Ioannis Telonis
The outbreak of the pandemic showed the degree of dependence of the world economy on the proper functioning of supply chains. The globalization of the economy also brought great developments in the way of production. The adoption of the mass production model that matured with the second industrial revolution, brought drastic reductions in the cost of industrial products, thus expanding their customer base. Items such as cars, refrigerators, washing machines, etc., which at the end of the 19th century were enjoyed only by the ruling class in less than 50 years, became affordable and available to almost all economic and social strata. The explosive increase in demand and production led to the globalization of trade and the development of the first mass supply chains .
The first industrial revolution (1760) began with the invention of the locomotive which brought the first great rise in the production of basic goods through the use of mechanical means but also on a regular basis communication and transport, as steamships detached navigation and intercontinental trade from the tricks of the weather.
The Second Industrial Revolution (1870) brought about the internal combustion engine and electricity that multiplied the potential of the industrial sector and created new markets and jobs.
The third industrial revolution (1960) brought the explosion of telecommunications, electronics and of course the computer and industrial robots. The production lines adopted new business models that greatly facilitated the smooth flow of world trade and the increasingly specialized flow of supply chains. The introduction of the standard container, introduced in 1956 by Malcom McLean, opened new horizons and perspectives in the world transit trade.
The Fourth Industrial Revolution (1983), with the creation and spread of the Internet and similar applications, accelerated the globalization of trade. The production lines evolved both in the way they were organized and in their supply with the various components. Practices such as the delivery of materials just in time that began to be applied as a philosophy by TOYOTA in the early 70's was established in most production units saving time, money and capital.
But this also meant greater dependence on the smooth operation of supply chains. When we refer to supply lines, we focus on navigation, since according to the OECD, more than 90% of world trade is handled by ships. And this is where the problem with the outbreak of the pandemic arose.
NAVIGATION AND CONTAINERS
The accident of the Ever Given of the huge container ship that blocked the Suez Canal for days, caused a heart attack in the supply chains and not only. The accident focused on supply problems and their impact on the smooth operation of production lines. In reality, however, the problems existed long before the Ever Given accident.
Containers, or rather the lack of sufficient quantities in the right locations, has created a long-term problem in supply chains by forcing factories and production lines around the world to go on holiday. In combination with the supply practices and the consequent reduction of spare parts stocks held by the various factories and companies, we have reached the point where production lines can not complete products and stop operating due to lack of a small number of spare parts!
THE SIZES
According to a German container management platform based in the port of Hamburg, the global container stock amounts to about 25 million, which are used on 170 million routes. In addition, 55 million routes are operated with empty containers on return routes or transport routes to peak locations. Under normal circumstances the system operates efficiently without distortions in the transport and delivery of goods. The pandemic brought the ups and downs, creating a sudden unpredictable disruption in the operation of the system.
THE SIZE OF THE PROBLEM
During the pandemic and the partial, erratic recovery that followed, the global container stock proved to be insufficient to meet the sharp increase in demand in certain key locations. The pandemic created a double shock affecting both supply and demand for goods. The magnitude and extent of the shock could not be predicted even by the most sophisticated risk models of large economies.
The different speeds of recovery between China and the US, created a traffic jam on the supply and supply lines between the two countries. And this traffic jam was not limited to the ports since even the loading and unloading of containers – even if it was automated – was affected by the mass absences of dock workers due to COVID19. The problem has in turn spread to road and rail supply lines due to a lack of drivers and operators.
Inevitably, the crisis spread to the EU and gradually to other countries. The grounding of the Ever Given and the blockade of the Suez Canal on March 23 multiplied the magnitude of the problem.
WHY THE SYSTEM IS SLOW
After a series of difficult economic times, the shipping market went through a wave of mergers and rationalizations with the main goal of reducing tonnage and maximizing returns. The market as it is formed now displays all the characteristics of a market with an oligopolistic structure. About half of the containers are owned by only ten shipping companies while the rest are leased to shipping companies by leasing companies or belong to other market participants e.g. cargo managers. Shipping companies are based mainly in Asia and Europe. They move their cargoes on defined shipping lines with defined itineraries which they prepare themselves based on what they expect to be the needs of the market. With this structure, function and targeting the market has proved less flexible in meeting sudden increases in demand. Instead it was much more efficient in removing capacity to keep fares high.
As a result of this situation, concerns about unhealthy competition and over-concentration began to increase, resulting in dynamic US intervention. On July 9, President Biden issued an executive order calling on the U.S. Maritime Commission to step up oversight of shipping companies to ensure that they do not over-indebted U.S. exporters. The Commission had already launched an investigation into the shipping companies' practice of returning empty containers from the Americas to Asia. But EU regulators have also begun to closely monitor the market to identify the steps they need to take to restore order to the market.
RETURN TO NORMALITY
Most analysts expected that the situation would begin to balance with the main indicator being fares. For example, before the pandemic, the fare for a forty-container container from China to the West Coast of the United States was around $ 2,000 in the last decade. Today the price has jumped to $ 10,000 and shows no signs of falling. Ship handling problems still exist, judging by the overcrowding outside the ports. It seems that for the time being the situation will continue to be problematic at least until the end of the year – which means that the most important shopping season – that of Christmas – will again have its challenges.
THE SITUATION IN EUROPE
The situation in Europe is not significantly different from what we have described above. With the main focus on transport problems in shipping, the supply chain in Europe has in addition to face side problems that have been created by other external factors.
For example, Ireland's agricultural sector has been hit hard by rising costs in energy, raw materials and transport.
According to Bloomberg, in the United Kingdom the lack of specialized chemicals in treatment sites has forced the authorities to allow wastewater companies to dispose of wastewater without treatment. The shortage stems not so much from low stocks as from the lack of drivers to transport them – a side effect of Brexit.
The low wind speeds – apparently due to climate change – did not allow enough power to be generated by wind turbines in the United Kingdom and Spain. As a result, the price of electricity has reached new record highs.
SUPPLY CHAINS AND INFLATION
The supply chain problems were caused by the disruption caused by the pandemic, which resulted in a distortion of supply. As mentioned above, another diversion in supply was noted by the disruption and shortages observed in some species that are necessary for the smooth operation of production lines.
But the pandemic has also affected demand – first with a sharp decline due to consumer exclusion and then with a sharp rise in the lifting of measures. The whole scenario has led for the first time in decades to price increases. And the big question is whether this inflation will be temporary and will weaken with the normalization of the situation or a new order of things has been created. I have the feeling that this issue will be of great concern to us in the coming months.
