With the emergence of new Omicron COVID variant, global supply chain operations could be in for a rough ride, again.
Unfortunately, this time it’s a bad news on two accounts. If things don’t get back to normal in the supply chain, it also means we will continue to have longer waiting times in ports and containers availability. Looking at the data comparing time in port before and after COVID, the typical time a container ship spends in port globally is 12% longer than before COVID-19.
The demand for goods interestingly is also impacted by the new variant. The longer it takes to get back to normal, the longer consumers will not spend money on things like haircuts, restaurants, travel, or movies. Instead, consumers will buy things or order through ecommerce. A lot of the goods that consumers purchase while in lockdowns are made in China but the stoppage, shortage, and volume of capacity that is being held up leads to this global shortage is actually largely on the West Coast of the United States.
Congestion and delays are everywhere but because of the volume of trade that is held up in Los Angeles which is almost one-third of the capacity that’s held up globally, is at that place the ships are waiting and on those ships are the containers that are needed.
As of November 30, around 50 ships were waiting outside the port of Los Angeles, a few weeks ago there were around 86 ships waiting. On the other hand, as many as 20 million containers are estimated to be held up in the ports of United States alone. In that sense, yes it’s goods from China, but the main bottleneck and delays are very often in the ports of destination and largely in Europe and the United States.
While little is known definitively about the health effects of the omicron variant, if it were to cause Americans to pull back on spending and slow the economy, that could ease inflation pressures in the coming months.
Yet, if the new variant causes another wave of factory shutdowns in China, Vietnam or other Asian countries, that could worsen supply chain snarls, particularly if Americans keep buying more furniture, appliances and other goods. That, in turn, could push prices even higher in the coming months.
At present, it looks like the Auto industry is being hit hard by the emergence of the new variant as investors took a very cautious approach when the news came out. Even though the cost of moving a good from say Shanghai to Los Angeles or from Vietnam to Rotterdam may not be that high for a high value good, but because a lot of the bits and pieces that are inside the goods or component, you end up with up to nine steps of deeper supply chain. So in the end we accumulate these higher transport costs. Every risk, every delay, every missing component then leads to this accumulated big impact on high value goods.