So that was basically possible, what made it so different. So if you have, for example, you have an event, you have a typhoon in Shanghai, it happens all the time. Port is closed for a couple of days and it resumes. But these waves basically and also that it was so widespread was the key difference to me.
Phil Levy: Okay, that's really helpful. All right, we're gonna go to our second poll. We've put in front of you a whole bunch of reasons why this might have been a crisis. We didn't really settle on it when, we haven't even talked about prices yet. We're going to, don't worry.
But in your opinion, you out there who have been so good to join us this morning, the biggest sign that it was a crisis era, and talking about the logistics here is why is it that prices rose extraordinarily high? Was it that it was difficult to make bookings or get goods from factories? Was it that the containers just didn't arrive on time? Or was it that it became really difficult for you to forecast demand? I'm getting more towards sort of the unusual consumer behavior, or we do leave the option of, I still don't think it was a crisis, we want to force you into one of these things.
Okay. Well, thank you all for voting. We're getting actually a very interesting spread here, where it's kind of across these things and a narrow lead for people who want to talk about, well, wait a second, prices just dip behind. I kind of like the way this horse race features on this thing. As we round the bend it is difficult to make bookings. Okay. I'm sorry, I won't go much of that. But we have difficult to make bookings in the lead, but really a fair balance of prices, challenge of actually just getting stuff and then delays coming in beyond that.
All right, thank you, everyone for voting. It's great, it's great to sort of get your view and see people have different experiences and this whole thing look to you, I guess we also take as a little bit of validation for us putting to multiple signs and not just one. So thank you very much for that.
Alright, now we've promised you as I promised you a couple things, I promised you that I promised you some science of hope, a very focused kind of hope, on why might we be at the end of this, as many of you seem to think we were inching towards? What is it that when looked at in the data, or in our experiences and says maybe things are getting back to normal. So let me start this off on the next slide.
5 Ocean Timelines Indicator
We're returning to something you've already seen, and that is this ocean timeliness indicator. And the part I want to focus on as my sort of contribution on hopefulness is, the very tail end, the recent data, and we do this, this is up until a week or so ago, we actually have it posted weekly on our website, you're welcome to check this out.
But what does one see? And actually, what I would point you to here is what you don't see. So remember, I said that we had the shipping, the overall times the thing that you all pointed at as the biggest thing, it was one of the biggest things, the difficulty of doing this is your timing was further down. But the timing, it would dip in the spring. And then you get to say August or September, traditionally start of ocean peak season, and we'd see the times go up again. So we saw that in 2020, we saw that in 2021 and we waited to see that in 2022, and it didn't happen.
So to me, that's the notable thing. And that's why it's actually a bit of a timely thing to discuss, because this is fairly recent that I didn't think we could take a lot of assurance in June and July, that times had fallen a bit because we'd seen that before, we didn't want to get duped again.
But in this case, now we're getting into things that look more like what should have been peak season where we wouldn't have expected this to expand and yet it didn't.
So I would put that forward as a sign of hope. I would also say that you all understand when you say it's winding down, because it is worth noting that here we actually have a metric, and you see that we're sort of given 90 days give or take a bit. On this timing, remember, we talked about 45 days as the norm. So this does not say 45 to 50, maybe it's the pre-Covid norm, we're not back to that. We don't have everything settled. There's still some bouncing around. But it does look like it's easing off a bit. Florian, is that how you read this? And I'm gonna let you then take this on and talk us through prices which have been promising.
Florian Braun: I mean, I will definitely read it like that. And I'm optimistic to say that it will continue to decrease at this point in time with basically upon all the signs we see. But if you put that in relation to prices, they look pretty similar to the chart that you're showing here. I think we have that on the next slide.
Phil Levy: Yeah.
6 Spot Rate Levels Have Seen a Steep Increase During The Last Years and are Normalizing Again
Florian Braun: What we see here, it looks like the Bitcoin chart, but it's not. It's actually the cost of shipping a 40 foot container from China to the US, to the East Coast to the West Coast and into Europe. And similarly it moves basically in parallel to the timeliness indicator. That's why by the time leading indicators are so great. But you can see that there's a spike so to say that in mid 2020. So this has basically been we thought, okay, container prices have reached like $10,000, it can’t go much higher. So this is higher than we've ever seen shipping prices before.
Then there was a slight cooling off period. But then these are the vapes I was talking about. So there was it looked like it's going to cool off and things are going to normalize again. But then another lockdown at another event is sort to set in and this acceleration sort of compounding of events. And then in the end, it led to spot rates that even reached $20,000 at some point in time. And people were still, the shipping on these rates, they have to because as you could see earlier in the poll, people were saying it was really difficult to forecast demand, that’s one thing. But everyone could see yes, it's clearly taking off. And then it was also pretty difficult to get stuff, to order stuff from factories and to get it on to get it on board or get it out of China. So that created so much pressure on the capacity that was there, that price was basically peaked up to $20,000.
Sanne Manders: I just have a few more things about these slides before you continue Florian. Like number one, prices are collapsing, right. And this goes week by week, which is for all of you that are on the call, right to check in with your account manager to make sure that you get the latest prices. Number two, this is very much applicable to air freight as well, we see a very similar trends in air freight. Yes, fuel is pretty expensive. So there's fuel surcharges, but if you're looking at the, let's say, base rates, they're following a very similar pattern.
And I think if you're looking at this slide, you know, we're getting close to 2019 rates, right, especially the west coast, where you're getting to, like around $2,000, but it's right now going to worse. Which is effectively you know, if you correct for the more expensive bunker to low sulfur bunker that this be used these days, it's kinda like the same, right? The East Coast is a little different, still, there's a little bit more congestion there. But following suit, and Florian, maybe you can talk a little bit about Europe and what you're seeing there as well, whether that's where you predict this will go to.
Florian Braun: It follows the same trends, also here we see that prices have reduced by more than 50% compared to the peak in 2021. Ports are a bit more congested still, especially in Hamburg, for example, and we had a couple of strikes, like in the UK, that led to some port congestion. But overall, the situation is tremendously improving and this is why also, rates are still above the pre-pandemic level, but they reduced by more than 50%. And we're approaching to say a level that is, I think slightly above the 2019 figure but that's related to more expensive fuels and other costs that have increased, but not related to the pandemic anymore. That's basically how I see it.
So this look like pretty clear signs that things have changed, and we are no longer whether we're fully back to where we were, it's dramatically different than it was at the worst, which is really not so long ago. Okay, thank you for that. Let me chime in on the next slide.
7 Income, Transfers, and Saving
And was just a little bit more of the drivers of this. And then I'll pass it back to you both. And that is, where did this come from? Why did we have this and have those causes led up because if the causes have led up, then that leads us to think that maybe the recovery is more durable as it were.
So what I'm showing here is what happened, again, in real terms to personal incomes. And we get new data on this tomorrow. But what we see is this dates from the beginning of the pandemic or recession in the US and these are US numbers. But there's a real oddity here, which is that normally when you have a recession, incomes drop, this is the black line on top, incomes don't drop, they go up. They go up, they stay up, and then they spike again. And if you were to put these side by side, you'd note that some of the big spikes you see here and income, they correlate with two things.
One, they correlate very closely with the blue line down below, which is government real government transfers. But we had some very big government programs, physical programs in the US that put money in people's pockets, that also correlate very well with some of the big spikes in consumption that we saw on earlier graphs.
What do we see subsequent to this? Well, if you watch the blue, if you look at the blue line, for example, you don't see any more spikes after a while, so this eases up so you're not getting quite the infusion of cash that may have fueled this.
Now, that doesn't mean there's no buying power left, the green line here shows personal savings, there's a bunch of evidence that particularly for higher income groups, trillions of dollars of extra savings are still out there. So it's not that consumption necessarily decreased. We'll argue about that in a minute or two. But some of the fuel for all of this has led up.
And on the next slide, I'll give the other part of this, which I don't think people have really failed to notice.
8 The Fed's Hole to Dig Out Of
This is what's been happening with monetary policy. Here, I show it for the US in a recent newsletter, I think I showed it for all the central banks. To our newsletter, there's links on the website, where we give you weekly doses of this kind of thing. It's free.
But what you see here with it, let's focus at the black line for a moment, that we have fiscal policy, stimulating things, we also have very stimulative monetary policy. The black line is the policy rate of the US Fed shortly after the onset of the pandemic crisis in early 2020. It drops down to effectively zero. But now we've seen the Fed start to hike and this graph doesn't even include the most recent hike, where it went up over three percent.
The blue line below basically adjusts that for inflation, it takes the most conservative measure of inflation and subtracts it and what you see is that we had very stimulative negative interest rates, that actually sends a little bit of a caution because we're coming off that floor. But you see, it's still negative interest rates, which was still be thought of as stimulative, and it's still a very large fed balance sheet.
But the general direction, the direction that we're starting to move in, is definitely monetary tightening. And you've had, you know, some words to that effect by the ECB, doing the same thing as well. So, again, some of the stuff that takes a little bit of the fuel off the fire.
All right, let's go to the next slide and back to our sort of perspective, Florian, you want to start us off on this one? What are the other signs of hope?
Florian Braun: So if you ask me, and what is the situation in the port in Ningbo or any other port in the world? So it's pretty hard to understand if you don't have metrics from your home office. If you're trying to judge. Hey, is it going well, or is it not going well in Ningbo? You can't do that without metrics. So this is why they have a big set of metrics that tells us what's happening in the different boards.
And the good news are, there are signs of hope. So the key metrics are improving throughout the board. If you look at for example, cargo ready date to extra time of departure. That means so how long does it take to get my stuff from the factory onto a vessel. So this is down to 11 to 13 days at the moment, which is basically pre-pandemic levels, and it's very comparative. Or cargo roll ratios are down to less than one percent of the cargo gets rolled. During the pandemic, we were looking at five to seven percent or even more in some weeks of cargo getting board.
The on time performance, similar to your graph you showed earlier, but this is not related to a port report, like 37% of all vessels are on time. That doesn't sound a lot. But if you come from 10%, there's a clear improvement that ships are on time today. And the very good news are, if you look at specific strings, there's strings that are consistently on time, but not once. So they're consistently over weeks, every time this spring is on time, this is very very good news.
Where we still need improvements is specifically in Europe is the dwell time at the port of destination currently takes about six days to get a container out of the port. Pre-pandemic level would be two days, one and a half to do this, about 20% of our customers are able to do that within one and a half days today.
The other customers basically if you talk to them, the key topic for them is the warehouses approach. So I'm not able to pick up my loaded container from the port because I have no place to put my stuff. So this is basically a bit of a slight concern, I would say that the warehouses are full, but overall, the metric is pointing into the right direction.
Sanne Manders: Then yeah, let me jump in for the performance metrics are a few more for the US right? I would say, you know, there's a lot of improvements there as well. The pain points are rail into the Midwest, right. There's a lot of containers dwelling currently in the old waterforce waiting to be dispatched to inland to Chicago, mostly. So there's quite a bit of congestion in Chicago, there are some other places where on the east coast where it's still a little a little harder to get containers out of the port.
I think what you hear here as well is the warehouse situation, right? We did a data analysis the other day on the primary drivers of detention, and it came back at 67% of detention was driven by the fact that the warehouse was not able to unload the container in time. And therefore we're getting into container detention charges.
So warehouses are really full. Inventory levels are high and that is still driving some of the congestion in the US as well.
Florian Braun: But overall, I think the situation is improving and this looks extremely good news for businesses around the world. At least the supply chain is, one aspect of the story is working again. Yeah.
Sanne Manders: Yeah and I think what you should hear also note is that, if demand is starting to slow down a little bit, which we're, you know, which we don't see much yet but the leading indicators are there. And imports are slowing down a little bit, it's just a matter of time until you, you know, the warehouses will start selling out their excess inventory. And then we'll get into a steady state again, but that periods between now where there's too much inventory to where there's a balanced inventory, you know, that's actually a great period for the system at large to work through their backlog and soulful congestion.
So if you look at it from that perspective, they're like alright, the next three months, we're actually cleaning out a lot here, and then we're getting back into more steady state, we don't know what the steady state look like, because it could be a recession steady state, we don't know. But at least it looks like you know, there's a moment right now ahead of us, where we can clean things up as an industry at large and then we're going back to a steady state that we are more familiar with pre-pandemic.
Phil Levy: Yeah, that's a good point. And I like particularly the point you made about how it gets back to what Florian said earlier. There's a whole string of things along the supply chain where various parts can go wrong. We may be seeing certain parts working better now. There's still to be worked out some of the stuff as you said, like inland rail or warehousing.
It makes sense also that as some parts get unblocked, then you get a surge of goods that get onto another part that you need to deal with. Did you guys want to do more on this side? Are we going to move on to on to some signs of concern that we've already started to blend the two of it, but anything else here?
All right, let's move on. Let's take our next slide, and we want to talk about some of the signs of concern and we've touched on them a bit. And so some of this, you'll see either familiar slides or some data backing up what we've talked about. So let's go to the next slide.
9 Relative Personal Consumption Changes
And with this one, this is what you've seen before. By the way, this gives me a chance to answer one of the questions that you all submitted. Sorry, I should have clarified earlier.
When I say durable, good, what do I mean? We give some examples, but technically, these are consumer goods, these are all consumption expenditures. A durable good is something that is intended to last for three years or more, that's the definition. That's a very particular categories that goes under that, whereas the non-durables are things like say, groceries or some apparel or things that are not supposed to last quite as long.
Sanne Manders: What was your question from this slide, right, it's not that because the blue line is at 120, we're importing as a nation, you know, 20% more goods right? Because the durables are a smaller part of the total spent. Phil, how much is it?
Phil Levy: Yeah, that's a great point. And so we get the benefit of, you know, indexing everything, because we can be percentages off the graph, but we lose the relative scale. And so that's an excellent point Sanne. If you want the relative scale of where these were, pre-pandemic, services are somewhere in the 69% range, and then of the remainder, two thirds are non durables, and then the remainder is durables. So it's something more like 10%. So you're quite right, that it sort of looms very large in this graph because of its relative change. But that's not the whole economy.
Sanne Manders: Right. So, if you keep putting it in context. So durables went basically from 10 to 12% right? That's what if you put it into the relative context, or are consuming, we're still consuming 20% more durables, but it's effectively only 2% of the total spent.
Phil Levy: Yep, that's exactly right. But it's also the case, as we've discussed, that you can have a system where it functions fine if it's at, you know, say 85% of capacity. But if you get to 99% of capacity, it's gridlock. So you don't necessarily need too much before you start seeing strains. And I think one way you guys can correct me on this, if you see it differently, but we had a supply chain system that was very much built around cyclical peaks where there would be a part of the year that was most intense, and an ability sort of before and afters kind of work off whatever you needed to, and we've had some descriptions of the pandemic extreme as the never ending peak season. That you didn't get those periods at the margins to work things off because you were, we saw a little bit of the lows in the OTI, but not as much.
Alright, the thing that I wanted to point out here, though in Sanne’s point is very well taken about the overall magnitudes, but what you see is we have not had, were down for durables consumption and for non-durables. Most was in durables or minute, we're down from the peak, we're down from the spring of ‘21, but we're not actually back to where we were, this is we're not even and certainly not to a compensating. Well, that comes after. So if this were sort of a reset to normal, it would look the mirror image of services where you finally get back to, you know, 100% of where you were. We're still over 120% with durables.
With non durables, we're not even that far off the peak, it's trending down ever so slightly, but it still remains high. So I would argue that this is where we may have some disagreements in terms of what we've seen so far, and what's coming next.
But in the data so far, again, to be updated tomorrow have not seen big consumption drop offs. And on the next slide, I'll show sort of what we have forecasted sort of pending this new data.
10 Flexport Post-Covid Indicator
Which is, this is our post Covid indicator, not directly comparable to what you just saw before, in the sense that this is a ratio. This is the goods to services ratio. So this can go down just because services go up and they have been going up.
But here we see the black line that was our overall PCI post Covid indicator, which is to give the overall goods to services ratio, it's actually hanging around in the end part is our forecast that we issued earlier in the month. It's, you know, around 80%, 80-85%, that's not this was supposed to be zero was a return to normal. We broke this down into the two components with durables and non durables.
For non durables, yeah, actually, that does look pretty much like what we had expected to see at some point for the whole thing, which is, you trend the back down to zero and we restore, these are long standing ratios. Durables are not cooperating. They are actually if anything looks like they're going up a bit, it will see what that proves out, this is a forecast once you get into the gray zone. But this would be a sign of concern, to the extent that it says, there's still a lot of demand out there in this stuff to deal with. So whether we're going to see a full sort of return to pre Covid norms is an open question. All right, let's go to the next slide.
11 We Are Seeing Higher Inventories With Slower Turnover
Sanne, maybe you want to take this, I let you two fight over it. But this is where we're talking about sort of the buildup in inventories and how we think about it.
Sanne Manders: Yeah, and so what you see here on the slide is the absolute number of the absolute amount of inventory. So that's the blue line. And then you'll also see the inventories over sales ratio, which is the green line. And Phil, just asking one question, is this excluding or including automotive? Oh, this is excluding automotive right? No motor.
That's an important detail here is if you make this graph including automotive, it looks actually pretty different and this could be misleading, right, we all know that the dealer loads are still pretty empty and it's hard to find a new car right now. That's also to a large extent is driven by the chip shortage issue, which is another supply demand problem in the world. So but this is the retail non-motor inventories. And what you see there is that the forecasted inventories to sales ratio go back to kind of like normal pre-pandemic, right? It's like around 1.2, that's where it's trending towards.
This still assumes that our sales is pretty high. Right? You know, what you've just seen on the previous slides, we're still buying quite a bit of stuff. So with the inflation, a looming recession, etc, if that starts to trend down, then all of a sudden, we do have a lot of inventory. So there's actually no excess inventory right now. Because it's actually our inventory to sales ratios are back to pre-pandemic. But what we do know there is a lot of inventory and that's actually reconciles with the fact that our customers all have full warehouses, they're unable to receive goods, etc.
Part of that is a little bit of a buildup of pre Christmas and Thanksgiving and Christmas, making sure that you have goods in store that you can sell. Part of it is also because we probably anticipated even higher sales and maybe imported a little bit extra, and therefore we have more inventories right now.
So there's a lot of inventory in the country. This is not only here in the US, this is very similar in Europe. There is some difference per category, but overall I say retails, non-motor, we are back to pre-pandemic levels in terms of let's say inventory over sales with a very high inventory.
Phil Levy: I completely agree with you Sanne, that this is an important indicator. We've discussed this quite a bit. The part that gives me a little bit of pause is, you and clearly the numbers prove you right about getting back to where we were before. But is that the new target? And that's where we have a degree of uncertainty? Because I think it is if everybody says, hey, look, I still want to have that same relationship between inventory and sales. If I was doing just in time before I wanted to just in time again, or are we in a new world with somebody who says, I've gotten burned by that? I want to do just in case inventory, I might desirable, my target margin is higher. You're quite right, I think it you know, there's limits to what one can do given sort of warehouse space and the like, but to the extent that this shows is this a, so do we have as a sign of hope, or a sign of concern? Depends a little bit on where you think they're going next? Are you confident that you know, the return to normal that we're going to end up in roughly the same range we were before?
Sanne Manders: I am, I am not confident about that. There's also, if you're looking at an economy, which is mostly driven or which is more and more driven by ecommerce, which is two day or one day delivery, you might likely need a little bit more inventory than in a more traditional economy, simply because you have to store more products closer to the consumer to meet that two day delivery window. So it might actually be that we're going to end up a little higher and that this is what we're seeing that this green line keeps on trending up and we'll end up at an inventory to sales ratio of s above pre pandemic.
That said, if you're looking at ecommerce trends, over a long period of time. I do recall when we were just in the pandemic, five months into it, that people were saying ecommerce accelerated it's five years in five months.
If you're looking over the long term trends right now, it's actually trending back to the long term trends as a percentage of total retail, instead of that massive acceleration that people thought that would stick.
So people are going back to stores. And you know, because it's also an activity that people like to do. So we don't know where this is going to end up. I think for now, I think the big takeaways are, you know, we have, you know, in absolute numbers, a lot of inventory that totally reconciles with, you know, warehouse utilization and the fact that our customers are having issues receiving goods.
And that also means if demand starts trending down, we might have too much inventory. If demand stays this high, we are actually pretty well balanced if you compare it to the past.
Phil Levy: Yeah, good summary of the situation. Alright, let's move on and take our next slide.
12 Actual Space and Demand Are Stabilizing For The First Time in 2 Years as Consumption Slow
And Florian, maybe you can talk us through this on where are we with space and demand.
Florian Braun: So what we see is basically, the plant space, I would call that the nominal space, the actual capacity that's available, how many vessels are deployed, and then you've got the actual space, which is the nominal capacity available to you on a weekly basis. So there is still a gap between those two.
So the nominal capacity is higher than the actual capacity, and that shows you that there's still a traffic jam, there's still this Monday morning traffic jam that we're talking about, that a lot of capacity is sitting somewhere idle. But right now, we see that total volume in the market depending not necessarily consumer spend, but the overall volume base is going below the actual space.
So at the moment, there's more days than demand available and this is why rates have dropped significantly. So this is in very short, I would summarize it like that.
Phil Levy: Alright, that sounds good. Let's wrap up this section on the next slide. ### 13 Signs of Concern
They were kind of blending a bit of sort of concerns about the broader economy, and concerns about logistics, but who wants to take us through this?
Sanne Manders: Yeah, I would love to make one more point about the previous slide, though. And if we can switch back to the previous slide. What's important to understand also is that, you know, now demands so the blue line is below the red line which is the actual space, it doesn't mean that the actual space will remain this high, right? Carriers do have a lot of tools enhanced to reduce the actual space, right? And one of them is actually blank sailings. We see quite a bit of that, right. And there's a lot of blanking being announced.
Two, a lot of vessels have been pulled from, let's say secondary or tertiary strings that were less than Important for carriers and put on the main traits to make sure that they could fulfill the demands. Those vessels might actually migrate back to those secondary and tertiary traits. And as a result, the main traits will have less capacity and demand and supply will balance more.
So what you should expect is that carriers will work hard to bring that red line much more in line with the blue, and that there's only a small discrepancy there to make sure that you know, their utilization stays high. Because if they make money with full ships, and so they want to have those lines as close as possible together.
Florian Braun: As a sign of concern, but the positive aspect is, I think a lot of those vessels are older than 20 years and I think a fair share of vessels will be scrapped. And also, there's new environmental regulations coming up next year. So a lot of those vessels will not comply with the overall number of vessels will go down because they're gonna get scrapped. This line is going to move on the same level.
Phil Levy: Interesting. All right, we have a lot we could talk about here and we're running a little bit behind on time. But let's go to any last thoughts on signs of concern that when he wants to chip in on it.
Sanne Manders: I would say the thing to watch out for on the demand and supply side is also the IMO regulation that will come in 2023. Which will lead to effectively slower steaming, for the carriers, environmental regulation and the only way to comply with that is either very modern vessels or slowing them down. There's a lot of debate whether this is good for the world because essentially you need more vessels.
But the reality will be that in the short period of time, that will take out some capacity. So that will lead to some kind of supply shock. We still don't know how big that supply shock is. But it's going to be a couple of percent.
So it's definitely going to, you know, help, you know, the supply side of the industry to carriers to right size to capacity. The other two, you know, I think Phil, you have a much better perspective on inflation.
Phil Levy: We've clearly got a lot here and we can discuss some of this. The point being is going to be a rocky environment and we'll see how this all works. There's a lot we can cover and especially if we take kinds of concern more broadly. Yes, all of these things inflation, energy demand and supply are sort of working out there. So if you take end of crisis as we get to stable calm times, these are definitely signs of concern that at least some kind of crisis atmosphere might persist. But it could be quite different than it might have very different freight prices. Alright, let's move
Sanne Manders: I’d like to call out on the supply side that I forgot to mention is if China reopens their borders, this will also have a pretty big impact on the supply side of the air freight industry. Currently, everything that's flying out of China is basically on freighters. A lot of freighters have been repositioned to that trait. If the bellies are back because passengers are flying in and out of China, that will actually create quite a bit of a supply shock there. Reducing that older freighters that have been, you know, there's a lot of old seven.
Phil Levy: A positive supply shock with supply expanding and prices going, right?
Sanne Manders: Exactly, exactly, exactly. And a positive supply shock there. That will lead to a lot of repositioning of the older freighters and there will be also quite a few that will go back to the desert because they have been revived for the last couple of years. But they will go to the desert.
Phil Levy: Yeah, good point. All right, let's do our last poll. We want to get one last chance for all of you to chime in. And so we're going to ask you to look ahead a little bit before we conclude and say looking ahead to next year, what do you see? Do you see that the crisis goes on and you've already budgeted for higher costs, you're expecting this. My CFO is pushing us to reduce shipping costs, maybe a universal. But we're more focused on resiliency now, so costs are less important. Or when we're worried about demand recession interest rates, or we haven't really budgeted for next year, we're just shipping on the spot market.
So you know, where are you all as you're sort of thinking ahead to this with these choices that as you make plans all right, so while it's like more worried about demand recession, interest rates, good, we know what future programs should be on. But Sanne, does this surprise you the responses that we're getting?
Sanne Manders: No.
Phil Levy: But things are moving around a bit. But, number one is demand recession, the other CFO pushin to reduce shipping cost.
Sanne Manders: Yeah I know. So I was expecting this very much. Also, I was very much expecting the comment around my CFO, you know. There's been a lot of talking in the last year, like, hey, shippers have fundamentally changed their view on shipping, and only we'll focus on resiliency and costs are less important. I always call that BS. Because in the end, the CFO is looking at these line items and says, like, hey, what can we do better? Right?
So, you know, this is just, you know, you know, Finance 101, and the CFO is doing their job again, or is able to do their job again, on the cost items where in the last two years say like, hey, it's more important to sell than me pushing on the cost here. So very much expected that this would be the outcome of his poll.
Phil Levy: All right, well, thank you all for sharing your thoughts. We very much appreciate it. And now we're going to get to our concluding section, we've just got a few minutes left. Lots of stuff to talk about with all this. But Sanne, maybe you can take us through on the next slide.
14 What Did We Learn?
What do we learn from all of this stuff? Did we come any wiser on the other end?
Sanne Manders: You know, I think we all got a little hurt and therefore probably a little wiser. So we do realize that we got to build some kind of resiliency, right? Whether that is, you know, sourcing from multiple locations, you know, making sure that you have you know, maybe a little bit more inventory.
The international supply chain, which we assumed was something that would just work, didn't work, right. And, you know, I think one of the things that everyone has learned is like, I gotta have real time visibility. You know, everything at my fingertips so that I can actually make quicker decisions. Because everyone in the world is looking at the same problem. So if I can out compete them on a quicker decision, I have a better chance to have my goods in store and sell.
I also think like, you know, what I just said, like, yes, resiliency is important, but it's, you know, it needs to be affordable. You can't, you can't just have way too much inventory, or you can't have, you know, a supply chain that is fully fulfilled by air, where your products don't, your margins if your products don't support that. So, the CFO points very much, you know, we'll go back to, in that sense to the old world, where we're, you know, looking at cost as well.
And I think, you know, partnerships, it's hard, it's a difficult world, and it works in this context. Because, you know, we also know that some partnerships were broken, right, where people just chose that for their own P&L or their own company, rather than a true long term partnership.
Some of that was actually, you know, people trying to survive, you know, suppliers raising their prices, because their inputs got much more expensive. You know, it's, you know, asset owners trying to, you know, make up for the losses they had in the recent past, etc.
So you have to be careful what partnership means in this world, but what we do know is that it goes beyond only price negotiations. It's about like, hey, how can we really help each other, you know, being more resilient and have better data and work together.
You know, problems, work together on solving problems. That's one of the topics that I've been talking about in past webinars a lot is like, you know, the OODA loop is like, how can you actually improve your decision making by having better information and therefore you're going quicker to orient and decide, and act.
Phil Levy: Yeah, that's a good place to end it. We are not out of interesting things to talk about, we are out of time. So Sanne, Florian, thank you both very much for sharing your insights on all of this.
To all of you out there, thank you very much for attending today's session. We will email out the slides and a link to this recording tomorrow morning. There will also be a short feedback survey presented when you log off this call, please take a moment to share your thoughts and feedback with the team so we can continue to curate excellent content for you. Thank you again, have a great day.
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