Navigating Supply Chain Disruptions

Global trade recovered remarkably well from the clutches of the coronavirus pandemic, but a shortage of containers and heavily congested ports have caused shipping delays and scarcity of key components, fuelling inflationary pressures across the world.

In another of a series of specialised webinars, HSBC invited analysts and industry experts to share their views on how businesses can navigate supply chain disruptions and when they can expect the bottlenecks and shipping prices to ease.

A lot of the strength in global goods trade has come from emerging Asia, mainly from China, due to a strong demand for pandemic-related products, including electronics and gaming consoles.

But recovery has been uneven globally. China’s export volumes are about 17% above pre-pandemic levels in contrast to the likes of the UK where they are 15% below, according to a presentation by HSBC Global Research.

Now, the momentum in global goods trade has started to slow slightly with the pace of year-on-year growth declining in each month since May, as people have already bought some of the goods needed during lockdowns and some of the fiscal stimulus in western economies is fading away.

Recent Purchasing Managers' Index (PMI) data also show the cooling of global trade growth, with new export orders in developed and some emerging markets starting to come off the boil with businesses cautious in the face of exploding cases driven by the highly transmissible Omicron variant.

There is also a little bit of a rotation away from consumer spending on goods towards services, a trend HSBC Global Research expects to continue when lockdown restrictions ease.

The World Trade Organization (WTO) revised up its October global trade forecast, expecting global merchandise trade volume to grow by 10.8% this year, up from 8.0% seen in March, before slowing down to 4.7% in 2022.¹

With trade recovery strong, extremely high container shipping volumes exacerbated the congestion at some key ports, especially in the United States, constraining availability of containers elsewhere, which reduced shipping volumes along main trading routes.

The waiting time for containers to be cleared remains extended particularly along the West Coast of the United States, stretching to around 17 days, partially due to a lack of truck drivers, making a lot of disruption in the system, which has pushed up container freight rates.

“In the past, it took 30 minutes to book a container from Asia, or Dubai, to anywhere in the world. Today, it takes about 30 emails, three days of anxiously waiting for confirmation from the carrier if they can accept the bookings with a delay in receiving cargo in the final destination,” says Stephane Jarmache, CEO Middle East and North Africa at ISS Global Forwarding.

Some 39% of HSBC webinar participants said that their supply chain is being extensively disrupted, while 55% saw a moderate disruption. Only 5% saw no disruptions whatsoever.

Businesses around the world across nearly all regions are very concerned about supply shortages of critical components, according to an analysis of company earnings calls by HSBC Global Research.

It is mainly the technology sector, which has been impacted by the shortage of semiconductors, but delivery times have been extended across nearly all sectors, including consumer goods and industry.

“We have been paying a lot of attention to logistics due to bottlenecks,” says Asli Karapinar, head of treasury, Middle East and Africa at Schneider Electric Energy & Sustainability Services.

“We spent a lot of time to make sure we were able to bring our materials in the most cost-efficient way, and also in a timely manner,” she says.

When exactly will all these supply chain bottlenecks ease is the million-dollar question, which is very challenging to answer at the moment.

Trade disruptions could start easing after the Lunar New Year in mid-February with a two-week respite, providing some breathing room for port operators in some parts of the world to clear some of the backlogs, according to HSBC Global Research.

However, there is a risk that two weeks will not be enough to fully unclog the bottlenecks. In that case, trade disruptions might only start to lessen in the second half of next year.

In the worst-case scenario of further lockdowns and ongoing strong demand for consumer goods, the supply chain disruptions may not show any sign of fading before the end of 2022, HSBC Global Research says.

Such a development would be bad news for businesses already feeling the pinch of rising inflationary pressures globally.

A 40-foot container from China to Long Beach, California, used to cost US$ 3,000 before shooting up to around US$ 15,000 more recently, according to Jarmache, and does not expect rates to normalise in the next six months.

That has already caused an increase in air freight, as cost became more competitive for specific products and as many companies cannot afford to absorb a four- to six-week delay in container shipping.

HSBC Global Research expects the high container freight rates to stay at least in the near term, with shipping lines likely to use higher spot rates as leverage to secure higher long-term rates next year.

Since the pandemic started, many companies decided to build inventory to avoid being caught short by supply chain disruptions, shifting to Just-In-Case strategy from the widely used Just-In-Time (JIT).

Such a shift could exacerbate the disruptions in the near term, but it could also provide some support to the global goods chain going forward, according to HSBC Global Research, but it does not mean that the JIT model will be abandoned for good.

“The environment is very dynamic. We have decided to closely follow up our inventory levels to make sure we are ready and that we can meet demand,” says Karapinar.

“This is one of the major decisions we have taken,” she says.

In addition to building up inventory, businesses have already taken a number of steps to help mitigate future trade shocks, including diversifying markets or looking at alternative markets to shift production and distribution during the pandemic, even if it is temporary.

Some are also looking to nearshore to potentially bring some of their production home or source a bit closer to home. Another long-term strategy is vertical integration as well as digitisation to help secure the supply chain.

“If we're talking about short to medium term, look into sourcing from countries that are closer to your market,” says Jarmache.

“We have seen some clients that were sourcing typically out of Asia, who went into Central Europe with a 6% increase of costs but a shorter transit time to come back into the Middle East,” he says.

Such strategies are key to making sure customers get their products on time, which has emerged as a major competitive advantage due to ongoing supply chain disruptions.

“In a lot of industries, on-time delivery was a given. Today, it's not,” says Mathew Faisel, CFO Middle East, Türkiye and Africa at Honeywell Building Technologies.

“The players who are able to navigate through the uncertainty and get the product to their customers on time will have a competitive advantage,” he says.

Open and transparent communication within every company, its clients, suppliers, and logistics providers is key to navigate the current environment along with planning and forecasting, which may help ease some of the bottlenecks next year, webinar participants said.

“You can never plan and forecast enough. And think outside the box, because that's something that we do almost every day looking at cargo instead of going the conventional way – what if you go into a different African port, which has ample containers available,” Jarmache says.

Businesses should also become more agile, entering into more flexible arrangements to share risks and returns together, according to Karapinar.

“HSBC’s GTS supply chain solutions can help our clients impacted by the disruption to build resilience in their supply chain by supporting their working capital cycle through the provision of pre-shipment finance and other tailored financial capabilities,” says Chaker Zeraiki, regional head of business development, Global Trade Solutions at HSBC MENAT.

Businesses can also improve their own working capital by extending Days Payable Outstanding without the need to rely heavily on less cost-effective unstructured lending programmes.

On top of that, the bank’s innovative online banking platform, HSBCnet, offers a single point of access to accounts and information for enhanced control over global supply chains.

Supply chain disruptions caused by the pandemic are likely to stay for a while, forcing businesses to build up inventory, adjust sourcing and other strategies to increase resilience against logistics shocks and ensure on-time delivery of their products.