The Lab | First Things First - Episode 8: Supply Networks Are Shifting

First Things First: The Fastest Five Recap – September 2022 Edition

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First Things First

The Fastest Five Recap - September Edition

September 14th, 2022   ·   By Callum Berry

We hope you enjoyed the eighth edition of our First Thing’s First (if you missed it, you can still find it here) where Mercado CEO Rob Garrison spoke to Jim Tompkins, entrepreneur and founder of Tompkins Ventures. Jim was an absolute delight to have on the show, and gave us his experience in the supply chain industry as well as providing a unique perspective on where he sees the supply chain heading.

As usual, Rob kicked off the show with a segment called ‘The Fastest Five,’ which looks at some of the hottest topics happening in supply chain right now. Below are the highlights and details from this week’s show.

Rail Unions Rallying

Two of the largest railroad unions currently in negotiations with railroad carriers have stated beyond any shadow of a doubt that they will strike if more quality-of-life provisions (covering attendance policies, vacation and sick days) are not put into place.

The Brotherhood of Locomotive Engineers and Trainmen (BLET) and the SMART Transportation Division represent half of railroad union workers. So far, eight out of twelve unions have reached tentative agreements with carriers, however have yet to fully negotiate quality-of-life provisions. The unions also have “Me Too” agreements with their fellow unions, meaning whatever benefits the BLET and the SMART unions agree to in their contracts, other unions’ members will also receive.

As of this article going live, if an agreement isn’t reached by Friday, the strike will go ahead with an estimated two-billion dollars per day impact on the U.S economy. Further, the reduced workforce would have a knock-on effect on shippers, with 40% of all long distance trade in North America undertaken by rail. Emergency measures have already been taken by railroads—for example, offloading hazardous cargo in the event of a shutdown.

Rob’s perspective

Wow, that really is crazy! A 10-12% drop in demand overnight isn’t something any business leader wants to see. Economists are really struggling to predict what’s in store for businesses and our consumers from an inflation point of view—some view it as a near-term consequence of high government stimulus injection alongside shortages driving prices higher and making the cost of living more expensive; whilst others see it as something that’s been building for a long, long time. Whatever the case, we are all going to have to figure out and prepare for this added layer of complexity in an already struggling industry.

Sticking the Landing

The shipping container industry is currently enjoying its most profitable era on record. In fact, in just three years, the industry will have made as much money as it did in the entire previous six decades combined.

However, Richard Milne from The FT predicts that the industry might be in for a hard landing; port congestion worldwide is still high which has forced up prices and helped profits. However freight rates have fallen by about a third recently, and analysts are predicting that profitability will decline next year.

To compound issues, fears of both sky-high inflation and possible recessions in many western countries are high.

“I certainly hope we will not see a pandemic of this nature again, certainly in my lifetime. It’s been a dramatic period. We are looking forward to a more normalized world. We believe we have used this period to build a much better business,” said Søren Skou, Maersk’s chief executive.

Working against the industry are economic headwinds felt around the world, as well as cooling demand for consumer products coupled with carriers affected by capacity increases. The good news is that carriers have become more adept at forming alliances to help reduce this capacity and ease demand, investing in new businesses in order to keep freight going. Maersk, for example, recently invested $3.6 billion dollars into acquiring Li & Fung Logistics.

Further Challenges for China

China’s economy is suffering due to growth challenges piling up. A real-estate crisis coupled with fading demand for exports are creating dark clouds over the previous titan of exportation.

Inflation in the country unexpectedly retreated in August; a fresh sign of trouble in the world’s second-largest economy as new lockdowns in large cities, as well as severe droughts continue to impede domestic consumption. China’s economy grew by just 0.4% in the second quarter of this year, and is expected to go 2.7% for the year down from 8.1% last year.

Consumer prices rose 2.5% in August compared with a year earlier, China’s National Bureau of Statistics said Friday, down from July’s 2.7%.

This slowdown in inflation is adding to signs of weakness in China’s economy as the Communist Party leaders prepare to gather at the party congress in Beijing next month where Xi Jinping is seeking to overturn recent precedent and secure a third term in office. Still, subdued inflation may give policy makers extra comfort as they calibrate policies to stimulate the economy. China has said it aims to keep consumer inflation to 3% or lower this year.

Join us on our next show!

We hope you found this recap useful and informative.

The next First Things First liveshow will be held on the 11th of October, and will feature Eric Johnson, Director at S&P Global and Senior Technology Editor at the Journal of Commerce, as the guest speaker who is sure to give us a lot of great insight into the market. Links to the event to follow!

Catch-up on the live show

To watch the full episode of First Things First, head over here.
To subscribe to the podcast (available wherever you listen to yours), click here.
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