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Supply chain inflation proves persistent with high freight, commodity costs

Cons. Discr. - Apparel 425 Cons. Discr. - Durables 422 Cons. Discr. - Retailing 379 Consumer Staples 695 Corp - Forwarders 308 Corp - Ports 835 Corp - Shipping 895 Energy - Crude Oil 287 Global 1299 Health Care 314 Info Tech - Tech Hardware 694 Materials - Metals/Mining 683 Materials - Packaging 38 Metals - Aluminum 216 Metals - Copper 63 Metals - Steel 467 Tariffs 1728 Theme - Rates 211

Global supply chains have faced a mixture of rising costs and continued congestion in logistics networks. This report updates our earlier work considering the sources of the challenges faced in light of companies’ Q4’20 earnings reports and conference calls held during Q1’21.

Shipping rates still high, short term relief possible

Global container shipping rates started to surge in June 2020 as economies started to reopen after the initial round of pandemic-related lockdowns. Careful capacity management by the container shipping firms compared to a jump in demand for stay-at-home consumer goods resulted in rates that increased to a peak of $4,570 per FEU (forty-foot equivalent unit) on March 5 compared to $1,040 per FEU on June 1 according S&P Global Platts data. That excludes a wide range of surcharges as discussed in Panjiva’s research of March 2.

There are some signs of a relief of pressure on rates with China-outbound rates measured by the Shanghai Shipping Exchange having dipped by 4.9% on March 5 versus Feb. 19, though this likely reflects the normal seasonal downturn after the lunar new year rather than being a sign of an overall relief in fundamentals.

Seasonal slowdown in rates has started

Chart shows China outbound container shipping rates, rebased to 100 on week 49 of prior year. Source: Panjiva

No sign of demand declining

The key drivers of demand, including elevated consumer durables demand and a supporting industrial recovery, are still very much in place. The passage of the U.S. stimulus package may offset the reopening of leisure activities and keep the demand side of the equation in place.

As of February, U.S. seaborne imports climbed 29.3% higher year over year and by 20.1% compared to the same period of 2019, Panjiva’s data shows. When combining January and February to offset the timing of the lunar new year the increase was 17.9% with the growth versus the same period of 2019 being 13.9%.

Imports of consumer discretionary products climbed by 38.2% year over year in January and February combined and by 22.7% versus the same period of 2019. Imports of industrial products, including capital goods and components, rose by 19.2% year over year and by 15.2% compared to 2019.

Shipping growth in Q1’21 more than just a seasonal effect

Chart segments U.S. seaborne imports by industry. Source: Panjiva

Container shipping costs rise by more than $3 billion per month

The mixture of higher costs per container shipped and increased number of containers being transported has added billions of dollars to supply chain operating costs. In February 2021 the container shipping costs for U.S. seaborne imports can be estimated at $5.19 billion compared to $1.95 billion a year earlier based on S&P Global Platts rates route-specific rates and U.S. seaborne imports of containerized freight from Panjiva’s data in Asia-U.S. west coast, Asia-U.S. east coast, Europe-to-U.S. east coast and other routes.

That followed costs of $6.37 billion in January compared to $2.46 billion a year earlier. That brought the average monthly year over year increase in costs to $3.33 billion in the October 2020 to February 2021 period.

U.S. inbound shipping costs increased by $3.3B per month in Q4’20 and Q1’21

Chart shows cost of containerized freight shipping to the U.S. Calculations include S&P Global Platts shipping rate data and Panjiva figures for U.S. seaborne imports by routing. Source: Panjiva

Commodity rates picked up too

Freight costs are not the only expanding expense that supply chains have faced in 2021. Panjiva’s analysis of S&P CapitalIQ data shows a basket of seven energy, metals and industrial commodities have increased by 21.7% year to date and by 23.5% in Q1’21 compared to Q4’20 on average. The fastest rate of growth has been in steel supplies which have increased by 36.0% year to date, followed by a 30.3% rise in crude oil prices and a 26.8% rise in lumber. 

While some of the increase may be due to temporary factors – polyethylene’s 20.9% rise may be down to recent winter storms in Texas – the nature of commodity price hedging by many corporates could lock in higher costs for an extended period.

Most supply chain input costs have seen marked increases in Q1’21

Chart compares change in basic commodity prices. Calculations based on S&P CapitalIQ data. Source: Panjiva

Corporations, investors increasingly preoccupied with freight and inflation

Panjiva’s analysis of company earnings call transcripts for key words and phrases can provide a guide to the preoccupations of senior management teams. The proportion of calls held in January and February mentioning “freight” and “inflation” increased markedly. 

In aggregate 25.4% of calls mentioned “freight” in January/February compared to 18.0% in Q4. Similarly, 21.9% of calls included mentions of “inflation” in January / February compared to 21.9% in Q4. Both likely reflect a growing focus by investors, in Q&A, and management during scripted remarks with the rising costs identified above.

There was also a growing number of mentions of “logistics” (37.0% of calls from 33.2% in Q4) and “supply chain” (50.1% from 46.7%) suggesting concerns regarding the operation of supply chains as well as the costs of them.

Discussions of “tariffs” in the meantime were unchanged (13.4% of calls versus 13.0%).. The lower level of mentions versus other topic likely reflects firms having already implemented strategies to deal with the Trump administration tariffs. The potential for reduced tariffs under the Biden administration has yet to surface.

Growing preoccupation with logistics operations, costs

Chart segments mentions of keywords in company earnings calls on a three month average basis. Source: Panjiva

At a sector level the fastest rate of pickup in mentions of “freight” have occurred in Leisure Products (ranging from toys to fitness equipment and including firms such as Callaway) with 66.7% of calls mentioning the phrase in January and February compared to 23.5% in Q4’20. That was followed by Industrial Distributors which increased to 62.5% from 22.2%. 

The second highest number of mentions in January and February was in the Specialty Retail sector with 63.0% of firms discussing the topic of freight, up from 41.9% in Q4’20. There have been concerns expressed across the retail industry no matter the consumer vector with both Qurate (home retail) and Urban Outfitters (store and e-commerce) discussing rising freight costs.

A pickup in mentions of freight in Technology Hardware (57.1% from 26.3%) has come at the same time as an emergent shortage of specialty semiconductors which has started to afflict consumer electronics firms as well as automobile manufacturers. Perhaps unsurprisingly there was also a pickup in mentions of freight (40.0% from 17.6%) in the Transportation Infrastructure space given the impact on costs of port congestion.

Products needed to tackle the pandemic have run into the same challenges as other sectors resulting in increased discussions of freight in pharmaceuticals (34.5% from 12.8%) as vaccine rollouts start and in paper/forest products (41.2% from 22.2%) as products as basic as tissues continue to face distribution challenges.

Discussions of freight rising in diverse set of sectors

Chart segments proportion of company conference calls mentioning “freight” by industry(GICS-6). Source: Panjiva

Plenty of solutions, very few cutting back shipments

Few companies have discussed explicitly what their plans are for offsetting cost increases among the options of: rising prices for customers; accepting a diminution of profits; restructure their supply chains; renegotiate with suppliers; temporarily cut back shipments and run-down inventories. Further research is needed to investigate those topics on a programmatic basis.

It is clear, however, that the cutting back shipments and running down inventories is not a popular strategy, which is perhaps unsurprising given the strength of demand in many sectors and challenges in fulfilling demand previously – nobody likes losing market share.

Out of the 28 companies where Panjiva Research has carried out deep dive analyses in the past two months 64.3% are still increasing their U.S. seaborne imports on a year-over-year basis in January and February combined.

That compared to 75.0% of firms increasing shipments in Q4’20 however only 35.7% of firms either slowed the rate of growth in shipments or raised the rate of decline. Only 21.4% of the firms analyzed this quarter have cut their imports on a year over year basis in January and February after increasing them in Q4’20.

Firms with the fastest rate of momentum (growth in Jan./Feb 2021 less growth in Q4’20) were Energizer and Crocs with growth rates in Jan./Feb. 21 of 88.3% and 39.5% year over year respectively. The fastest turnaround was seen in shipments linked to HNI which rose by 48.6% in January and February versus a 13.8% decline in Q4’20.

Cutting back shipments is not a popular option

Chart segments U.S. seaborne imports of containerized freight by consignee. Source: Panjiva

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