Author: Philip J Palin

April US retail sales

US consumers continued to spend more than ever before (see chart below). But there may be some signs of cooling demand. For example, grocery store sales were up 8.6 percent from April 2021, but were slightly down from March 2022: $68,286 million compared to $68,560 million (not adjusted for inflation). Spending at food service places increased from March to April: $86,421 million compared to $84,643 million. Are we finally seeing Food-At-Home better balanced with Food-Away-From-Home? As you may have noticed, answering this question has been a personal preoccupation. (More and more)

Price improves pull prospects for diesel

During April, diesel volumes via the Colonial Pipeline declined. Mid-Atlantic diesel inventories saw sharp drawdowns (more). US Gulf Coast refiners diverted flows toward higher prices in Latin America and other markets (more and more).

During the last week in April the price of diesel delivered into the New York Harbor market increased from $4.27 per gallon to $5.16 (see chart below). US diesel prices have mostly continued to climb (more). The second chart below is for June futures contracts on NY Harbor diesel.

Meanwhile, Latin American demand has softened. After the end of the trading day on Friday, May 13, S&P Global reported, “Latin American diesel prices are fading from record highs… Waterborne premiums also were falling in the US Gulf Coast, the main source of diesel for the region, and plunged May 13. The premium paid for barges and cargoes compared with the more liquid pipeline assessment had risen to 13.45 cents/gal by mid-April, the highest level in at least seven years. But it was tagged May 13 at pipeline plus 3 cents/gal. Market sources from both sides of the Atlantic attributed the waterborne decline to less USGC cargo demand from Latin America.”

Refining capacity is tight for all products. Global demand is strong for refined product — especially diesel. The US Energy Information Administration recently predicted that US refineries will operate at up to 95 percent of operating capacity for the summer driving season (with about 31 percent of capacity dedicated to diesel). Given constrained capacity, the tendency for push to follow the highest-priced pull is especially strong. New York is much more attractive this week than three weeks ago.

Attractive enough to pump more diesel volume into the Colonial Pipeline?

It is possible to track flows of natural gas in Ukraine’s pipelines (even in war time). Flows of refined product from Greensboro, NC to Linden, NJ and in-between are not as transparent. Colonial typically transports about 100 million gallons of fuel per day. Several have claimed that late April pipeline flows were well below this capacity. How much? I don’t know. I have talked to three old friends who focus on the fuel market everyday. None of them are sure if more is flowing today. But they each independently expect (one offered to bet) that we will all know by Memorial Day. Two of the three perceive that the increased price into NY Harbor will pull enough to meet demand — and even rebuild inventories a bit.

If I was in a different position — say, the Governor of North Carolina’s chief-of-staff, the CEO of a mid-Atlantic chain of truck stops, the Executive VP of a national trucking firm, staff with the National Security Council — I probably would be calling my friends in Alpharetta with some questions. And if I did not have any friends in Alpharetta, I would decide it was time to make some new friends.

New York Harbor diesel price through May 9

New York Harbor June Diesel Futures as of May 15

+++

Special Note: On May 13, S&P hosted a podcast focused on tanker market dynamics since the Russian invasion of Ukraine. Sanctions on Russia have complicated and at least marginally reduced flows of Russia’s diesel into the European market. This disruption and related uncertainties have created new opportunities and widespread volatility, especially for midstream transportation providers. The podcast’s discussion does a good job of framing this context and (for better or worse) allowing outsiders to listen-in while insiders talk through some rather arcane midstream realities.

Mind the gap (between demand and supply)

Inflation measures the rate of price increases over time.

Surrounded by demand and supply networks, I experience price increases when demand exceeds supply. The greater the gap between demand and supply, the faster and sharper the rate of price increases.

Mind the gap.

Some inflation is helpful. An emerging gap signals where demand is going. Closing that gap — per time and/or space and/or content — spurs creativity, productivity, investment — the wise effort of consumers, enterpreneurs, and great enterprises.

Narrow gaps suddenly crumbling into yawning chasms are dangerous.

During the pandemic’s first year rapid demand-destruction permanently closed almost 80,000 restaurants, over 10 percent of the sector. Supply far exceeded demand. Early in the pandemic’s third year, high speed swerves in demand have opened sink-holes for some who did fine that first year (e.g. Peloton). Even steep price discounts cannot always stop the slide.

If prices for food, fuel, or other fundamentals rapidly exceed an ability to pay, such vulnerability can unfold into fear. If the gap continues to widen, fear can become hunger. The gap can prompt violence. The more who are unable to cross the chasm, the more suffering… the more fear… the more potential for violence.

Please see the Global Report on Food Crises (2022). Please listen to or read this interview with the CEO of Feeding America. According to the Bureau of Labor Statistics food prices since last April have increased 9.4 percent, the largest 12-month increase since the period ending April 1981.

Even when the threat is not as existential, a quickly widening gap between demand and supply can depress consumption. From a systems perspective, inflation can be understood as a warning signal of excess demand: consumption exceeding production capacity.

But despite a high inflation rate in March 2022, US Personal Consumption Expenditures continued strong and even grew a bit. Personal expenditures on food were the highest ever recorded (see chart below), even higher than March 2020 hoarding. That March 2020 spike, also known as nervous buying or pantry stockpiling, emerged from the run-up and aftermath of mandated lock-downs. The sustained increase in food expenditures over the next many months reflects increased purchases of Food-At-Home, making up for folks not eating out nearly so much during 2020.

By Spring 2021 Americans started spending about as much on Food-Away-From-Home as we had pre-pandemic — and, yet, our spending on groceries continued to grow (more and more). Subtract food inflation from the overall increase in food expenditures and we still have a double-digit increase one year after we restarted full-scale eating out.

I am surprised. I don’t understand why Food-At-Home consumption has not fallen back to something much closer to pre-pandemic patterns. But, whatever the cause, these data help explain the persistence — even escalation — of food inflation. Sure, there have also been — and will be — supply-oriented inflationary influences. Drought, labor shortages, diesel prices and such have nudged up costs. Increased fertilizer prices will impact this year’s food prices. But a two year ascent in aggregate demand is the principal cause of the gap between demand and supply for food.

Food production capacity has also expanded. The United States is processing more food than ever before. But growth in demand has been even more abundant than growth of supply (more). I assess that today we have a “normal” gap of roughly five percent plus another one-tenth caused by the persistent increased demand for Food-At-Home.

The April Consumer Price Index reports that the rate at which US overall demand exceeded overall supply was the narrowest in twelve months — about one-fourth as fast as March 2022. Is this a trend or just an example of volatility?

The answer will depend mostly on current and near-term US consumer behavior. Many Americans still have an unusually large amount of savings. Employment is very close to its pre-pandemic peak. Wages continue to grow. There are at least 11 million unfilled jobs. This context is receptive to continued strong demand… and an expanding gap between demand and supply… in other words: more inflation.

There is, however, the possibility — unlikely as it may be — that consumers could slightly cut back food expenditures for three or four months. If high earning, well-fed Americans would spend (only) about ten percent more than they were spending in 2019, food inflation would flatten. Demand and supply would approach equilibrium. The gap would narrow. The chasm would almost close. No one would need to lose their food industry job. No one would need to sacrifice taste or even calorie counts. Price increases would slow and might even stop. Similar consumer behavior in other high-demand categories could have similar results.

Prospects for this happening are so improbable, it may seem delusional. But I notice that near the close of the inflation-fighting “Volker Recession” of the early 1980s, food expenditures peaked in October 1982 and then fell for five of the next six months just as record-breaking interest rates fell and the nation pulled out of recession. This sharp turn in food expenditures is unusual both in depth and duration, but the four decade old precedent supports the possibility

May 12 Update: Overnight a reader sent me this link to Martin Wolf’s Tuesday column in the Financial Times. I had missed it. She comments, “The two of you are looking at the same behavior and perceive similar patterns. You emphasize a positive that is possible, but unlikely. He acknowledges the positive possibility and explains why it is unlikely. The complex adaptive system is self-organizing to create equilibrium. Which will win: your “wise effort” (sammā-vāyāma?) or gluttony?” I very much appreciate the link… and such a careful reader (even between the lines). She asks a meaningful question. The choice she offers would seem to favor Mr. Wolf’s assessment…

Watching ocean horizons

[Updates below] This morning there are 111 vessels at the Port of LA with at least sixty-seven on the way, according to MarineTraffic (see chart below). This is less crowded than last fall, but still plenty congested compared to any pre-pandemic day. On Friday the Executive Director of the Port of LA said April cargo volume had been the second highest on record (last year was higher). He does not see dramatic changes in vessel traffic heading his way from China (more and much more).

Covid-related lockdowns in China have decimated domestic demand, imports are down from oil to soybeans (more). Production is down and very spotty. For example, take steel exports, according to S&P, “In the first four months of 2022, China shipped 18.156 million mt of finished steel, 29.2% lower on the year.” Transportation to and from many major ports is deeply disrupted (very helpful link). Flows between China and North Europe are clearly declining (so is European demand). Prices for trans-Pacific transport are softening (more and more). Upstream drought will eventurally reduce downstream discharge.

And… where there is pull there is often push. So far, Americans are continuing to buy. Purchases of imported consumer goods during 2022’s first quarter were higher than 2021 and well above pre-pandemic patterns. Most of these goods originate in China. Despite crazy covid constraints, steel is still being shipped. China’s aluminum production is strong and exports have increased. While Shanghai is locked-down, Shenzhen has reopened. Over the last month, the number of vessels arriving and departing Shanghai has typically ranged between 1200 and 1500 per day; nearby Ningbo is running about about 600. Yantian (Shenzhen province) serves fewer — but very big — vessels and has seen comparatively normal come and go. Some sources see China’s port congestion slightly easing… There is a drought, but the well is not yet dry.

There are profound problems with China’s recent economic productivity. Prospects for early improvement seem to be dissipating. What started as short-term delays are edging toward systemic demolition of some flows. There have been and will be implications for US consumers (and more). But what will be impacted when and where — and how badly — are not yet clear to me. I absolutely perceive a demand and supply network under severe duress, but I also see surviving demand, surviving capacity, and considerable adaptation. It is plausible to lean toward worst cases. A bit more analytic restraint — and patience — may, however, be prudent.

Totals through midnight on May 8, 2022

+++

May 14 Update: In a long-form detail-rich assessment of China’s economic slowdown, the Wall Street Journal concludes, “The amount of drag China puts on the global economy will depend on how severe the country’s downturn gets. Fortescue Metals and Rio Tinto both said they are optimistic that Chinese demand will recover and some economists are hopeful that ebbing caseloads and government stimulus will propel faster growth later in the year. With Western demand easing, supply-chain strains may not get as bad as they were last year, some analysts say.”

May 15 Update: A Financial Times “Big Read” joins us in looking closely and trying to discern what is happening inside China and with outbound flows. The FT reports profound problems across China, but — so far — reasonably responsive flows still emerging from China. Please see chart below. Shanghai is especially troubled, yet cargo is still being loaded and shipped. Shanghai is important, but there are other — less troubled — ports in China that continue to receive and discharge flows. Other East Asian ports are operating close to normal. The disruption of domestic demand and supply in China does have dramatic consequences for China’s consumers, producers, and mid-stream providers. There are accumulating constraints on fulfilling global demand. Impacts differ category to category and product by product. For what it is worth (and probably not much), I currently perceive that US consumers are unlikely to experience generalized short-falls in China-sourced flows until September-October with the stock-build for Christmas. How big and troublesome these gaps could become will reflect demand and supply variances that I cannot yet confidently predict.

Financial Times and project44 as of May 12

May 16 Update: Economic data released today confirms a contracting China economy. According to Reuters: “Retail sales in April shrank 11.1% from a year earlier, the biggest contraction since March 2020, data from the National Bureau of Statistics (NBS) showed on Monday, a steeper decline than forecast in a Reuters poll. Factory production fell 2.9% from a year earlier, dashing expectations for a rise and the largest decline since February 2020, as anti-virus measures snarled supply chains and paralysed distribution.” (More and more and more.)

May 17 Update: Helpful report on trans-Pacific flows from Bloomberg, including excerpts from an interview with the Executive Director of the Port of LA. Gene Seroka said, “Freight is “finding its way through to the Yangshan deep-sea port and if not, it’s going down to neighboring port Ningbo, which is up 25% over this past two months,” the L.A. port chief said. “We’re watching day and night, but so far, the cargo flows seem to be very consistent.”

Drilling into diesel demand

[ May 13 update below.] Russian refineries typically sell a significant portion of their diesel fuel to European customers (more). Early-stage European sanctions related to the Russian invasion of Ukraine complicated, but did not stop this flow (also see second chart below). The complications and partial constraints did, however, increase prices. For example, the chart immediately below shows the average Euro price of a liter of diesel sold in Germany since the end of January. In the last few days the price has increased again as an oil-specific set of EU sanctions may be implmented (more and more).

Facing current complications and future uncertainty, diesel buyers in Europe turned to North American, Middle East, and Asian refineries for increased diesel flows (see chart below). Especially since global prices escalated, refiners have been motivated to sell. In the case of US Gulf Coast refineries the atypical European demand coincided with increased diesel demand from established Latin American markets (more and more). In late April, according to Bloomberg, “Waterborne diesel exports out of the U.S. Gulf Coast have climbed to 1.04 million barrels per day so far this month, on track to hit the highest level since August 2019, according to estimates from oil-analytics firm Vortexa. Volumes to Europe have seen the biggest jump in the period to 84,700 barrels per day, on course for an eight-month high.”

Given solid international diesel demand and higher prices, over the last several weeks many US refiners have sold inventories and increased diesel production (constrained by fixed capacity, probably the most important link in this post). According to the US Energy Information Agency, as of the end of April US diesel inventories were less than half 2021 same-time levels in New England and the Mid-Atlantic and about one-fifth lower along the Gulf Coast and the lower Atlantic. Since the invasion of Ukraine, diesel imports (typically an important part of the mix in New England and the Mid-Atlantic) have fallen from over 400,000 to barely 100,000 barrels-per-day. Meanwhile US diesel exports have increased almost 50 percent since early March.

US domestic diesel demand has been mostly within recent seasonal averages and slightly lower than last year. As a result, even though the US average retail price for diesel has also spiked (see chart below), there has been an incentive to serve displaced demand in Western Europe and nervous demand in Brazil. Part of the risk calculus — and related urgency — has included the possibility of an early end to the invasion of Ukraine restoring full-speed Russian diesel flows and lowering prices. [Late on this Victory Day, the “risk” of an early end seems considerably reduced.]

The reduction in diesel inventories has been especially pronounced in US east coast markets served by the Colonial Pipeline. Colonial’s Line 2 moves diesel from Gulf Coast refiners to Greensboro, North Carolina. Line 4 delivers diesel from Greensboro to Linden, New Jersey. It typically takes at least two weeks and up to twenty-four days for refined product to move end to end. In the current market environment, this means diesel in the pipe is more or less creeping inventory. According to several market sources (more and more), since early March Colonial has loaded much less diesel than usual. S&P interviewed an official with the largest US refiner:

Brian Partee, Marathon’s head of clean products, said that increased distillate exports have tightened the US Atlantic Coast market, which is seeing lower European imports as well as lower flows up the Colonial Pipeline, the main conduit of refined products from the USGC refiners to New York Harbor. But this is a function of timing, and the “run-up in the prompt front end of the cycle,” he said, allowing Marathon to capture current high diesel prices immediately through export rather than waiting for the time it takes diesel to move up the Colonial Pipeline.

At the end of April there was a significant price surge for diesel contracts in the New York Harbor market (see chart below). According to Bloomberg on April 26:

Diesel futures trading in New York surged to the highest level in records going back to 1986 as global demand for the fuel remains robust in the wake of Russia’s invasion of Ukraine.  Nymex ultra-low sulfur diesel futures settled at $4.4679 a gallon on Tuesday, exceeding the prior record on March 8, when the U.S. formally sanctioned Russian oil. Since then, diesel has become the world’s most in-demand fuel as buyers in Latin America, Europe and within the U.S. compete for supplies as fast as refiners on the U.S. Gulf Coast can make them. 

This additional pull should attract additional push up the Colonial Pipeline. You can follow the price and futures action here.

New York diesel futures settle at a record high as stockpiles drain

May 10 Update: According to the Financial Times and others, European Union and G7 efforts to develop oil-specific sanctions on Russia are faltering. “Brussels has shelved its plans to ban the EU shipping industry from carrying Russian crude as it struggles to push through its latest sanctions package because of anxiety among some member states about the economic impact of the measures.” Other potential oil-specific sanctions — while still being negotiated — have also encountered resistence from EU member states. S&P reports, “Crude oil futures were sharply lower in mid-morning Asian trade May 10, extending steep overnight declines, as recession fears, hurdles to an European Union-ban on Russian oil and the ongoing spread of COVID-19 in China saw sell-offs across the financial markets.”

+++

May 13 Update: The Wall Street Journal reports, “… the price for the diesel fuel that is crucial to industrial business has continued going up. That has added to rising costs in supply chains and to inflation pressure on things from housing construction to deliveries of consumer goods. The costs are hitting smaller trucking fleets that make up the bulk of the highly fragmented U.S. trucking market particularly hard, worsening cash flows for businesses that tend to be lightly capitalized with little cushion to absorb sharp changes in costs.”

Fuels find flows

{May 11 update below] Russia’s natural gas suppliers continue to pay Ukraine’s pipeline operators to transport product to paying customers farther west (please see map below). As shown in the chart, bookings and flows have been roller-coastering, but recent volumes often remain within range of early 2020 and most 2021 levels (more from Reuters and S&P and NYT). Russia’s oil outputs have been harder hit by Western sanctions (more from the BBC). But at the right price, buyers can still be found. Quick price hikes for global fossil fuels following Western sanctions have been contained by China’s economic slowdown… and the potential of lower global demand (more). More stubborn demand equals more stubborn supply. Less stubborn can also generate symmetries.

May 11 Update: According to Bloomberg: “Ukraine’s gas network operator said late Tuesday it would stop receiving Russian fuel through the cross-border Sokhranivka station at 7 a.m. local time because it can’t control the infrastructure in the occupied territories. Russian gas giant Gazprom PJSC said it can’t reroute supplies to another entry point, Sudzha, because of how its system currently works.  The development marks the first time the war in Ukraine has disrupted gas deliveries to Europe via the country. Russian gas had been flowing normally through both entry points despite the conflict, although most of the time at lower rates than the transit deal envisages.”

Logistics Managers Index eases

The LMI focuses on the growth of US domestic flows. Slower growth, faster growth, or contraction is measured for a set of eight data indicators. Writing for the team of analysts, Zac Rogers provides this summary of April outcomes:

Inventory and Warehousing metrics remain elevated, but Transportation has clearly slowed. Whether this slowdown will result in recessionary pressures or is simply the market moderating towards more sustainable levels, remains to be seen… Aggregate Prices hit their all-time high in March, reading in at 271.3. In April they were down (-23.9) to 247.4. As with many of the metrics in April, this is down slightly from historic, and likely unsustainable highs, but still well above the all-time average for the metric, which in this case is 223.9. The logistics industry is slowing down, but it hasn’t yet slammed to a halt.

The full report is careful, detailed and worth attentive reading. My much less careful take-aways:

  • US domestic flows remain robust, but are no longer rising as fast as last year.
  • Flow volumes are falling for some product categories.
  • Warehouse space remains tight, but inventory levels are improving.
  • Transportation capacity and utilization are much closer to what is needed for current flows.
  • US consumer demand has diversified from its fixation on stuff, reducing pressure on many supply chain components.

Looking beyond the April snapshot, there is increasing concern that transportation, after months of clawing back lost capacity, will be seriously challenged as prices-for-push moderate (and diesel explodes).

The LMI also gives attention to potential upstream pinchpoints related to China’s lockdowns. Here’s how the LMI analysts combobulate what we can currently hear and see in flows from China:

It is not unreasonable to expect a slowdown at US ports sometime in Q2 that is similar to what we saw in 2020, followed by further congestion as importers race to catch up. The differences between 2020 and 2022 is that during the former, US consumers were stuck at home, and last-mile delivery of goods buoyed transportation fleets around the country. It seems unlikely that major lockdowns will reemerge in the U.S. in 2022, meaning that U.S. consumers will continue to spend on services and in-person commerce…

Yesterday afternoon the Federal Open Market Committee acted, as expected, to increase interest rates and reduce the size of the current Federal Reserve balance sheet. Justifications for these actions include, “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures…” and “COVID-related lockdowns in China are likely to exacerbate supply chain disruptions.”

To merely state the obvious: the world is moving through an extended inflection point. Demand and supply have experienced — and are experiencing — significant disruptions. War, plague, drought and other climate extremes, mass migrations, and more challenge our ability to effectively adapt. Making and finding a modicum of equilibrium continues to be elusive.

Amazon’s slower flows

On April 28 Amazon opened its First Quarter 2022 report (through March 31) with these three outcomes:

  • Operating cash flow decreased 41% to $39.3 billion for the trailing twelve months, compared with $67.2 billion for the trailing twelve months ended March 31, 2021.
  • Free cash flow decreased to an outflow of $18.6 billion for the trailing twelve months, compared with an inflow of $26.4 billion for the trailing twelve months ended March 31, 2021.
  • Free cash flow less principal repayments of finance leases and financing obligations decreased to an outflow of $29.3 billion for the trailing twelve months, compared with an inflow of $14.9 billion for the trailing twelve months ended March 31, 2021.

This is not the direction you want these flows to go.

Amazon’s CEO, Andy Jassy, is quoted to provide context:

Our Consumer business has grown 23% annually over the past two years, with extraordinary growth in 2020 of 39% year-over-year that necessitated doubling the size of our fulfillment network that we’d built over Amazon’s first 25 years—and doing so in just 24 months. Today, as we’re no longer chasing physical or staffing capacity, our teams are squarely focused on improving productivity and cost efficiencies throughout our fulfillment network. We know how to do this and have done it before. This may take some time, particularly as we work through ongoing inflationary and supply chain pressures, but we see encouraging progress on a number of customer experience dimensions, including delivery speed performance as we’re now approaching levels not seen since the months immediately preceding the pandemic in early 2020.

During the third week in April I visited several warehouses, distribution hubs, and fulfillment centers — including Amazon facilities — in one US West Coast metro area This was my first time back since late-2019. It is an amazing build-out. I had, of course, read about the tight market for logistics space (here and here and here). But walking pre-pandemic empty lots and derelict buildings, now featuring dozens of dock doors, fresh tarmac, and ambitious landscaping was eye-popping and mind-expanding. This urban area’s collection of Amazon facilities is a fascinating example of the transition from hub-and-spoke networks toward rhizomes. Million square foot hubs can still be important for procuring price-advantaged volume, but velocity is better advanced by much smaller nodes more intimate with demand.

Nonetheless even a “modest” quarter-million square foot structure is a challenge to insert into an already dense urban web and especially residential neighborhoods — no matter how nice the landscaping. Siting is an intricate dance of snuggling as close as possible to high velocity demand (population multiplied by wealth), divided by real-estate costs (often weighted by transportation, topographical, and zoning constraints). Simple availability is not a given. Given limitations of time and space, I am impressed by what Amazon so quickly accomplished.

But some are asking: Has Amazon built too many warehouses? Amazon’s own comments can imply an affirmative answer. Last week Amazon’s CFO, Brian Olsavsky, told financial analysts:

We currently have excess capacity in our fulfillment and transportation network. Capacity decisions are made years in advance, and we made conscious decisions in 2020 and early 2021 to not let space be a constraint on our business. During the pandemic, we were facing not only unprecedented demand but also extended lead times on new capacity. And we built toward the high end of a very volatile demand outlook. Now that demand patterns have stabilized, we see an opportunity to better match our capacity to demand. We have lowered our operation’s capital expenditures for 2022 and are evaluating other ways to increase our fixed cost leverage. We estimate that this overcapacity, coupled with the extraordinary leverage we saw in Q1 of last year, resulted in $2 billion of additional costs year over year in Q1.

But then — crucially — Mr. Olsavsky added, “We do expect the effects of the fixed cost leverage to persist for the next several quarters as we grow into this capacity.” During 2020 and 2021 Amazon did what it could to fulfill an extraordinary surge in demand. There were understandably rough relations between supply and demand for an extended period, but in most places, most of the time, Amazon mostly succeeded in delivering what was expected. Amazon led the way in demonstrating that consumers could have confidence in ecommerce… even in times of considerable duress.

In many urban areas Amazon has now claimed the forward operating facilities needed to fulfill future growth with increasing velocity and profitability. The value of this investment — especially operationally, especially in terms of flow velocity — will more often grow than slow. As every supply chain nerd will assert, these are not warehouses. These are crucial intersections and accelerators of flow.

The Amazon Chief Financial Officer is apparently a supply chain nerd too (as investors would hope). Deep inside last week’s analyst call Mr. Olsavsky said that Amazon’s productivity depends mostly on, “the right capacity and the right demand matched at the warehouse level and the transportation node level.” Bingo. Bingo. Bingo.

During my late April tour of one metro area, I visited several distribution/fulfillment centers that were disconcertingly ghostly. Most of these had been leased for the first time in the last 18 months. Interior racks were not overflowing. Outbound stock was not being hurriedly lined up. Selectors seemed remarkably relaxed. These were mostly traditional large retailers (with ecommerce operations). Amazon is not the only enterprise experiencing over-capacity. For what it’s worth, at each of the handful of Amazon facilities personally observed there was, in contrast, sustained inbound and outbound flows, busy selectors, and an impressive line of Prime delivery vans heading into surrounding neighborhoods (especially for a Sunday morning).

Deploying the right capacity within the right configuration of nodes and channels to fulfill the right demand is how the most sustainble flows and profits are achieved. Agile, adaptable networks organized (and disciplined) around effectual demand can, like Goldilocks, find flows that are “neither too hot nor too cold, but just right.” These just-right equilibria are typically ephemeral (even fragile), but possible. The possibility, better yet probability, of just-right flows is improved when we don’t (like Goldilocks) just stumble across these possibilities, but (like the three bears) do the cooking ourselves. Amazon is a smart and adventuresome cook.

Whither goest demand?

According to the Bureau of Economic Analysis, March US Personal Consumption Expenditures continued to grow (see chart below). Not adjusted for inflation, Americans are spending more than ever before. The rate of expenditure growth is a bit less torrid than one year ago. The purchase mix is also much closer to pre-pandemic patterns: services, entertainment, travel, and eating out are back. Demand for “stuff” has softened (and some stuff is still and will be hard to get, see here and here).

Strong US employment and wage growth are supporting consumption. Higher earning Americans can also draw down savings accumulated from non-spending and higher incomes in 2020 and 2021. All consumers are paying somewhat more because of price increases, especially for food and fuel. The Personal Saving Rate for current cash-flow is now about 15 percent lower than decade-long pre-pandemic averages.

Supply chain implications: The retreat from even more stuff and advance on services is reducing friction in goods movement. For example, Amazon has reported slower revenue growth for first quarter 2022 and single digit growth ahead. On Thursday Amazon’s CEO said,

Today, as we’re no longer chasing physical or staffing capacity, our teams are squarely focused on improving productivity and cost efficiencies throughout our fulfillment network. We know how to do this and have done it before. This may take some time, particularly as we work through ongoing inflationary and supply chain pressures, but we see encouraging progress on a number of customer experience dimensions, including delivery speed performance as we’re now approaching levels not seen since the months immediately preceding the pandemic in early 2020.

According to many March results, freight flows were (are?) evening out. North American ports are much less congested. Several indicators suggest last month’s freight volumes and expenditures were consistent with 2018 and 2019 (more). After two years of extreme volatility, 2022’s first quarter saw equilibrium gradually resurfacing in many sectors of demand and supply.

But on February 24 Russia invaded Ukraine. By mid-March various sanctions were complicating flows of Russia’s energy, food, and metals. Military measures seriously disrupted flows of Ukraine’s agricultural products. Global prices for food and fuel (and related) increased accordingly. Complications in these flows have proliferated since mid-March. US diesel prices are flirting with all-time highs.

On April 1 Shanghai was locked-down. By mid-April, by one estimate, more than 40 percent of China’s economy was seriously disrupted by the attempt to contain covid. The demand shock in China is undeniable. The potential supply shock for the rest of the world is deeply worrisome. As previously noted (here and here), I am part of a distinct minority who still, tentatively, discern it is possible that China’s outbound flows — plus adaptation elsewhere — will mostly match broad-based global demand for manufactured goods.

But apparently not for many Apple products. Thursday Tim Cook, Apple’s CEO, told financial analysts:

looking ahead, we see two causes of supply constraints. One is the COVID-related disruptions, and there’s the industrywide silicon shortages that will continue. We’ve estimated the constraints to be in the range of $4 billion to $8 billion. And if you — these constraints are primarily centered around the Shanghai corridor. And the — on a positive front, almost all of the affected final assembly factories have now restarted. And so, the range, the $4 billion to $8 billion range, reflects various ramps of getting back up and running. We’re also encouraged that the COVID case count that’s been reported in Shanghai has decreased over the last few days. And so, there’s some reason for optimism there. Then answering a related question, Mr. Cook added, In this business, you don’t want to hold a ton of inventory. And so, you want to work on cycle times and so forth to do things very quickly and take strategic inventory in places where you need to buffer for interruptions and so forth. And so, we’re constantly thinking about where those places are. In today’s world, it’s not really possible for us to have buffer on silicon. And so, today, silicon rolls off the fab and it’s into a final assembly plant very, very quickly, and we try to make that as shorter time as possible.

Apple is absolutely not alone. Recently at FreightWaves Craig Fuller outlined what he perceives is not happening upstream from China’s ports:

The loss of trucking capacity in China means that raw materials and components can’t get from the ports to factories and finished goods can’t leave the factories to the ports to be put on ships for export. The temporary blip (dead cat bounce) was likely containers that were already in the queue at the port prior to the lockdowns.  Since factories can’t receive new components or raw materials, they will also stop operating once their supplies are exhausted. Supply chains involve large webs of suppliers that are interconnected and just because one supplier is online does not mean that other suppliers are. Once they shut down, it will take much longer to bring them up to full productivity.  According to SONAR’s ocean intelligence dashboard, it currently takes 27 days for a vessel to travel from a Chinese port to a U.S. port. Since the volume of containers from China to the U.S. started its drop on April 6, it will likely be May 3 before U.S. ports experience a drop in volume. 

Combine Tim Cook’s comments with Craig Fuller’s analysis and there is good cause for outbound flows from China anticipating rocky shoals ahead. How low might flow go? How fast?

Tim says Shanghai production is ramping up (so do others). So-far total outbound flows from China are more up-and-down like a roller coaster than spinning down like a water slide. Both Europe and the United States over-reacted to a much more complete stop in flows from China in February 2020. The prospect of lost flows became a self-fulfilling — and self-subverting — prophecy. Transpacific container spot rates have recently been stable (more). Some insiders even claim flows from China are about to surge. I also notice that real (inflation adjusted) US individual disposable income decreased 0.4 percent in March while our purchases of goods declined 0.5 percent and purchases of services increased 0.6 percent. Americans are still buying plenty, but don’t want as much from China now as during most of 2021.

I also watch, a bit amazed, as Russia’s oil essentially flows uphill toward persistent demand (more). I notice Ukraine’s grain using every available crack and crevice to connect with desperate demand. There are all sorts of serious problems. But again and again, I seem to see whither goest demand, so goest supply.

April 30 Update: China’s official print for the April Purchasing Managers Index (PMI) confirms the slowdown in production and domestic consumption. According to Reuters: “China’s factory activity contracted at a steeper pace in April, as widespread COVID-19 lockdowns curbed production and disrupted supply chains, an official survey showed on Saturday. The official manufacturing Purchasing Managers’ Index (PMI) fell to 47.4 in April from 49.5 in March, for a second straight month of contraction, the National Bureau of Statistics (NBS) said. The 50-point mark separates contraction from growth on a monthly basis.” Perhaps I protest too much, but it seems to me worth noting that the manufacturing element in the index remains well-above 2020’s bottom and even above current factory orders (export or not). China’s domestic demand has been decimated. Demand for China’s goods in much of the world is cooling. Even US demand, still stronger than most, has lost a couple of degrees of friction’s heat (more ).

The argument about what comes first — supply or demand? — can become (like chicken or egg) a definitional rabbit hole. Of course, both factors matter. Disrupted, congested, and delayed outbound flows from a major upstream node (even more: a dense cluster) will frustrate demand. Long-term, wide-area, extreme demand surges (or destruction) will seriously stress supply capacities. Either can cause disequilibrium. Over the last two years we have often suffered both. Today there is increasing evidence of less extreme demand. To the extent effectual demand continues to more steadily pull, this will help sources of supply to push more consistently… to the extent war, plague, and calamity allow.

Re: Shanghai – Another Contrarian

In an interview with Bloomberg the Chairman of Yang Ming Marine Transport Corporation perceives big flows are easing where most others argue there is increasing friction (including a rather apocalyptic Monday analysis at Bloomberg). Please see interview excerpts in the video below (less than 4 minutes). Before joining the Taiwan-based shipping company in 2020, Chairman Cheng has served as a respected academic and government economist. Much of his argument for easing focuses on differentiating inbound flows serving China’s domestic consumption from outbound flows serving global consumption. He was not asked about and does not address upstream production cut-backs due to covid lock-downs across China. While Mr. Cheng and I seem to see similar behavior in current flows at Shanghai, he is much more confident (and optimistic) than I am regarding the trajectory for global demand heading into 2023. Or perhaps these differing expectations reflect our immediate contexts and angles: his in East Asia and mine in North America.