Labour Market Risks Weigh On Global Supply Chains

Fitch Solutions / Freight Transport & Shipping / Global / Wed 06 Oct, 2021

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Key View

  • Risks to global supply chains will remain elevated in 2021 and 2022, as pandemic-related bottlenecks amid a sharp rise in demand, have created significant congestion and delays at ports, pallet and container shortages, and record-high shipping rates. Labour shortages present a key risk factor interlinking the ongoing supply chain disruptions, particularly across the US, Europe and Asia.
  • Strict measures imposed by Asian governments to prevent the spread of Covid-19 present downside risks to the operations at ports and key production hubs.
  • Meanwhile, Western markets will continue to struggle with low labour availability particularly for road transportation, while a lack of business-friendly immigration policies will see the strains remain elevated in the quarters ahead.
  • Ongoing labour market constraints, compounded by the impact of energy sector risks and shock weather events, will see ports and logistics companies struggle to deal with large backlogs of shipping containers and goods.

Supply Chain Risks, This Time Is Different

While there have long been supply chain challenges across the world in the years preceding the Covid-19 pandemic- largely related to factors such as unfavourable weather, economic downturns, capacity issues, pricing fluctuations, labour strikes, conflict and policy shifts - supply chain risks in 2021 present a significant and unusual challenge to global trade flows. The pandemic-related squeeze in global supply nodes has coincided with a sudden and massive surge of demand that far outweighs the available capacity, particularly in manufacturing and transport. The global supply chain infrastructure that exists simply cannot handle the volume of products flowing through the global economy, particularly as government stimulus has greatly driven demand.

Parabolic Increase In Container Shipping Costs
World Container Index Shanghai To Los Angeles Container Freight Benchmark Rate, USD
Note: Based on weekly average mid-price of container freight. Source: Bloomberg

Zero-Covid Policies Immobilise Asian Supply Chains

Zero-Covid policies will continue to contribute to delays in the global shipping network as ports are forced to slow down, or stop, operations as and when Covid-19 outbreaks are detected. In August 2021, ships were unable to berth at a container terminal in China’s Ningbo-Zhoushan Port for two weeks, due to a shutdown caused by a worker testing positive for Covid-19. Flights to and from Beijing were also cancelled for two weeks, in line with China’s aim to eliminate Covid-19. This was in spite of the fact that Ningbo was considered a low risk area, according to the local health commission. Similarly, Vietnamese supply chains have also been impacted due to production struggling under prolonged lockdowns, with “stay home” orders leading to “closed loop” conditions, whereby workers sleep on site. According to the Vietnam Textile & Apparel Association, 30-50% of garment factories have had to close as they were unable to meet the lockdown demands, both in terms of cost and logistically. Zero-Covid policies are also active in Australia, New Zealand and Singapore, with new cases having the potential to severely disrupt business operations and trade flows.

Generally, shifting from port to other modes of transportation includes multiple touchpoints in internal freight networks, all of which are vulnerable to their own chokepoints. Indeed, despite the diversion of shipments to other terminals at the Ningbo-Zhoushan port, the immediate impact of the closure of the Meidong container terminal at Ningbo-Zhoushan hit bunker fuel demand and disrupted shipments of metals, including manganese flake, which hit a 14-month price high in Q321 in Europe, partly due to concerns over shipping. The terminal closure subsequently caused congestion to rise by 60% at the ports of Xiamen and Shanghai, according to data compiled by Bloomberg. At least 14 vessels operated by CMA CGM, five Maersk vessels and four Hapag-Lloyd ships also skipped the terminal, opting to go elsewhere to avoid the container vessel queue. The March 2021 Suez Canal blockade, which saw over 400 ships waiting to pass through, also compounded the backlogs and highlighted the fragility of the global supply chain. Such congestion at ports inevitably impacts further components of supply chains, creating downstream bottlenecks that pressure warehouses and distributions, rail and road freight, as well as air freight as exporters scramble to find alternative methods.

Shipping Rates To Remain Elevated Amid High Market Concentration

Delays and an increase in pent-up demand have also contributed to soaring container prices, increasing baseline import costs and surcharges, globally. According to Freightos, China-to-US transit times for ocean freight reached 71 days door-to-door in September 2021, up from 40 days two years ago. According to Drewry World Container Index, the cost of a 40-foot shipping container from Shanghai to Los Angeles rose to over USD12,400 in September 2021, while Freightos, which measures container rates and factors in additional surcharges and premiums, shows the same size shipment cost rising past USD20,000, compared with less than USD4,000 in early 2021. Maersk, the world’s biggest container shipping line, was expected to make around USD4.5bn in operating profits in 2021, however, due to surging freight rates, the company is now expected to make USD14.5bn this year. Further, the top ten container lines control more than 80% of global capacity and of these ten companies, there are three “alliances” for instance between APM-Maersk, Mediterranean Shipping Co and Hamburg Sud – pointing to a highly profitable year for shipping companies. In addition, the three Chinese manufacturers that supply around 80% of the world’s shipping containers (CIMC, DFIC and CXIC), have been unable to manufacture the products fast enough to meet the container demand. As such, given the sharp price rises across the transport sector and significant market concentration, freight and shipping companies and container manufacturers may come under increasing scrutiny from policymakers in the months ahead.

Asian Ports Key To Container Throughput
Rank Port Country Container Throughput (mn TEUs) % Of Global Total
1 Shanghai China 43.3 5.3
2 Singapore Singapore 37.2 4.6
3 Ningbo-Zhoushan China 27.5 3.4
4 Shenzhen China 25.8 3.2
5 Guangzhou China 23.2 2.9
6 Busan South Korea 22.0 2.7
7 Qingdao China 21.0 2.6
8 Hong Kong China 18.4 2.3
9 Tianjin China 17.3 2.1
10 Rotterdam Netherlands 14.8 1.8


Source: Bloomberg, Fitch Solutions

Labour Shortages In The West Contributing To A Perfect Storm

We expect that labour market rigidities, particularly in the UK are unlikely to subside in the near term, as a scarcity of Large Goods Vehicle (LGV) drivers has been exacerbated due to a decline in migrant workers, the pandemic impact, as well as a more general mismatch between job supply and demand in lower-skilled sectors. According to recent local media reports, the number of Romanian and Bulgarian workers in the UK, who had previously filled key roles in domestic supply chains, had plunged by 24%, or almost 90,000, since the end of 2019. H221 has seen delays in transporting goods and agricultural products, with stocks in shops and warehouses having fallen to their lowest levels since 1983, in late August. As such, business leaders have called for the government to relax visa restrictions for LGV drivers and other labourers in related work areas, as well as increasing pay, for instance, Waitrose is offering a salary of USD73,000 for LGV drivers, which is significantly higher than the UK average salary of USD43,100. However, we at Fitch Solutions believe such solutions will only be a short-term fix, as the core problem surrounding a lack of suitable labour availability stems from a lack of training for replacement workers and efforts to incentivise employers to improve working conditions in these sectors. Further, given that the UK Home Office advises that “employers should invest in our domestic workforce instead of relying on labour from abroad” it is likely that supply chain issues in the UK will persist over 2022.

More broadly, uncompetitive remuneration, difficult working conditions and an ageing workforce will continue to impact the scarcity of labour in the transport sector. In the US, a recent study found that nearly 57% of all truck drivers in the US are older than 45 and almost a quarter (23%) of workers are aged above 55, with younger workers not being recruited at a replacement rate. While Covid-19 has suppressed the availability of testing for commercial driving licenses due to social distancing measures, the lack of worker supply also stems from wider dissatisfaction with the nature of the work. Unsocial and long working hours as well as difficult working conditions for drivers, means that trucking is an unattractive option for younger workers and female workers as well, especially factoring in safety conditions, for the latter. Much higher wages and hardship and danger pay as well as additional incentives would be required to cause a significant shift in this declining labour availability pattern and large companies have started exploring these measures. For instance, recent reports show that Walmart was offering a USD8,000 signing bonus for some drivers, while UK wages for some categories of LGV drivers have increased by around 21% in just under a year, according to recruiting company Adzuna. In the US , there have also been industry calls for a relaxation of immigration restrictions to ease labour shortages in the transport sector. While the short term labour supply problem is likely to persist, we highlight that these difficulties provide further impetus for the automation of labour-intensive processes and the emergence of more smart ports. Supply chain issues will be felt more acutely in the coming months as demand for consumer goods rise in the high demand periods of Q421.

Supply Shortages Weighing On Services
  Spain Germany France Italy UK US Japan Australia
Jul-21 61.9 61.8 56.8 58 59.6 59.9 47.4 44.2
Aug-21 60.1 60.8 56.3 58 55 55.1 42.9 42.9
Sep-21 56.9 56.2 56.2 55.5 54.6 54.4 47.8 45.5
Note: Services PMIs, Index. Source: Markit, Fitch Solutions

The latest purchasing managers’ index (PMIs) readings point to a further cooling off in key developed markets (DM) in Q3 and Q4. The composite PMI eased throughout the third quarter in all of the biggest DM economies, highlighting the impact of supply chain disruptions and rising input prices. The services sector continued to grow at a robust pace in September as the economic reopening continued, but it expanded at a less healthy clip than in August, partly due to labour shortages. A combination of recovering demand and sharp cost pressures saw the rate of inflation in average prices charged by services firms rise across most DMs, a trend that we believe will continue over the remainder of the year and into 2022.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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