Supply Chain Resilience

In March 2022 I started giving much more attention than ever before to EU natural gas sources, inventories, distribution networks, and consumption. In May 2022 I was invited to listen-in and ask occasional questions while European energy experts tried to decide what could be done regarding their dependence on Russia’s natural gas. Looking ahead six to nine months, in July 2002 I wrote here:

President Putin is depending on decadent demand. He is depending on European consumers and bourgeois politicians to succumb to high prices and chilly room temperatures. Putin has restored General Winter to a prominent place in Kremlin councils… In recent years natural gas has generally provided between one-fifth to one-quarter of the European Union’s total energy mix. There is considerable variation nation to nation. Natural gas fuels roughly one-fifth of EU electrical generation. This ranges from over 40 percent in Italy and Netherlands to less than 15 percent in Germany or barely more than 5 percent in Denmark… Maybe General Winter will descend on Amsterdam to Warsaw with the coldest temperatures in two centuries. He is confident that contemporary European consumers — and voters — are effete, weak, self-indulgent, and can eventually be distracted from any concern for Ukraine… much less what might come after Ukraine. Yesterday the host of the EU energy consultations said, “… everybody understands that this sacrifice is necessary. We have to, and we will, share the pain” (more).

By late summer 2022 a more resilient natural gas flow-map was beginning to emerge, but there was still plenty of cause for concern. In mid-September I outlined, “Efforts by the EU and its members states to reduce energy consumption began in the weeks following Russia’s invasion of Ukraine. As the summer ended, these efforts have escalated (more and more). Much will depend on winter weather.”

Fortunately, General Winter decided to extend his stay on the Riviera. On New Year’s Day 2023, this blog reported:

Europe’s second week of winter begins with Frankfurt breaking 60 degrees Fahrenheit. Autumn in Paris (and Berlin and Amsterdam) was remarkably mild. The EU has consumed one-fifth to one-quarter less energy than usual. Much higher costs have also contributed to declines in demand (more and more). EU natural gas storage facilities are more than 80 percent full (more and more). The price of a March futures contract for natural gas is now less than one-quarter the late August price per the Dutch TTF benchmark (see chart below). (The US Henry Hub price has also fallen.)

By late April 2023 the European benchmark price for natural gas was less than one-fifth its summer 2022 peak. Demand, supply, and winter weather all went much better than we had any good reason to predict in Spring 2022.

This week the first cold wave of the winter has descended on Europe. Next week will be even colder. Five days of snow is predicted for Berlin. Despite this early cold start, the long-range forecast is for another mild winter. Severe Weather Europe summarizes its seasonal forecast with “Europe is expected to have warmer-than-average temperatures over most of the continent. Colder temperatures will be more defined in the northern and northwestern parts of the continent.” Fingers-crossed.

Below is an S&P Global demand and supply update you first saw here in late September. This was a very encouraging set-up for early autumn.

On Tuesday Reuters headlined: Europe’s Gas Crisis is Ended but then added a comma plus “but not the painful adjustment.” John Kemp then reports:

EU and UK gas inventories peaked at a record 1,146 TWh on Nov. 6 which was +190 TWh (+20% or +1.97 standard deviations) above the prior ten-year seasonal average. Storage sites were a remarkable 99.6% full, which was more than 10 percentage points over the 89% average for the previous ten years… It is still very early in the winter heating season, so there is still considerable uncertainty about how much gas the region will consume and how much it will carry over to the summer 2024 refill. But based on storage changes in the last ten years, inventories are projected to be 591 TWh at the end of winter 2023/24 which would leave storage 52% full. Even a very cold winter would leave inventories of 401 TWh (35% full) while a very mild winter could leave as much as 804 TWh (70%).

The wise if not yet wizened Mr. Kemp then comments:

The region’s challenge is how to cope with relatively high gas prices in the medium term if relatively inexpensive pipeline gas from Russia is permanently swapped for more expensive liquefied natural gas (LNG). Greater reliance on LNG rather than fixed pipelines also means Europe’s gas prices will increasingly be determined by weather, business cycles and policies outside its borders, especially in Asia. Europe will always be able to outbid rivals to secure sufficient volumes LNG on account of its higher income and wealth but the prices it pays will increasingly be determined elsewhere.

Pull attracts push. Demand organizes supply. But every pool of pull is limited. Pulling this more expensive flow from here, leaves somewhat less pull to attract that from there.

Supply Chain Resilience is especially attentive to wide-area, cross-sector, high volume, high velocity flows. Is there enough flow in the right channels to deliver what is needed when and where it is needed? This is analogous to the human body’s blood pressure being sufficient to feed oxygen and nutrients to our vital organs, but not get so fast and tight as to over-stress the cardiovascular system.

During the worst days of the pandemic, global supply chains were arguably experiencing dangerously high pressure. It was possible to perceive supply chain equivalents of multiple blood-clots emerging simultaneously. The Global Supply Chain Pressure Index tracked that high pressure for most of 2020 through 2022. But we have spent most of 2023 with pressure well-below historical averages. (See first chart below.)

Are we now in danger of hypotension — too-low supply chain pressure? There are some US producers, shippers, carriers, retailers and consumers that have experienced related symptoms. But no, as a whole, current US flow is strong, consistent, even athletic. In many cases pandemic stress has resulted in higher capacity, increased efficiency, and more effective flows.

Below are some current measures that — in combination with the GSCPI, Logistics Manager’s Index, and other more comprehensive efforts — may suggest where our fitness routine is most successful or needs some extra attention.

Agricultural Production: There are places having serious food production problems, such as Argentina, Ukraine, and North Georgia (US) and Wisconsin. But total world production is mostly higher. According to the November World Agricultural Supply and Demand Estimates (WASDE), “The global wheat outlook for 2023/24 is for increased supplies, fractionally lower consumption, less trade, and larger ending stocks… Global coarse grain production for 2023/24 is forecast up 4.8 million tons to 1,499.3 million… The 2023/24 global rice outlook this month is for higher supplies, consumption, trade, and nearly unchanged stocks… The global 2023/24 soybean supply and demand forecast includes lower beginning stocks, higher production, higher crush, and lower ending stocks. Beginning stocks are reduced 1.6 million tons, reflecting offsetting back-year balance sheet revisions for China and Brazil. China’s beginning stocks are reduced on lower soybean imports for 2021/22 and 2022/23 and higher crush for 2022/23. Conversely, Brazil’s beginning stocks are increased on a larger 2022/23 crop of 158 million tons due to higher-than-expected use to date.” Where there is increased supply, prices are — not surprisingly — falling (here and here and here).

Global Natural Gas Demand and Supply: This week Bloomberg reported, “European natural gas traders have started taking fuel out of the region’s record inventories as colder weather settles in, drawing from its buffer against winter supply shocks. Consecutive net withdrawals took place for the first time since April this week, data from Gas Infrastructure Europe show, and may accelerate as parts of Europe face below-normal temperatures over the weekend. For now the withdrawals are marginal, and storage facilities remain over 99% full.” Asia’s demand for natural gas reflects continued economic sluggishness across the region. According to Reuters, Asian “prices have so far failed to get their usual seasonal bump as demand remains relatively subdued and supply is more than adequate, especially from the United States.” US natural gas inventories and production continue to be strong. According to the EIA as of November 15, current domestic stockpiles are at the second-highest end-of-refill-season level experienced during the past five years. US spot prices are two-thirds below fourth-quarter 2022 benchmarks, even though US consumption is slightly above last year. This affordable abundance is not limited to natural gas. Diesel flows have adapted better than many (including me) were worried about last year. The collapse of fossil fuel prices over the last few weeks is unlikely to reverse without severe reductions in supply (not impossible, but…). [November 20 Update: Very helpful round-up of the current Atlantic LNG market from S&P Global.]

China Export Volumes and Value: During October Chinese exports fell 6.4% compared to October 2022 according to China’s General Administration of Customs. This was the sixth month of consecutive declines and reflects a steeper decline than September’s 6.2% reduction (more). It is, however, helpful to differentiate between volumes and value. For example Barron’s reports, “Beijing is selling as much as ever, if not more, volume-wise. It’s the price of exports that’s dropping—8% year over year at the last reading, says Duncan Wrigley, chief China economist at Pantheon Macroeconomics. “China has become a global disinflationary force,” confirms Larry Hu, chief China economist at Macquarie Group. The yuan is partly responsible: It is down 3% against the dollar over the past 12 months.” Given China’s proportion of global flows its current condition is relevant to the health of the whole. A body with a great pulse rate but circulation problems or arthritis in the feet is not likely to do well running a marathon. [November 19 Update: Related commentary by Ruchir Sharma in the Financial Times.]

North American Grid Capacity: Extreme weather is prompting demand spikes that challenge North American (and other) electrical grids. This challenge is compounded where — as in Texas — episodic demand piles-on sustained growth in systemic demand caused by increased population and economic activity (more and more). As recently outlined here, the US grid will face serious threats if — likely when — severe winter weather prompts simultaneous increased demand and disrupted supply. [November 20 Update: The New York Times compares US sources electricity generation with that of other nations.]

US Personal Consumption Expenditures: The US Census Bureau’s method for measuring retail sales is differentiated from how the US Bureau of Economic Analysis calculates Personal Consumption Expenditures. But a flattening of the growth rate for US retail sales during October will almost certainly be echoed in the October consumption data to be released in a couple of weeks. Slowed growth at the current high levels of demand (see second chart below) is not, however, a systemic threat. The US economy is very active, as such domestic consumer demand has been robust. Food, fuel and most other supplies are flowing as needed without much stress. There are aging edges. There are comparatively weaker bones and muscles. Some extra attention, coaching, even therapy is needed. But right now the overall flow between demand and supply is about as healthy as a body this mature and this big can usually get.

GLOBAL SUPPLY CHAIN PRESSURE INDEX (Federal Reserve Bank of New York)

On Friday, November 10, DP World Australia container port operations in Melbourne, Sydney, Brisbane, and Fremantle were seriously disrupted by a cyberattack (more and more). DP World handles roughly 40 percent of Australia’s maritime throughput (in and out). This morning the BBC reported: “DP World Australia, a unit of the Dubai state-owned DP World, said its ports resumed operations at 09:00 local time “following successful tests of key systems overnight… The company expects that approximately 5,000 containers will move out of the four Australian terminals today.” Bloomberg is reporting that the three day slowdown prompted a back up of roughly 30,000 containers. Recovery of normal flows will require several days. But unless there are malware aftershocks or new attacks are experienced, Christmas retail should not be seriously impacted (a concern raised over the weekend in Australian media (here and here).

Yesterday the North American Electric Reliability Corporation (NERC) released its 2023-2024 Winter Reliability Assessment for the North American grid. Here’s how NERC summarizes its findings:

…much of North America is again at an elevated risk of having insufficient energy supplies to meet demand in extreme operating conditions. The areas identified as being at elevated risk extend over much of the eastern two-thirds of the continent. In these areas, although resources are adequate for normal winter peak demand, any prolonged, wide-area cold snaps will be challenging due to generator outages and fuel vulnerability, extreme levels of electricity demand, difficulties in accurate forecasting and the risk of firm electricity transfer curtailments.

Below is a map with risk assessments for each of the regional bulk power networks.

Bloomberg explains, “The grid’s vulnerabilities have been revealed during storms in recent years, notably a 2021 deep freeze in Texas that left more than 200 people dead. While utilities and power generators have made efforts to weather-proof equipment, the NERC report determined that many are still at risk. Gas and coal deliveries can both be hampered during extreme weather and plants can be forced offline, just as cold temperatures drive up power consumption.”

There was also a very close call late last year impacting MISO, PJM, and SERC (both C and E). Here and here are some related reports by this blog. As usual I tend to emphasize demand dynamics. Here is the FERC plus NERC report on that event. Please read this report. It is clear, comprehensive, detailed, and helpfully frames the strategic (architectural?) and tactical (engineering?) challenges for moving forward. Here is a brief example:

From December 21 to 26, 2022, in the Event Area, a total of 1,702 individual generating units—47 percent natural gas-fired, 21 percent wind, 12 percent coal, 3 percent solar, 0.4percent nuclear, 17 percent other (oil, hydroelectric and biomass)—experienced 3,565 outages, derates, or failures to start… Ninety-six percent of all outages, derates, and failures to start were attributed to three causes: Freezing Issues (31 percent), Fuel Issues (24 percent) and Mechanical/Electrical Issues (41 percent). Of those outages, derates, and failures to start, 55 percent were caused by either Freezing Issues or Fuel Issues… Natural Gas Fuel Issues (a subset, but the majority, of Fuel Issues) were 20 percent of all causes, and issues with other fuels were four percent. In addition to the outages, derates, and failures to start caused by Freezing Issues, those caused by Mechanical/Electrical Issues also indicated a clear pattern related to cold temperatures—as temperatures decreased, the number of generating units experiencing an outage, derate or failure to start due to Mechanical/Electrical Issues increased.

Good news: The current long range winter forecast for North America calls for above-average temperatures and extended extreme cold seems to have become less common than extreme heat (not exactly good news in August). Bad news: our temperature averages increasingly include more extreme short-term events — such as Winter storms Uri and Elliott. In the Northern Hemisphere these sudden onset anomalies are often associated with the polar vortex. Halloween weekend much of the United States experienced a rapid cool-down courtesy of polar weather escaping to the south. As winter deepens, these quick holiday flights — Christmas, New Years, Ground Hogs Day — will get even colder.

Last week I was asked to recommend a well-established private sector, business continuity process that focuses on all-hazards instead of specific threats. I was surprised — chagrined — that nothing immediately came to mind. If you have suggestions, please let me know…

In response I did send along two recent studies:

PwC has published a 2023 Global Crisis and Resilience Survey that found, “It is no longer sufficient for organisations to be in silos as they address today’s complex and interconnected risks. Enterprises are actively moving to an integrated approach to resilience, centrally governing and aligning multiple resilience capabilities around what matters most to the business, and embedding the programme into operations and the corporate culture.” Only one in five respondents self-assess they have a sufficiently integrated approach.

Accenture has recently published a similar analysis entitled Resiliency in the Making. Here’s one of several findings:

The turbulence of the last few years has forced many businesses to address the vulnerabilities in their highly globalized supply and production networks. Our research shows companies are reducing their dependency on sole sourcing strategic commodities in the next three years. Regional sourcing is also bouncing back. Numbers are set to leap from 38% of respondents today mostly sourcing regionally to 65% in the next three years. Leaders are also prioritizing proximity-based hubs that concentrate production facilities and sales within the same region to streamline logistics, improve inventory management and accelerate response to market demand. We found that the manufacturing of products across multiple plants is expected to rise from 41% today to 78% in three years’ time. 

McKinsey research has produced similar findings and related recommendations. Boston Consulting Group has a business resilience practice.

Many more consultancies seek to minimize commercial losses and seize comparative advantage through resilience practices. The consultancies are interested in generating new business. Consultants generate new business by persuasively articulating problems and offering plausible solutions to the problems articulated.

Increased attention to resilience reflects the after-effects of pandemic problems, climate change, increasing geopolitical risks, social-civil conflict, political gridlock, and related economic volatility. Surveys of current and potential clients also suggest unfulfilled demand. Please notice the anticipatory nature of the quotes above. The PwC survey found that only about one-fifth of respondents have “implemented initiatives to protect their workforce or physical assets from the impacts of climate risk.” Even implemented is not completed. Lots of need, lots of consulting opportunities.

The business enterprise that asked about an all-hazards approach currently takes a threat-specific approach. In other words: here’s what we should do in case of this kind of impact to this kind of asset. Were our lives ever that simple? With some rare exceptions, yes — for many firms operating in many places this sort of limited, rather linear risk management (perhaps emergency management) was mostly sufficient.

What has changed over the last thirty-plus years is that scale — both population and wealth — has exploded. As both effect and cause of this increased scale, speed (really velocity, both speed and direction) has dramatically accelerated (more). Given the capital costs required to serve this scale with speed there has been much more intense concentration of productive assets, both in terms of physical places and corporate ownership. As as result, for our most capable firms, risk profiles are much more complicated and extended — increasing the likelihood of experiencing hard hits someplace, sometime. Then, given increasingly tight concentration of capacity, a hard hit in any one place is much more likely to escalate, accelerate, and cascade consequences across the entire networked system.

The same systems that speed fulfillment of high-volume demand will also speed the effects of high-impact hits. Depending on context, our greatest strength can become our greatest weakness.

How do we imagine and prepare for our greatest strength failing?

Vulnerability assessment is hardly new, see Sun-Tzu, Thucydides, Sophocles, and Genesis among many more. The distinction between threat-based and capability-based planning has become common in the post-Cold War era. The now venerable SWOT method even offers the chance to consider potential relationships between strengths and weaknesses before taking up threats. But it is my experience that threats are more inherently motivating of change than any other factor. Fear of losing even trumps the opportunity to win. Some psychological studies find that most humans feel the pain of loss twice as intensively as the equivalent pleasure of gain (here and here). We can blame several thousand years of evolution under quite urgent threat conditions — and our reluctance to really, seriously, self-critically think — especially about variably emerging futures.

Given the scope and scale of our most capable enterprises and the complexity of our most serious threats, a vulnerability focus absolutely makes sense. Many threats are beyond prediction or even much influence, but our vulnerabilities are almost always self-created. We can engage and reshape vulnerabilities to reduce hazards — if we can gin-up the honest self-awareness, courage, key relationships, and practical sustained commitment this requires.

Focusing on all-hazards does not ignore threats. Considering weaknesses or vulnerabilities begs the question: vulnerable to what? Effective risk reduction involves both threats and vulnerabilities. But leading with our vulnerabilities while giving primacy to alleviating vulnerabilities (to typically uncertain threats) requires an uncommon sort of institutional culture.

I appreciate the request. I regret the insufficient response. Look for more on this topic over the next few weeks.