We're seeing 'global breakdown' of supply chains: Analyst

Peter Sand, BIMCO Chief Shipping Analyst joins the Yahoo Finance Live panel to discuss the supply chain crisis.

Video transcript

AKIKO FUJITA: Well concerns around a brewing shipping crunch prompting major US retailers, including Walmart, to charter their own vessels. We've heard about the long lines, the backup outside of major US ports, including the Port of Los Angeles. And there are real concerns now that this could lead to a major crunch during the height of the holiday shopping season. Let's bring in Peter Sand, BIMCO, the chief shipping analyst. BIMCO is one of the largest international shipping associations representing ship owners. And Peter, I imagine this is a really lucrative time for those shippers.

I've heard of bidding wars that are breaking out here as suppliers try to get things onshore. Give me a sense of how tight the market is right now.

PETER SAND: We are basically seeing a global all but breakdown of the supply chains from end to end. But where we do see the most strained part of this is in hinterland connectivity. So from a container liner perspective, they are basically transporting more cargo than ever before. And as I'm sure you are aware that there is some plus 50 container ships just waiting to offload their cargo off the coast of California. So I guess that is also proof to the point that it's the hinterland connectivity, which is mostly hurt at the moment.

But I think everyone, including the shippers as well as the liners, are doing their utmost to secure that that all cargoes get there on the shelves in due time for the upcoming holidays.

AKIKO FUJITA: Yeah, you mentioned the ports out in California, the Port of LA alone, looking at what's reportedly about 60 container ships off of its shores trying to wait for processing as well. How significant of an uptick have we seen in terms of volume? Not just within California, but if we're talking globally, give us a sense of how tight the supply is with a limited amount of ships out there that can carry the load with so many who are looking to get it across the waters in time for the holiday season.

PETER SAND: I think what we have seen in the past some 15 to 18 month has been a spectacular recovery in terms of consumer demand, and predominantly from the US. And that have completely biased the container shipping networks, which is basically a global network finely balanced with a lot of trade lanes crisscrossing the globe with much cargo leaving far East for destinations across the globe.

So what we have seen in terms of volume demand on the Trans Pacific from Far East into North America is 25% on pre-pandemic levels. So that's 2019 volumes. And that is the best way to compare the current crunch. Because the demand rising so fast on one of the key trade lanes when you see global demand as such growing only by 5.6% in the first eight months of this year is a little bit testament to the fact that it's very, very biased what we see in terms of demand growth.

For instance, if we focus on far East into Europe, the demand growth is 0.1%. So that whole reshuffling of container shipping capacity into service of the American consumers have really strained supply chains across the globe. And obviously, no one had really had a chance to prepare for such a steep rise in demand, which seems to carry on into of course what is normally the peak season of the year, the third and fourth quarter. We expect nevertheless strained supply chains to last until the early parts of 2023 actually.

AKIKO FUJITA: I mean, specifically on those retailers, we're looking at this story out from Reuters talking about names like Walmart who are sourcing their own container ships. Doesn't that suggest that there's a little flexibility within the space? I mean, if Walmart and other major retailers can source container ships, why is that not necessarily being put to use? I mean, help us understand how some of these companies who have huge amounts here to invest in trying to get things going for the holiday season, how they're able to source it when other businesses are not.

PETER SAND: Obviously, everyone is trying to improve their logistics performance right now. European shippers, of course, have the alternatives to go railway, to go trucking. But in terms of volumes, container shipping on the seaborn model of transportation is second to none. Naturally, if you have very high priced commodities, you can also choose air cargo. But then again, we have, of course, seen some of those big shippers also trying to solve these logistical problems on their own, either by chartering their own ships or also by buying their own containers.

But in the end, I mean, if we cut to the chase here, they face exactly the same obstacles once they arrive at the American coastline. They need to wait in line also to discharge their cargoes. And they may also face the same shortages of chassis and truck drivers once they get the cargo at land. So from an industry perspective, I think they welcome the competition but see us as no competition. Because they are the real experts. And I'm sure that some of the, of course, desperate importers are likely to face quite a steep challenge and quite a few obstacles that they will clear only to find out that, well, the real experts in the shipping are already out there are waiting in line to secure, well, the cargo and the supply chains rolling.

AKIKO FUJITA: What does this ultimately mean for the consumer? I imagine shipping rates are much higher. At some point, that gets passed down to the consumer too. I mean, how big of a spike are we seeing in those rates? And what do you think that means for those shoppers during the holiday season?

PETER SAND: Well we have indeed seen the ghost of inflation showing its ugly face most recently and highest in the US, but also in Europe. And that is not only due to high shipping costs. It is also due to the substantial stimulus provided to everyone in there in the US, but also in Europe. And the money that has been poured into the economy, that is, of course, spilling into not only while high rising stock market, but also commodities prices bull run. But also, of course into inflation.

How much of that will then turn up on the price of the shelves? Well, the longer a crunch like this sticks around, of course the higher the possibility and the risk is that it will also spill into consumer prices. If we have only had high logistics cost for a few months or a quarter, I would say you would not be able to see that as a consumer. But right now, we have seen a high spot market at least. But also on contract, freight rates now rising to somewhere between 4,000 and 9,000 depending on whether you are importing on the US West coast or the US East coast.

But the longer higher logistics costs stick around, of course, there is also a tendency for those, everyone in the chain to pass on that extra cost to in the end, the consumer. So I'm absolutely sure that a bit of what you see in terms of inflation is also coming out of the logistics cost. But then again, it remains the most cheap way of procuring cargoes and goods on a global scale. And it's not shipping cost that drives up inflation in itself.

AKIKO FUJITA: Yeah, a lot of jitters around higher prices come year end. Peter Sand, it's good to talk to you today. Really interesting insight here. BIMCO chief shipping analyst.