Is the world facing an inventory recession?
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Do you have any idea how many containers of stuff are bobbing offshore from Shanghai to Rotterdam, baking in marshalling yards or collecting diesel smoke film in traffic jams?
Of course not. Nobody does. The inventory en route around the world defies the imagination, not to mention the antique information systems in the shipping business.
All of that fitfully tracked and delayed stuff, when it finally lands where it is supposed to, looks as though it will create a big enough pile to trigger a bad inventory recession, where demand for goods drops while accumulated stockpiles are run down. The supply chain practitioners I’ve been interviewing figure that the port backups, unavailable trucks, Covid-19 restrictions and unskilled warehouse staff will be more or less ironed out by Chinese new year.
That is on February 1 of next year. So now you have an educated guess about when the North American economy will take a dive. China seems to have already slowed. The words “Europe” and “boom” have not been connected for a long time.
The public perception of the causes of recessions has floated away from the notion of a surfeit of goods for sale. Most people will blame Wall Street or the political party in power in their country. Or maybe the opposition, because it is slowing policy implementation.
A few on-the-run, contemporary central bank economists have explored the possible role of inventory “adjustments” in recent recessions. But that will not be the headline coming out of the central bankers’ star turn in Jackson Hole, Wyoming, in late August
An inventory recession on the horizon? No, that would suggest official finance is not “in control” with all the “tools they need”. But what can the US Federal Reserve or the European Central Bank do about double and triple ordering caused by truck drivers’ retirements and bridge shutdowns? Buy two containers of rubber bath ducks when the retail customers only wanted one? That would be a truly unconventional asset purchase programme.
At last, though, container shipowners can enter by the front door without being grabbed by the creditors’ marshals. Every operator in the chain is finally cash rich. As one logistics analyst said: “For me, the more chaos, the better.”
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Harper Petersen & Co, the Hamburg ship broker, reports that its Harpex container ship index of shipping rates has risen from 1,154 at the beginning of the year to 3,143. Shipowners have new and enthusiastic sources of finance for new-builds, a good thing since the retreat of German ship investors over the past decade.
Container owners are coining it. As Lars Jensen, of Vespucci Maritime in Copenhagen points out: “Under normal circumstances. a container will go from the factory in Shanghai to Chicago in 35 days. Now it takes up to 73 days, and then the same container has to be returned (usually empty).” Not surprisingly, the spot rental for containers from China to the US west coast has risen from an already high $4,000 or so at the beginning of the year to almost $10,000 in the past couple of weeks.
Of course, most shippers and shipping lines will not want to pay spot rates. Triton International, a US-listed container lessor that has about 40 per cent of the container leasing market, had second-quarter net income of $144.2m, up 148 per cent from the same quarter last year. The company finally snagged an investment grade rating (triple B minus), and did so even while ordering more than 1.1m TEU (twenty foot container equivalent units) of new boxes to add to the 7m they already had on hand.
Thanks to the desperate demand for containers, said Brian Sondey, Triton’s chief executive, the company had been able to roughly match the term of new leases (13 years) with the accounting assumptions of the life of the asset. And since the shipping companies’ credit has improved with their at present high revenues, counterparty risk has declined.
Sondey is philosophical about the inevitable turn in the market and sources of some of the current demand. “Professor Sterman was absolutely right about supply chain dynamics,” he said. John Sterman, of the Massachusetts Institute of Technology, is best known for modelling hoarding and “phantom ordering” among participants in supply chains, even though the behaviour is irrational.
During the forthcoming supply chain shakeout, the participants can start to collect a bit more information about what will arrive where and when. That might help moderate inventory swing recessions in future.
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