Global supply chains were a great idea during the Boomer-led SuperCycle beginning in the mid-1980s. But today we have lost the demographic and peace “dividends” that turbocharged the SuperCycle.
It’s time to go back to the more resilient and reliable ‘local for local’ supply chains that existed before the SuperCycle.
Today, the Suez Canal has been effectively closed for container ships by Houthi attacks:
- As the chart shows, this has caused container freight rates to skyrocket from $930 on 30 October 2023 to $4,828 on 23 January 2024.
- Ships are now having to spend 36 days going from Asia to Europe via the Cape of Good Hope, compared with only 26 days using the Suez Canal. And, of course, they face the same delay on the way back.
And, as ICIS has reported, this disruption is spreading. The major Taiwanese chemicals producer, Formosa Plastics, had to declare force majeure earlier this month, saying:
“Although we had tried our best to arrange the shipment, considering such circumstance is beyond our reasonable control under the force majeure clause in our contract, we would like to terminate all unshipped CIF shipments to Europe and Turkey from January 12, 2024.”
It’s not only Europe that is facing problems. Climate change means the Panama Canal is short of water. As the chart shows, the number of South to North crossings has more than halved in recent months:
- The shortage of container shipping has also led Asia – US West Coast rates to skyrocket
- These have more than doubled from $1,593 on 11 December 2023 to $3,721 on 22 January 2024
The risk now is that companies have low inventories down most value chains, due to weak demand. Buyers may be forced to go into the market to replace delayed product.
Inevitably this will start to create a vicious cycle of rising prices and potential product shortages. Spring, after all, is normally the strongest month for consumer demand as the weather improves. This year, Q2 would normally be particularly strong as Easter is in March, reducing the disruption from public holidays.
COMPANIES ARE NOW MOVING BACK TO MORE LOCAL SUPPLY CHAINS
During the Boomer-led SuperCycle, demand was expanding, and the “peace dividend” following the fall of the Berlin Wall in 1989 meant transport risks were lower.
But today, the low-spending, lower-earning Perennials 55+ cohort are the main source of global population growth, and the “peace dividend” is over.
Companies have been questioning the need for global supply chains for some time. As Bettina Büchel, Professor of Strategy and Organisation at the Swiss IMD Business School reported back in 2020:
“Firms today are prioritising resilience over efficiency as they look to curb costs to weather the disruption from the pandemic… Trying to produce and ship locally will ensure less disruption in case of limited movement of people and goods… This shift was already well underway prior to the coronavirus outbreak, which has simply reinforced the change.”
The growing disruption in the Suez and Panama Canals is set to encourage more companies to move to ‘local for local’ supply chains. These are not only more resilient, but also make firms more agile – and reduce their carbon emissions.