Home Month and Year July 2021 Supply Chain Bottlenecks are Getting Expensive

Supply Chain Bottlenecks are Getting Expensive

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It feels like only yesterday we were lousy with shipping containers. We had so many shipping containers strewn across our great country that we didn’t know what to do with them. Inventors were figuring out ways to make buildings out of them. Someone thought it was a good idea to make swimming pools, saunas and food stands out of them.

These days they are in extremely high demand for their intended purpose – moving goods overseas and back again. The scarcity of shipping containers is having a real impact on our economy, and consumers will wind up paying for it.

The shipping container shortage was initially caused by pandemic related lockdowns. Shippers around the world stopped shipping stuff in the first half of 2020. Then in the second half of 2020, US and European demand for Asian-made goods started to surge. With too few containers in Asia, the cost of acquiring them spiked, resulting in record high shipping prices between Asia and Europe last fall.

The Suez Canal blockage made it significantly worst, with thousands of containers stranded at sea for days or weeks.

It’s a tired cliché but we’re really seeing a perfect storm hitting global supply chains, and it’s starting to cost real money.

Just as global demand for goods is rebounding as we come out of the pandemic (knock on wood), we’re seeing a global shortage of microchips and semiconductors. A fire at Japanese automotive chip maker’s plant and a drought in Taiwan (it takes a lot of water to make microchips) are primary culprits. Trade tension between the US and China has caused Chinese manufacturers to stockpile chips, making matters worse.

Demand is going to keep increasing, and logistical bottlenecks are going to continue to limit supply. According to a TD Economics study released in May, this could all lead to inflation. The US Producer Price Index came in at 4.2 per cent year over year in March, the largest increase in almost 10 years. The study points out that, historically, consumer prices go together with producer prices.

Manufacturers may resist the urge to pass along increased costs to consumers in an attempt to maintain demand, but the longer the price surge continues, the more likely we are to see price increases.

Free markets are good at solving problems like supply chain bottlenecks. The TD study points out that orders for newly built container ships recently hit a five-year high and shipping containers are being built at a staggering pace. But it takes years to build ships and the new containers are increasingly expensive, costing $3,500 each in 2021 – a dramatic increase from $1,600 in 2019.

The best course of action is for manufacturers to shorten their supply chains and many already are. While this would reduce their exposure to future supply chain disruptions, it will also mean higher prices in the short term.

Hopefully the long-term gain is worth the short-term pain.

Canadian Manufacturers & Exporters (CME) is the voice of Canadian manufacturing. CME represents more than 2,500 companies who account for an estimated 82 per cent of manufacturing output and 90 per cent of Canada’s exports.

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