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UPDATED 11.22.2022 – Impacts on Global Supply Chain Logistics

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

Supply chain challenges continue even as we see improvement in available freight
capacity, declining freight costs and softening commodity prices. Port operations
are stabilizing, and container costs are nearing pre-pandemic levels. Even as
diesel fuel prices remain elevated, trucking transportation costs continue to
decline, and available capacity is at the best point in over two years. Most
commodity prices continue to stabilize or have softened over the past 30 days.

While these actions are highlighting some positive news as signs of combatting
the highest inflation in 40 years, many challenges continue. Labor shortages
remain a significant challenge to material availability and manufacturing capacity.
Unemployment and workforce participation remains at or near record lows, and
job creation continues even in the face of economic uncertainty. COVID-19 cases
are rising again in China, and many large manufacturing hubs will be shut down
temporarily due to the Zero COVID policy. The country also announced it was
doubling down on the restrictive policy this past week, suggesting that it would not
end anytime soon. We are seeing more announced pricing increases going into
the new calendar year from suppliers than we anticipated after some price stability
the past quarter. The primary justifications and drivers are continued rising labor
costs, energy costs and capital investment costs due to adding capacity or
onshoring production to mitigate future supply chain risks.

The October Consumer Price Index (CPI) report published this morning showing
12-month inflation at 7.7%, a slight decline from the prior month, but remaining
much higher than the targeted 2%–3% range. The Federal Reserve (the Fed)
continues to raise interest rates, announcing an additional 75 basis point rate hike
at their meeting earlier this month. So far in 2022, they have announced six rate
increases with a funds rate between 3.7%–4.0%. It is likely these rate hikes will
continue until inflation returns to a more normalized state. These actions will
continue to slow demand in some markets we serve, like residential construction,
but many customers in the commercial construction, industrial and utility segments
are suggesting they will continue to push forward with their projects and workplans
in the near term.

 

Material Lead Times

Average material lead times from our suppliers remain 85% higher than prepandemic levels across all products and markets we serve. We continue to see stabilization in several categories in the construction and industrial segments, while lead times in the electrical and gas utility segments continue to trend higher, up more than 150% from pre-pandemic levels. Utility demand remains strong asthey focus on grid hardening and resiliency, storm and wildfire mitigation, the transition to clean energy and infrastructure spending to support the electric vehicle (EV) transition.

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 2022
and beyond.

Impacted Construction/Industrial Categories

  • Distribution equipment: circuit breakers, load centers, panels, switches
  • Wiring devices and wall plates
  • PVC and weatherproof boxes
  • Fuses
  • Meter sockets and hubs
  • Ground rods
  • Automation products controls

Impacted Electric and Natural Gas Utility Categories

  • Wire and cable – 600V aluminum, bare overhead distribution and transmission, primary underground
  • Transformers, capacitors and voltage regulators
  • Fiber optic cable
  • HDPE conduit
  • Anchors and pole line hardware
  • Fiberglass box pads, enclosures, pedastals and hand hols
  • Fiberglass crossarms
  • Transmission insulators and related hardware
  • Gas pipe
  • Gas regulators
  • Excess flow valves
  • Meter risers and meter set assemblies
  • Anodes
  • Bypass meter valves and bars
  • PE fittings and line stoppers
  • PE tap tees and line stoppers

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 a significant concern in the transportation industry.

  • Ocean freight – Ocean container rates continue to normalize and are
    nearing pre-pandemic levels as demand slows and available ship cargo
    capacity increases.
    • U.S. ports appear to be doing a better job handling inbound freight volumes based on the slowing demand referenced. U.S. container imports declined 13% year-over-year in October, but inbound volumes are still 7% higher than pre-pandemic levels.
    • Container rates from Shanghai to the West Coast are down 85% since the beginning of the calendar year and are nearly back to pre-pandemic levels.
    • 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 point that is stalling the contract renewal is the push for additional port automation, such as automated guided vehicles, robotics and remote-controlled cranes.
      • While the ports remain operational, the longer these negotiations persist, the higher the risk of work slowdown or stoppage if settlements are not reached.
    • Shippers continue to shift freight to East and Gulf Coast ports due to the continued West Coast ports. While the ports of Los Angeles and Long beach have historically handled the largest inbound volumes, the port of New York/New Jersey has handled the most inbound volumes into the country now for three consecutive months.
  • Over-the-road (OTR) trucking – The U.S. truckload market remains soft, and
    capacity is at the best point in more than two years due to slowing demand.
    • Spot rates continue to soften, even as the price of diesel fuel rises, now
      60% higher than the 2021 average.
    • Lead times on class 8 vehicles remain a significant concern due to strong demand and continued supply chain issues on parts like semiconductors, which is impacting new vehicle lead times and fleet maintenance.
      • New truck orders continue to book well into 2024.
    • According to DAT Freight & Analytics, capacity is normalizing for both
      vans and flatbed vehicles.
      • For flatbed trailers, it is estimated that there are now 12 loads for every flatbed trailer on the road — down from 97 at the peak in May 2021 and down 8% from last month.
      • For enclosed vans, there are an estimated 2.9 loads per truck on the road, down from 7.5 at the height of 2021 and down 21% over last month.
    • The national average cost per mile for a spot rate flatbed in October was $2.85 per mile, down 2% from last month and down 6% over prior year.
    • The national average cost per mile for a spot-rate dry van last month was $2.42 per mile, down 2% over prior month and down 17% from prior year.
    • Diesel fuel prices remain elevated with a national average near $5.35 per gallon this week. This is 47% higher than the 2021 average and 75% higher than the 2019 average (prepandemic).
  • Rail Transportation – We continue to provide updates on the pending rail strike that would have been the first rail labor stoppage in nearly 30 years.
    • A tentative agreement was reached on September 15, which involved moderation from the White House; however, in October, several of the negotiating unions rejected the proposed deal.
      • Four of the negotiating unions have now come forward, saying that if a deal is not reached by Sunday, December 4, they are prepared to strike.
    • A rail strike would cause a significant impact to the U.S. supply chain with railroads carrying 30% measured by weight and distance traveled. While Border States does not directly utilize rail as a transportation source, many of our suppliers use rail to transport raw materials and components to their manufacturing facilities.

Raw Material (Commodity) Updates

Commodities remain highly volatile due to economic slowing and uncertainty, the Russia-Ukraine conflict, global energy shortages and a slowing Chinese economy. Most core commodities have softened considerably over the past quarter with several at or nearing pre-pandemic levels.

  • Copper – Pricing remained stable in September and October with monthly averages of $3.48 and $3.47 per pound, respectively, but are seeing some volatility to start November. Prices rose on a weakening dollar and 4 speculation regarding China’s Zero-COVID policy. Price of the red metal spiked above $3.70 per pound last week but has declined back to $3.60 this week as China has reaffirmed their commitment to the policy. The shift to electrification and clean energy have increased the long-range copper forecast from the current 25 million metric tons (mt) today to an estimated 50 million mt by 2035. To achieve these requirements, it will call for significant capital investments in new mining operations and investment in older mines to increase output.
  • Aluminum – Demand for aluminum remains exceptionally high, and pricing is volatile. The metal opened this week at $1.22, relatively flat over the past month, and down 20% over the past quarter. Aluminum prices have fallen since highs this spring driven by fears of supply chain impacts from the Russia-Ukraine conflict — the region is the third largest producer of the metal. To this point, Russian exports have not slowed, but some countries have self-imposed bans. The United States and the London Metals Exchange (LME) continue to evaluate a ban on Russian aluminum, which would have a significant impact on global pricing and availability. Pricing has also fallen due soft Chinese demand driven by a slumping economy and continued lockdowns. Costs have been held up by rising energy costs withelectricity accounting for 30%–50% of the total cost of aluminum production, and rising global costs of magnesium, a key additive in the aluminum manufacturing process.
  • Steel – Prices in the United States continue to fall to the lowest level in more than two years. Hot rolled coil (HRC) steel — a good benchmark for the steel industry — is below $660 per short ton this week, the lowest point since September 2020. Prices remain about 20% higher than 2019 levels. Some of the decline in prices have been offset by rising energy and labor costs. Prices continue to soften based on declining demand as consumer spending slows and as the auto industry continues to combat supplier chain issues (e.g., semiconductors). Price softening has been offset somewhat by rising energy and labor costs impacting production. U.S. steel producers continue to evaluate taking capacity offline to combat the rapid deflation.
  • Crude Oil – Oil prices have softened over the past week on building U.S. inventories and continued concerns over China’s demand with rising COVID-19 cases. The Brent Crude (the global oil index) fell to $93 per barrel and the West Texas Intermediate (WTI) — the index for U.S. oil — fell to $86 per barrel, both down 25% from June highs. The geopolitical risks in the oil market remain. OPEC+ continues to suggest production cuts to elevate the price, while The European Union is set to ban Russian crude imports on Monday, December 5, in retaliation for Russia’s invasion of Ukraine.
  • Resins — Prices remain relatively stable as the Atlantic hurricane season has had very little impact on the Gulf Region. Suppliers in some categories have tried to push increases into the market the past several weeks with mixed results and push back.
  • Lumber — Prices continue to fall as U.S. mortgage rates are at their highest point since 2008 and with U.S. housing starts at their lowest point in more than two years and down 8% in September. Prices have fallen about 25% over the past quarter and are down more than 70% from the record highs in spring 2021. With additional interest rate hikes expected, it is anticipated that lumber will return to 2019 levels in the coming months.

Labor Challenges and Inflation

Labor shortages and rising wages continue to be major concerns for driving supply chain challenges and inflationary pressures. The unemployment rate ticked up slightly to 3.7% in October, up from 3.5% in August. Labor participation — the number of eligible people participating in the workforce — was flat at 62.2% in October and remains near 40-year lows. This rate means there are nearly three million fewer workers participating in the work force in the United States today than before the pandemic.

The Bureau of Labor Statistics released the October CPI report showing 7.7% inflation over the past 12 months, down from 8.2% in September. The number of U.S. job openings increased to 10.7 million in September from 10.3 million in July, but 1.7 jobs remain available for every unemployed worker. While unemployment is rising and some market segments are experiencing layoffs, finding labor for manufacturing and warehouse jobs remains extremely challenging and will continue to create inflationary pressures on wages.

 

What We’re Doing to Help Our Customers

While we continue to see some areas of the supply chain normalizing in the face of economic uncertainty and slowing demand in some segments, we continue to face significant challenges and pressures across all core markets we serve. We believe that it will be years before the supply chain fully stabilizes, and we may never fully return to the “just-in-time” world seen prior to the pandemic.

Even in the face of these ongoing supply chain resiliency challenges, we understand our customers’ work cannot stop — you are unstoppable businesses, and we understand the importance of maintaining your operations while managing your costs.

At Border States, we continue to invest in working inventories, maintaining emergency and storm response inventories in core markets and working diligently to justify that all price increases align with current market conditions. We are focused on more tightly integrating supply chains, improved forecasting and planning with customers and vendors and delivering better insights through technology to ensure your long-term success. Communication and partnership remain key in continuing to navigate the challenges.