Supply-chain stress may have peaked already

Don’t look now, but the worst may be over for the supply-chain snarls that have plagued shipments of everything from Coca-Cola Co ingredients to paint, toys and industrial fasteners.
Average ocean freight rates have declined for three straight weeks. A composite index of global container prices has fallen back under $10,000 for a 40-foot box for the first time since Labor Day,
according to data by maritime advisory and research firm Drewry. The cost relief is modest: The freight rate benchmark remains almost 300% higher than it was at this time last year. But the feverish climb in shipping costs at least appears to be waning. Rates had climbed for 23 straight weeks before the recent step back, Drewry data show.
Carrying goods across the ocean is just one part of the supply chain. More than 60 container ships wait to enter the ports of Los Angeles and Long Beach, according to the Marine Exchange of Southern California. While that’s still very high relative to historic levels, it’s an improvement from the record 73 ships that were anchored or idling further offshore in mid-September.
Once a ship can be unloaded, its contents are often packed onto a train and ferried across the country to railyards, then picked up by a truck for the last mile of their journey to company distribution centres or factories. Industrial distributor Fastenal Co typically negotiates an overarching rate with steamship freight lines, which coordinate the whole process. But the dearth of shipping containers has forced the company to cut out the railroad middle man and instead manually unload goods at the port and pack them onto a semi-truck. The extra logistical legwork is significantly more expensive. So while shipping rates are up fourfold, Fastenal’s total door-to-door cost is up more like six-fold, Chief Executive Officer Dan Florness said.
Even here there’s some good news, though: Fastenal had to manually unload about 45% of its shipping containers in August. By September, it was unpacking 28%.
“I don’t know if it’s coming down and it’s going to continue,” Florness said. “One month isn’t a trend; it’s a data point.” He’s right, but at least it’s a positive data point for a change.
The shipping crunch may have been exaggerated in recent months as companies over-ordered to ensure they had enough product and wouldn’t miss out on sales. Retailers in particular appear to have moved up their holiday-season shipping to July-September, from the usual September and October, Bank of America Corp analyst Ken Hoexter observed in a recent note. Even in normal times, the window to get goods in time for holiday shopping would largely be closed by mid-October and certainly by Thanksgiving. So there soon should be more availability for everything else.
President Joe Biden’s administration announced a plan to operate the Port of Los Angeles 24 hours a day, seven days a week to further ease the congestion. It’s a rather simple proposal for an incredibly complicated problem.
Even if the ports were operating perfectly, labour shortages and bottlenecks elsewhere would continue to gum up the system. But the White House plan might make another dent in the logjams, and a dent is better than nothing. Authorities are also working to set up inland “pop-up” terminals and speed the application process for commercial truck-driving licenses.
The Covid-related factory restrictions in Vietnam and Malaysia that have contributed to shortages of industrial parts and semiconductors also appear to be easing. Units of Intel Corp and Samsung Electronics Co aim to resume full operation of their Ho Chi Minh City plants by the end of November, Bloomberg News reported, citing Le Bich Loan, the deputy manager of the Saigon Hi-Tech Park.
Toyota Motor Corp is working with pandemic-stricken suppliers in Southeast Asia on a plan to ramp up production starting in December and recover some of the output it’s lost due to shortages, Reuters reported.
Of course, the global supply chain is still nowhere close to normal. Fresh headaches may emerge — like the typhoon that shut down China’s Yantian port this week. In any case, early reports indicate that even at its peak, the freight crunch may not have been the earnings killer investors feared — at least not for every company. At Fastenal, average daily sales growth actually accelerated in September from the July and August pace despite substantial disruptions. The company used price increases to offset what CEO Florness called “brutally high” inflation in the third quarter and expects to do so again in the final stretch of the year.
Large companies have more leverage with suppliers and shippers than smaller ones. In Fastenal’s case, it also helps that the company operates on a highly decentralised basis and empowers local employees to do whatever is necessary to fill product gaps with alternative domestic suppliers. Fastenal also has its own trucking fleet; while it’s still expensive to move products that way, the company has an advantage over those who rely on third parties. But Honeywell International Inc and Dover Corp have also gotten creative about finding ways to push product out the door.
Emerson Electric Co reaffirmed its sales outlook — a notable development after others, including Allegion Plc and Eaton Corp, trimmed their forecasts on supply-chain woes.

—Bloomberg

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News