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Fragile supply chains drive up prices
09/06 2021 // International

Fragile supply chains drive up prices

Photo: Gerd Altmann/pixabay.com

Euler Hermes study: Bottlenecks in container capacities and delays are causing prices in global trade to explode. There is no relief in sight in the short term. Companies are trying to replenish their stocks and hoard scarce goods.

So far this year, global trade has recovered faster and stronger than expected, particularly in the value of traded goods and services. For 2021 as a whole, this is likely to continue, with a healthy 7.7 percent increase in the volume of traded goods and services (2020: -8 percent) and even a +15.9 percent increase in value (2020: -9.9 percent). This is the conclusion of the current study "Ship me, if you can" by credit insurer Euler Hermes.

Hoarding purchases are currently in in global trade - Europe and Germany lagging behind

"The predicted post-lockdown catch-up boom has long since begun, and companies are desperately trying to replenish their inventories," says Ron van het Hof, CEO of Euler Hermes in Germany, Austria and Switzerland. However, he adds that this is currently not a foregone conclusion: In view of the ongoing bottlenecks in the supply chain, especially for shipping containers themselves, and the longest delays in a decade, prices and thus the costs of global trade are galloping to new record highs. Hoarding is currently in in global trade, he said. However, the U.S. has a clear lead in the race for goods - in part because of the earlier reopening.

The collapse in supply and demand has been the key driver behind the slump in global trade in 2020, he said. However, normalization of supply and demand conditions accounted for only about 15 percent of this year's increase in the value of traded goods and services - while restocking accounted for about 50 percent. Tight shipping capacity, with its associated high prices, also accounted for about 35 percent of the increase.

No relief in sight for shipping capacity in the short term - bottlenecks expected again in 2022

Ship capacity is likely to remain tight in the short term," says Van het Hof. In addition to the regionally very uneven upswing, the reasons for this are the insufficient investments made in the shipping industry in recent years. The fact that there are few alternatives to ocean freight and that new capacity is slow to come on stream also does not contribute to a rapid easing of the situation. The construction of a new ship usually takes one and a half years, so that bottlenecks and consequently high freight rates are likely to continue in 2022.

Price and capacity pressures are expected to continue in 2022, according to Euler Hermes, although they are expected to peak in 2021. Expected lower tariffs would not be able to offset the price pressure, and trade costs would remain high in 2022. Overall, the credit insurer's economists expect global trade to grow at another above-average rate of +6.2 percent in volume and +8.4 percent in value in 2022.

The great "run" for goods: U.S. clearly at the top of the race compared to Europe

U.S. companies would currently have moved to the front of the queue in the race for goods: Deliveries of goods from Asia to the USA are currently increasing by about 30 percent, while deliveries to Europe are only up by about ten percent due to the much later opening. After the supply disruptions in 2020, this is the second shock to global supply chains in a short time, he said.

"Most European countries, especially Germany, are currently struggling to replenish their already low inventories," Van het Hof says. Supply chain disruptions will continue to be the order of the day in 2021, he adds - although many companies have already initiated numerous measures to stabilize their supply chains in the past year. It is definitely time to address the issue, he says, because further shocks to supply chains can be expected in the coming years. Companies therefore have it in their own hands to be among the winners.

Stabilize supply chains: Contingency plans and stable partnerships with suppliers important

In 2020, 94 percent of companies surveyed in an Euler Hermes study on supply chain disruptions in Germany, the U.S., the U.K., France and Italy had to cope with temporary disruptions to their supply chains (Germany 95 percent), with one in five of these companies even experiencing severe disruptions (Germany 16 percent). At the time, more than half (52 percent) had already taken measures to make their supply chain more robust for the future. Re-shoring had also been discussed in some cases - although only about ten to 15 percent of companies were actually considering bringing their production back to Germany.

"Supply chains can break, whether they are global or local," Van het Hof says. "The Corona pandemic showed that - but so did the current flood disaster, which also disrupted supply chains in our own country. There is never a guarantee of a robust supply chain; ultimately, it's more about having contingency plans in place for different scenarios so that you can act quickly and flexibly. In addition, the quality of relationships with one's own suppliers is likely to play an increasingly important role in the future, regardless of where they are geographically based. A partnership-based relationship with suppliers is more likely to pay off in the long term than squeezing the last penny out of them in supply agreements."

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