Are your current distribution and supply methods causing internal disruption?

There is a sense that there are signs that the Global Supply Chain Crisis is coming to an end. If this is true, it will be fantastic news for retailers, especially in the technology and automotive sectors, who have arguably felt the worst impacts of the crisis.

These sentiments may be a bit premature. While there are signs that global trade is becoming easier, there are still structural challenges that are associated with the crisis that may need to be addressed before it can come to an end.

I recently read an article on the Safety4Sea website which discusses this in a bit more detail.

Improved maritime supply chain resilience

The article points out that, during the pandemic, all stakeholders have invested in improving their resilience to better respond to future shocks. UNCTAD programs in trade logistics have seen a surge in demand: Port managers have been trained to improve resilience; shippers and carriers have assessed the implications of the COVID-19 pandemic for commercial contracts; port and cross border trade procedures have been reformed; blockchain solutions for trade facilitation are being developed; Customs authorities adapted the use of Asycuda World ( Customs management software) to the Covid-19 situation; and a new comprehensive UNCTAD on-line tool helps to build maritime resilience, not just in the context of pandemics.

The UNCTAD programs followed up on a 10-point plan of action published in early 2020 and benefited from a global UN project in support of transport and trade connectivity in the age of pandemics. These reforms and investments will help prepare governments and customs-, port- and maritime authorities, as well as private sector operators, to respond faster and more flexibly to future shocks. IS SA PART OF THIS?

The article adds that, even with all these improvements and investments in place, freight rates will be largely shaped by the demand and supply of ships, and thus future shifts in the demand and supply curves will continue to have strong bearings on freight rates and thus global supply chains.

The energy transition and its impact on freight rates

The article points out that all shipping markets we have seen boom-and-bust cycles. Just during the last two years, the Baltic Dry Index surged 14-fold between May 2020 and October 2021, LNG charter rates increased 11-fold between January 2019 and December 2021, and daily oil tanker earnings increased ten-fold between July 2019 and April 2020.

Freight rate volatility is more strongly affected by shifts of the demand- and supply-curves than by movements along the fundamental changes in the cost structure.

• The supply curve may shift as a result of lower speeds, port congestion, capacity management by carriers, or a fundamental under-investment in new ships, ports and intermodal transport infrastructure.
• The supply curve may shift upwards if underlying costs increase, for example due to higher fuel prices or technical measures that increase the underlying capital or operational costs for the ship owner.

These two types of shifts in the supply curve are important to understand when we look at the decarbonization of maritime transport.

The article points out that the energy transition is the most important challenge the industry is facing over the next decades. Reducing GHG emissions from shipping will lead to higher maritime transport costs, be it from economic measures such as mandatory contributions per ton of CO2 emitted, or more traditional technical measures such as fuel standards and further operational efficiency targets which can only be met with more expensive ship designs and technologies. And there is no way around this. Combatting climate change is the challenge of our and future  generations, and shipping will not be excluded. The costs of inactions would be higher than the costs of reducing emissions.

However, the uncertainty about the future cost structure – including charges for CO2 emissions, alternative energies of the future, and the global regulatory framework – and the resulting delays in investments have almost certainly a stronger bearing on freight rates than the underlying changes in the cost structure.

Three simplified scenarios for our future

The article adds that, currently, investors – ship owners, energy suppliers, ports, shippers – are not sure about the future cost of emitting carbon and the global regulatory framework which may determine this.

Given the great uncertainty, plus uncertainty about which low or zero CO2 emitting fuels will be available or technically viable for use on board ships or sanctioned by regulators, investors require a higher return on investment before ordering the next ship.

An alternative scenario could include an economic measure that provides a clear and transparent picture to investors. Costs increase, which leads to an upward shift of the supply curve, but there is no underinvestment, i.e. the global capacity limit is not lowered and the supply curve does not shift to the left.

The article adds that a third scenario, would lead to investments in new supply capacities, financed partly by funds generated from a global multilateral economic measure. The supply curve would move slightly upwards in line with higher basic costs, but the supply curve could – in addition – move somewhat to the right, as investments are expedited by regulations, public investments, and possibly cross-subsidies from those that still burn traditional fuels. The final freight rate may be very close to where it would be without the energy transition.

The debate about how global supply chains are impacted by the shift to more carbon-neutral policies, is reflective of the ubiquitous way that the move to greener technologies and impacts on the environment need to be considered in every aspect of how are businesses are configured.

I once headed a large project on pharmaceutical distribution and supply chain in light of the changes proposed to the way Pharmaceutical products were to be priced and regulated. I was reminded that supply chains were at the strategic core of every business, and their strategic impact had to be carefully considered as they are only changed every thirty years.

This timeframe has changed, and supply chain inbound and outbound are at the heart of the value proposition for every business. Have you considered the future of your own supply chain and how digital technologies, AI and ESG will impact them over the next five to ten years?

These are relentless long-term trends, and the opportunity to get ahead of them when designing your new business is now.

Robin Nicholson is the Director of Corporate-911 and is a Senior Business Rescue Practitioner.