The Suez Canal Supply Chain Story10 Apr 2021
AY Industrial Capital Markets Impacts and Opportunities
The recent blockage of the Suez Canal has exposed the sometimes-fragile nature of global trade. In this issue we explore how the Suez blockage impacted supply chains, what the future foretells for industrial real estate given this recent event, and how the nature of global logistics may change to mitigate these issues in the coming days.
Have a great week,
Principal, Head of Industrial Capital Markets
The Suez Canal: issues and Solutions
The recent container ship blockage in the Suez Canal has focused international attention on the importance of the container shipping sector -- and the vulnerabilities of an already stretched supply chain. The six-day ordeal that left 350 vessels backed up in the channel has prompted debate about the short and long-term impact on the shipping sector and the industrial sector overall.
According to CNBC, the 120-mile long waterway accounts for approximately 12% of global trade and supported an average of 50 ships per day in 2020. As noted in Edward Segal’s article in Forbes, quoting Paul Hong, global supply chain professor at the University of Toledo’s College of Business and Innovation, the Suez Canal accounts for 1.2 billion tons of cargo annually. Lloyd’s List estimated that $400 million of goods typically moves through the Suez Canal each hour. With that volume of traffic, it could take another month or more before the traffic flow returns to a normal pace.
The Ever Given incident comes at a time when many sectors of the supply chain were still struggling to regain stability from pandemic shortages and other container shipping dislocations. What was a fragile recovery in many instances turned into a new, but hopefully short-lived, crisis in global logistics. Still, however, new macroeconomic reverberations will be felt, and the complexity of many global supply chains was again drawn into the spotlight. This dramatic Suez Canal slowdown is exacerbating an already challenging congestion issue throughout the U.S. port system. The surge in e-commerce activity due to the pandemic, along with labor issues and other factors, has already stretched the supply chain and created backlogs at many ports. These implications should likewise not be lost on near-term demand for industrial real estate, especially in the United States.
In February, for example, there were reports of approximately 40 container vessels anchored outside LA/Long Beach, waiting for other ships to clear the port. While that figure decreased to about 30 vessels in March, it continues to present challenges as retailers and other businesses look to keep up with the demand for goods.
Will the recent Suez Canal issue be the tipping point to prompt businesses to shift their port strategies away from LA/Long Beach or New York/New Jersey and into more regional ports? Will it push businesses to expand their on-shoring efforts in order to hedge against further shipping disruption? These are issues the Avison Young team will be watching in the coming months.
More Safety, More Stock, More Space
As these global shipping and port access issues continue to challenge the industry, they are ultimately impacting the delivery of goods to the end consumer. When buying mattresses, clothing, furniture and even Peloton bikes, consumers have seen delivery times pushed out by weeks and even months. In this environment, a key question is how do businesses respond? And, what does it mean for the industrial sector?
The shortage of consumer staples in the early days of the pandemic led some companies to shift toward additional “safety stock” and away from relying so much on imports and just-in-time inventory. The toilet paper wars of 2020 have mostly been resolved through changes in inventory management, which will then continue to be an important focus for retailers.
The pressures of same, next or two-day delivery has increasingly put pressures on supply chains, with the pandemic only exacerbating those burdens. And many are thinking about diversification, not just in suppliers and shipping points, but also in maintaining ‘safety’ inventory in different locations throughout the U.S. to not suffer from acute out-of-stock situations again.
Whether it be a structural shift from a top-heavy ‘just-in-time’ (JIT) strategy to a more comprehensive ‘just-in-case’ dictum, companies are even more considering their ‘right’ amount of inventory, balancing volatile transportation costs along with their real estate needs. Just-in-time strategies kept inventory costs lower and maximized throughput of goods and materials. Now, the need to maintain inventory closer to consumers and above prior levels will likely add sufficiently to net demand for warehouse and distribution space over the mid-term.
Early on in the pandemic, a survey from RapidRatings found that 59% of U.S. companies would have only two weeks of stock after manufacturing was halted. While that shutdown felt abrupt at the time, the Ever Given incident was an even more unexpected shock. This past week, the Institute for Supply Management (ISM) Customers’ Inventories Index fell to its lowest point since its inception and has remained low since mid-year 2020.
Some businesses are continuing with that “safety stock” approach, adding a 5% buffer of additional inventory to hedge against disruption. This is translating to an increased demand for warehouse space, as companies focus on meeting customer demand, particularly during unexpected shipping delays. As the Suez blockage clears, it will be weeks if not months before the full impact is realized. Understanding the flood of inventory throughput and restocking from ports to warehouses to end consumers may be muddied, and any artificial boost in absorption rationalized against conditions that may have otherwise been in place, even if strongly favorable.
Infrastructure Investment - Any Immediate Relief or Long Horizon Goals?
As the Biden administration’s $2 trillion infrastructure proposal moves through Congress, there are many elements of it that would impact the industrial real estate sector, especially in creating efficiencies in the movement of goods and materials. According to the American Society of Engineers, U.S. highways and roads move nearly $17 trillion in goods each year. And, 43% of those roadways are in poor or mediocre condition. The infrastructure proposal includes a wide range of projected expenditures, including funds for roads and bridges ($115 billion), railways ($80 billion) and waterways/ports of entry ($17 billion).
While the plan cannot possibly account for exogenous occurrences like the Ever Given blockage, the proposal is still in its early stages and the details and costs will likely be debated for many months. As the bill winds its way through the political process, Avison Young is monitoring developments and will continue to provide updates.
Sources: CNBC, Forbes, Journal of Commerce, NPR, Port Technology, Seatrade Maritime News, Supply Chain Dive, Hellenic Shipping News Worldwide
Erik Foster, Principal
Head of Industrial Capital Markets