The world economy is running on complex and vulnerable supply chains. A big question today is if we are at the end of globalization or starting a new phase in the process. Supply chains have been around for a long time and have been crucial in connecting the world. But looking at all the current issues in the market, our complex and extensive supply chains need to be reviewed and become more resilient. This is part 2 of our article – “How The Global Supply Chain Crisis Is Worsening Inflation“.
This article is written by Rudi Stalmans and featured in the 2022 autumn edition of Tank News International. The title of the article in the Magazine is “How The Global Supply Chain Crisis Is Worsening Inflation”.
The Just-In-Time (JIT) management system has created vulnerable supply chains as one considerable disruption can affect the global supply chain. If the supply chain collapses, businesses and our economy will also fail.
Below are three examples exposing our complex and vulnerable supply chains.
Example 1: Retreating water levels on the Rhine and backwardation
In August 2022, Rhine freight rates for transporting liquid bulk products up the Rhine river in Europe rose significantly to the various destinations as market players were coping with the retreating water levels, lack of available tanker barges, and a necessary re-supply of product into storage tanks. The hefty backwardation in the gasoil markets, seen since the start of the Russian invasion of Ukraine, has also prompted traders to cut back on stocks in hinterland depots and only move the bare minimum of product into tanks.
Example 2: Port congestions and lockdowns
Maersk, one of the world’s largest shipping companies and a good gauge for global trade, highlighted that supply chain congestion in Europe remained as retailers and manufacturers kept containers in ports and warehouses due to weak final demand. Port lockdowns in China due to the COVID-19 zero-tolerance policy and the consequences of the Ukraine war also caused strains in vital areas of the logistics network. In July 2022, Maersk warned that resurgent COVID-19 infections in China put port cities like Shanghai at risk of new health restrictions.
Example 3: Feedstock and inventory issues
Petrochemicals are closely related to many essential human needs, such as food, hygiene, housing, and health. Since petrochemicals do not reach the final consumer in their raw form, people buy everyday products that seem to have no relation to petrochemicals. Before you can have a plastic PET water bottle, you need to establish a whole supply chain. To produce PET, you need PTA, for which you need the liquid feedstock Paraxylene. Paraxylene is shipped in parcel tankers and stored at tank terminals. To make Paraxylene, you have another complex supply chain in place. Any issue during the supply chain, such as problems in feedstock production or inventory issues at the tank terminal, will affect the final product, namely your plastic bottle.
Don’t ignore supply chain geopolitical risks
Supply chain geopolitical risk is the possibility that your supply chain is disrupted by global political events. We have already seen the US-China trade war, the Covid-19-related restrictions, and the sanctions on Russia after the Ukraine invasion. But also, many crucial maritime chokepoints, such as the Suez Canal and Panama Canal, are next to politically volatile countries, increasing the risk of access and obstructions. The Strait of Hormuz is also in such an unstable region and very connected to strategic oil and energy markets.
At the start of 2022, I provided seven actions for business success. One of them was my call to improve supply chain resilience and develop greater visibility over your supply chain to find areas for improvement, achieve greater efficiency, reduce the chances of disruption, and stay competitive. Have you started reviewing and redesigning your supply chain? Contact me if you need help.
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