As we continue to navigate unprecedented global supply chain challenges, Border States is committed to keeping you updated regarding supply chain impacts, inflationary pressures and other market trends. We are working diligently to provide you with the most current information possible, knowing this information could change at any point.
Supply Chain Brief
We continue to see improvement in many aspects of the global supply chain, but the overall system remains fragile. Freight capacity with ocean and trucking carriers continues to stabilize and freight rates have normalized to near pre-pandemic levels. Diesel prices have also softened over the past quarter further contributing to declining freight prices. The major risk in the transportation sector remains risk of labor stoppages due to ongoing contract negotiations. Lead times are improving across each of our market segments, and we are seeing continued improvement in fill rates for customers in several market segments. Commodity prices remain volatile, but most prices are well below pandemic highs over the past three years.
While we continue to see notable improvement in many areas, several challenges continue. Unemployment and workforce participation remain at or near record lows, and job growth continues even in the face of economic uncertainty. Right now, there are not enough people to fill jobs, including in the manufacturing and distribution sectors. Strong demand growth in some segments, like electric and natural gas utilities, continues to strain the supply chain and product availability in many categories. Some raw material and subcomponent shortages remain major global risks, including semiconductors chips, semiconductor-grade neon, electric grade steel used in transformers and EV products, and black carbon used in cable shielding/jacketing.
We are closely monitoring the catastrophic earthquakes that occurred in Turkey and Syria earlier this month. Our thoughts go out to all who were impacted by this disaster, which has caused significant loss of life and infrastructure damage in both countries. While we don’t know the full extent of the supply chain impacts, we believe the overall impact to be minimal in our industry. We know there was damage at some of the major ports in Turkey, which will cause short term disruption. Turkey is located between the Black Sea and the Mediterranean Sea and is a critical waterway for ocean container traffic in Eastern Europe. Turkey’s largest exports include iron and steel (sixth largest exporting country by volume), motor vehicles and machined vehicle parts, electrical equipment and refined petroleum. We know some cable manufacturers have capacity in Turkey, but, to our knowledge, the disruption is minimal. We will continue to monitor this situation moving forward.
The Consumer Price Index (CPI) report was released this week showing 12-month inflation declined for the fifth consecutive month to 6.4%, while month-over-month inflation rose .5% from December. The Federal Reserve (Fed) met earlier this month and announced an additional 0.25% hike to interest rates. This comes on the back of seven interest rate hikes in 2022, totaling 450 basis points. The Fed funds rate now sits at 4.5%–4.75%, and most expect an additional 0.25% hike during their next meeting in March. These actions will continue to create economic uncertainty, slow demand and further risk global recession. We anticipate that ongoing rate increases will occur until inflation normalizes in the 2%–3% range. These rate decisions will continue to impact demand in many markets we serve, but we continue to hear from several customers, like utilities and large contractors, that they are not slowing their workplans at this time or have large backlogs that have built up over the past three years.
Material Lead Times
We are starting to see the improvements in the supply chain reflected in lead times across all market segments. Average material lead times remain elevated at 69% higher, on average, than in April 2020, but this is down from 80% in December. We continue to see stabilization in several categories in the construction, industrial and natural gas segments. While lead times are extended, they are becoming less volatile and more predictable, helping us plan inventory levels more effectively. Lead times in the electrical utility segment remain a major concern at nearly 160% higher than pre-pandemic levels; however, we are starting to see some improvement in this market as well. Utility lead times are stabilizing, but we anticipate demand will remain strong while utilities focus on grid hardening and resiliency, storm and wildfire mitigation, transitioning to clean energy and infrastructure spending to support electrification (EVs).
Below are the top categories where we are seeing extended lead times and material availability challenges. We continue to work with suppliers on these issues and on alternate sourcing to mitigate risks, where possible. We say this each month, but early planning together as partners is critical. The better visibility to your forecasts and needs, the more we can help you plan your business in 2023 and beyond.
Logistics and Freight Updates
We continue to collaborate with our national carrier partners to understand trends and impacts in the freight markets. We are seeing improvements in capacity and transportation costs for both ocean and over-the-road logistics; however, labor disputes remain the biggest potential risk in the transportation industry. Baring labor stoppages, we believe transportation is a low risk for further supply chain impacts in 2023.
- Ocean freight – Ocean container capacity continues to increase due to slowing demand and as supply chain bottlenecks unwind. Shipping container costs fell an additional 6% last month across all freight lanes and are down nearly 90% from pandemic highs. Year-over-year container imports into the United States were down 21% in December and down for the fifth consecutive month. We anticipate yearly import volumes will continue to decline in the first half of 2023, which may cause further container price declines. The labor contract between the International Longshore & Warehouse Union (ILWU) and the Pacific Maritime Association (PMA), which officially expired on July 1, has still not reached an agreement. A reminder that the ILWU is the labor union representing over 22,000 dock workers in 29 West Coast ports. The biggest negotiation points stalling the contract renewal are the push for additional port automation (such as automated guided vehicles, robotics and remote-controlled cranes) and increased employee benefits in targeted areas. While the ports remain fully operational, the longer these negotiations persist, the higher the risk of work slowdown or stoppage if settlements are not reached. We continue to see a rebalancing of freight traffic from West Coast to East Coast ports live in New York/New Jersey, Savanna and Charleston due to the risks on the West Coast.
- Over-the-road (OTR) trucking – Trucking availability continues to improve and, as diesel prices have declined over the past quarter, freight rates for all modes of trucking transportation continue to decline. Diesel prices remain at historic highs but are well below the 2022 average of $5 per gallon, and down 13% over the past quarter. This is driven by slowed trucking demand and warmer winter weather, creating excess supply. The one ongoing area of risk that remains is fleet replacement and maintenance. Lead times on class 6, 7 and 8 trucks remain extended as manufacturers work through backlogs and ongoing supply chain issues (e.g., semiconductors). Many trucking companies and logistics companies will see aging fleets over the next two years due to replacement lead times, which may cause ongoing reliability and availability challenges. According to DAT Freight & Analytics, for flatbed trailers, it is estimated that there are now 12 loads for every trailer on the road — down from 97 at the peak in May 2021 but up 27% from last month. For enclosed vans, there are an estimated three loads per truck on the road, down from 7.5 at the height of 2021 and down 13% from December. The national average cost per mile for a spot-rate flatbed in December was $2.72 per mile, down 1% from last month and down 14% over prior year. The national average cost per mile for a spot-rate dry van last month was $2.30 per mile, down 4% over prior month and down 26% from prior year.
Raw Material (Commodity) Updates
Commodities remain highly volatile due to economic slowing and uncertainty, the Russia-Ukraine conflict, global energy shortages and volatility in the Chinese economy. While most commodities have softened considerably from pandemic highs, China’s reopening and economic restart the past several weeks has caused some price softening.
- Resins — Prices remain relatively stable as the Atlantic hurricane season had little to no impact on resin production in the Gulf region in 2022 as previously noted. We expect to see continued softening in resin prices through the winter, with likely some uptick in the spring. We continue to see volatility in pricing on resin-based categories like PVC, but we could see continued price softening if there is a surplus of resins and finished goods inventory.
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