The U.S. supply chain is in the throes of a so-called “bullwhip effect.” Importers overreacted to last year’s congestion and heightened consumer demand, brought in too much cargo too early, and are now stuck with excess inventory. Could there be a bullwhip effect in the opposite direction next year?
It could happen, says Rolf Habben Jansen, CEO of ocean carrier Hapag-Lloyd. He addressed this scenario — as well as his views on future rates, capacity levels and trade patterns — during an online panel discussion Monday.
“There is still a lot of volatility in the market, and everybody seems to be doing the same thing, which is quite scary,” said Habben Jansen.
“Everybody is overreacting all the time. At the start of COVID, we lost 20% of our volume in two weeks because everybody started cutting their orders. Then the economy recovered and everybody started ordering like crazy.
“This year we saw lots of people ordering Christmas stuff [for early arrival] in the summer. So, a lot of volume was brought forward. Now we see congestion easing, inventories filling up and warehouses filling up and everybody is cutting orders like crazy. We’ve gone to the other extreme.
“I’m just waiting for the next step,” he said. “Because I’m pretty sure what we’re seeing right now is an overreaction — again. People trying to cut everything possible at this stage will see that underlying consumer demand is actually relatively healthy and all of a sudden, they’ll become concerned that their inventories are a bit on the low end and we’ll possibly see a bounce-back.”
Post-COVID rates should top pre-COVID rates
Bringing forward Christmas cargoes to the summer left a hole in demand this fall. Spot-rate indexes continue to decline, albeit at a slower pace recently as ocean carriers remove more capacity to balance the market.
Habben Jansen, whose company is the world’s fifth largest ocean carrier measured by fleet size, continues to believe that post-COVID rates will ultimately end up higher than pre-COVID rates.
“In the short term, anything is possible,” he said. “I think we will see rates above pre-COVID, at that level, and below that level for stretches of weeks or days. What’s more important is to look a little bit longer term.
“And in the end, whether we like it or not, costs have gone up quite significantly over the last couple of years. Time-charter rates have gone up and been committed to for longer periods. Terminal costs have gone up. Bunker [fuel] costs have gone up. That results in a higher unit cost for the industry, on average.
“What we’ve seen in the last 10 years [prior to the COVID boom] is that rates tend to hover somewhat above the cost level,” he continued. Because the future cost level will be higher than the pre-COVID level, Habben Jansen believes that carrier rates in the long term “are going to be significantly above pre-pandemic levels.”
Hapag-Lloyd CEO sees newbuilds as a positive
This assumes shipping lines don’t descend into a price war when a massive wave of newbuildings hits the water starting next year.
Habben Jansen did not sound particularly worried about all the new ships. “Of course, the orderbook right now is certainly a bit on the high side,” he said. “But on the other hand, in the years before 2020, we were underinvesting in this industry and the orderbook was actually too small.
“We’ll see how this pans out. I think scrapping [demolition of older ships] will have to go up very significantly. We’ll also need to see whether everything can be produced and delivered on time. We’re hearing the first report of delays at some of the yards.”
He continued, “We’re not going to have the tightness in capacity we had in the last two years and having a little bit of a buffer is a good thing.
“What we saw in 2020 when demand came back with a vengeance was that there was no slack in the system whatsoever. That’s why you had a lot of these bottlenecks. As an industry, if we had slack in the system of 3%, 4%, 5%, that would allow us to swiftly react if there were a peak and prevent some of the things we saw in the last couple of years. It would give us the resilience we need and help us reestablish the trust of our customers.”
Geopolitics and the China factor
The Hapag-Lloyd panel discussion occurred at a particularly fraught time for world trade and geopolitics. As the Ukraine-Russia war rages on, relations between China and the U.S. continue to deteriorate. Companies are reconsidering their import supply chains and their exposure to China.
Asked about the implications, Habben Jansen said: “Sourcing patterns will change. People will do less single-sourcing. We see quite a lot of people already going from China [only] to China-plus-one [alternate source] and China-plus-two. Moving stuff to Vietnam, Indonesia, India, Turkey, Egypt and those types of markets.”
The end of pandemic travel restrictions helps businesses diversify import sourcing, he said. “In 2021, you couldn’t travel to see your new sourcing partner or your new manufacturing plant. There’s a hesitancy to take that decision based on a [Microsoft] Teams meeting alone.
“We are going to see more diversification and nearshoring,” he predicted. But he also emphasized that this will not happen overnight.
“There is a reason that most of the biggest ports are in China, and I don’t think that’s going to change anytime soon. These changes in the setups of supply chains go slowly. It can take a lot of time before you can really make it happen. There were people talking about de-risking from China 10 years ago.”
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