Author: Philip J Palin

US January retail sales

Demand rebounded according to the US Census Bureau:

Advance estimates of U.S. retail and food services sales for January 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $697.0 billion, up 3.0 percent (±0.5 percent) from the previous month, and up 6.4 percent (±0.7 percent) above January 2022.  (See chart below). The inventory to sales ratio also improved (see second chart below), despite the bounce back from a couple of softer months. Many are concerned about what this signals for inflation, but the supply chain implications are mostly positive. (More and more and more.)

US January Food Inflation

Here is the complete quote from the Bureau of Labor Statistics on food inflation for January (bold highlights are by me):

The food index increased 0.5 percent in January (see chart below), and the food at home index rose 0.4 percent over the month. Four of the six major grocery store food group indexes increased over the month. The index for other food at home rose 0.7 percent in January. The index for meats, poultry, fish, and eggs increased 0.7 percent over the month, as the index for eggs rose 8.5 percent. The index for cereals and bakery products rose 1.0 percent over the month, while the index for nonalcoholic beverages increased 0.4 percent in January.

In contrast, the fruits and vegetables index fell 0.5 percent over the month with the fresh vegetables index declining 2.3 percent. The index for dairy and related products was unchanged in January.

The food away from home index rose 0.6 percent in January, after increasing 0.4 percent in December. The index for limited service meals increased 0.7 percent over the month and the index for full service meals increased 0.5 percent.

The food at home index rose 11.3 percent over the last 12 months. The index for cereals and bakery products rose 15.6 percent over the 12 months ending in January. The remaining major grocery store food groups posted increases ranging from 7.2 percent (fruits and vegetables) to 14.0 percent (dairy and related products).

The index for food away from home rose 8.2 percent over the last year. The index for full service meals rose 8.1 percent over the last 12 months, and the index for limited service meals rose 6.7 percent over the same period.

Underestimating resilience: my Freeport confession

When a June 8, 2022 fire at Freeport LNG export facility shut-down flows, I assumed the worst. I was not the only one. According to Reuters, “Natural gas prices slumped in the United States and soared in Europe on news of an extended shutdown. The facility accounts for about 20% of U.S. LNG exports and has been a major supplier to European buyers seeking alternatives to Russian gas since its invasion of Ukraine.” (More and more and more.)

In June last year the ability to replace Russian natural gas pipeline flows to Europe with global LNG deliveries seemed very iffy. Losing a major US node would not help. In August when Freeport’s shut-down was extended, I was worried — and said so here.

But even without Freeport’s capacity, LNG flows to Europe have fulfilled this winter’s European demand (and exceeded expectations).

Sunday morning the BP-chartered Kmarin Diamond departed Freeport for Suez, additional flows from Freeport are expected to resume soon. This morning S&P Global reports, “European LNG prices have fallen to an 18-month low with returning Freeport volumes adding further bearish sentiment to the market” (See chart below). The global natural gas market remains constrained, but a mild winter, effective demand management, and proactive procurement has kept Europe supplied without Freeport’s help.

I underestimated the enormous power of effectual demand to attract abundant supply. When suppliers are confident of effectual demand, volumes and velocity will move accordingly. There are always capacity constraints — and less effectual sources of demand may suffer. But when supply is available and there is sufficient value to trade for supply and this value can be effectively expressed, supply will almost always flow.

EUROPEAN BENCHMARK (TTF) LNG FRONT-MONTH PRICING

+++

February 23 Update: S&P Global provides the following infographic. S&P Global also reports, “The return of Freeport volumes is a bullish factor for US markets and a bearish factor for international ones,” Michael Stoppard, global gas strategy lead at S&P Global Commodity Insights, said in an interview. “The return of Freeport LNG is expected to be the single largest supply addition to the global LNG market in 2023 relative to 2022.” As Freeport ramps up to full operations, its return stands to ease tightness in the global gas market, while cutting a US supply overhang that is weighing on domestic prices.

Vegas rules and demand management

Thursday Kinder-Morgan found a gasoline leak in their pipeline that transports refined products from Watson Station near Long Beach to fuel racks in Southern California, Arizona, and Nevada (more and see map below). To fix the leak, pipeline operations were suspended. Before sundown on Saturday the leak was isolated, fixed, and flow was restored.

Friday night and Saturday morning the pipeline pinch prompted so-called “panic buyingin parts of the Las Vegas region. According to the local CBS affiliate, “The panic started when Clark County officials announced they were aware of a leak, affecting a Kinder Morgan gas pipeline in California. That pipeline feeds gas storage facilities with unleaded and diesel fuel here in southern Nevada. It’s one of two major pipelines that feed our area, the other comes from Utah.” (More and more)

As far as I can determine — and according to local contacts — a similar buying surge did not emerge in the Phoenix metro area, despite gasoline flows also being suspended to Arizona and the extra pull of Super Bowl visitors. Worth considering: In Nevada both the Governor and Clark County declared related emergencies. Each statement discouraged panic buying. But neither statement offered any estimate of duration for the pipeline shutdown (more).

I don’t know what Kinder-Morgan was telling government officials — in my experience there can be a reluctance to say much and to avoid restoration estimates in particular. If I was a public official, however, I would have pushed hard for a duration estimate before saying anything — and I would have been very reluctant to declare an emergency. Given the storage capacity of fuel racks in the Las Vegas region, I would have been much more inclined to advise the public that there had been a temporary shut-down of the pipeline, but there was plenty of local buffer stock and no significant disruption in retail supply was likely — unless unnecessary nervous buying began to drain the system (which is what started happening).

Given public attitudes in Las Vegas this more optimistic tone might have caused the same dysfunctional consumer behavior. But in 2021 I was impressed to hear Governor Edwards of Louisiana explain gasoline supplies to his citizens after Hurricane Ida shut down several refineries. I was even more impressed that the citizens evidently listened and panic buying was not a problem. Crucially, in my judgment, Governor Edwards often emphasized local buffer stocks, cycle time distribution realities, and a credible duration calendar.

+++

I have been absent without leave again — and I expect this to continue into March. Real-time demand for face-to-face communication is constraining my time for research and writing. I apologize.

Transatlantic diesel dynamics

US diesel inventories are still recovering from reduced refining operations in late December. Please see chart below for levels as of January 25. (Tomorrow EIA will give us an update, but I will be airborne and offline for a few days.)

On February 5 a new set of European Union sanctions — including a ban on importing refined petroleum products from Russia — will be implemented. It was anticipated that this would prompt a spike in diesel imports from the United States. Not yet. (Fortunately for US diesel stocks and prices.)

According to S&P Global:

Counter to market expectations, Americas clean tanker freight rates have plunged ahead of the upcoming EU ban on Russian oil product deliveries to Europe, amid limitations to supply and demand of diesel. This comes as demand from Europe has yet to significantly materialize for US Gulf Coast barrels, with Russian product still traveling to Europe at significant levels and amid low US diesel export volumes. The US Gulf Coast-to-UK and Continent diesel route is showing pronounced losses. Platts, part of S&P Global Commodity Insights, assessed it at 75 worldscale — just $17.79/mt — Jan. 27, down 78% from its recent peak at 345 worldscale Dec. 2, when a strong pull for vessels from the USGC to Latin America resulted in tight tonnage on the Gulf Coast.

According to a mid-January report by S&P Global, Russian diesel still made up more than one quarter of Europe’s total 1.69 million b/d of imports from January 1-18. US exporters may need to wait until last-minute pulls on Russian diesel subside. Diesel flows (and prices) have also moderated as EU LNG inventories have increased (more).

+++

February 3 Update: For the week ending on January 27, the EIA reports an increase in US diesel inventories, rising from 115.3 million to 117.6 million barrels. Gulf Coast inventories increased from 38.4 million to 41.4 million. Some of this will soon be distributed up the Colonial Pipeline and by barge or ship to other regions and nations.

US consumption

Fourth quarter real US GDP was strong, better than expected… especially given the decline in real consumption expenditures in November and December.

According to the Bureau of Economic Analysis, during the fourth quarter inventories increased “led by manufacturing (mainly petroleum and coal products as well as chemicals) as well as mining, utilities, and construction industries (led by utilities).” Inventories have also been increasing in many consumer sectors according to other analysis (here and here).

GDP analysis recognizes the potential value of inventories. And… increased retail inventories — especially at Christmastime — could signal a potential slowdown in demand. Today’s abundance may be tomorrow’s surplus. And… the inventory to sales ratio is still well below typical pre-pandemic levels.

This space gives sustained attention to US spending on food (please see the inflation-adjusted pattern in the chart below). Low unemployment, stronger wage growth, and past savings (aka excess savings) continue to support robust grocery purchases (and eating out). But real grocery consumption has now been flat for six months, low unemployment does not mean high employment, and December (of all months) saw an interesting uptick in the current personal saving rate (here and here).

It seems to me that pull patterns are increasingly reforming around pre-pandemic dynamics. There is less volatility, so more predictability. Pull is settling into vectors that push can usually fulfill. Demand and supply are much closer to equilibrium — and push can flex to follow marginal shifts in pull — up or down.

US freight resilience

Last week J.B. Hunt released its 2022 fourth quarter and year end results. The Wall Street Journal reported:

Slowing shipping demand helped push fourth-quarter profit at J.B. Hunt down 17% from the same quarter the year before and revenue growth fell short of expectations as retailers pulled back on inventory restocking and consumer spending sagged during the traditional shopping season heading into the holidays. Operating revenues at the freight bellwether rose 4% in the last three months of 2022 over the year before to $3.65 billion, the company said Wednesday, but freight-related revenues excluding fuel surcharges were off about 3% from the fourth quarter of 2021.

During last week’s analyst call J.B. Hunt’s CEO said, “We have had good signals from our customers about Q2 starting up back to a more normalized or having a more normal environment…” What does normal mean in the context of the US freight market?

Below is a chart based on a a US DOT freight transportation services index that uses a 2000 baseline (this was updated yesterday through November 2022). After about twelve months of strengthening, the index has experienced sharp losses since a very good September 2022. December will probably continue down… which will bring the index back to its immediate pre-pandemic levels.

The second chart below is a more narrowly scaled index focused on freight expenditures and volumes captured by Cass Information Systems. This angle of observation combined with the longer duration perspective displayed suggests that if you carry freight, it helps to make friends with volatility. The slope of the current curve over the next three months will matter a great deal. But right now — in the context of the last thirty years — we still have strong flows. Inflation — and especially higher fuel costs — are strength-sapping. But if fuel costs are contained, overall inflation eases, and consumer demand does not crater (lots of ifs there), J.B. Hunt’s hopes for the first half may not be in vain.

The third chart below may reinforce this vanity. Spot rates (not inflation adjusted) are, at least, not falling as sharply as the index numbers might suggest (more and more). Freight is very responsive to consumer behavior. As always, pull shapes push. This morning FreightWaves is reporting, “Looking at the Outbound Tender Volume Index (OTVI), truckload demand is still anything but reliable as it follows no historical pattern entering 2023. While the situation may have looked better than expected coming out of the holidays, the market appears to still have room to fall for both contract and more so for spot freight.”

If pull begins to increase again, current freight capacity is ready. If pull stabilizes there is likely to be a gradual reduction in top-line capacity. If pull seriously slows, historically there has been a tendency for freight capacity to lag higher and then dive deeper. I don’t have any confidence regarding which way we will go this year. But as suggested by J.B. Hunt’s CEO, by the end of the second quarter we should have a much better sense of direction.

US retail sales

December retail sales extended November’s decline (see chart below). According to the US Census Bureau, “Advance estimates of U.S. retail and food services sales for December 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $677.1 billion, down 1.1 percent (±0.5 percent) from the previous month.” But as the chart demonstrates, retail sales remain almost one-fifth higher than pre-pandemic patterns. December sales of appliances and electronics were lower than last year. Furniture, sporting goods, and automobile sales were comparatively slow. Not adjusted for inflation, grocery sales were slightly up. Year-end holiday celebrations supported continued spending on eating and drinking away from home. (More and more.) Given the historically strong — but softening — demand, the very slightly improved inventories to sales ratio suggests how supply chains are still less robust than pre-pandemic.

Rechecking vital signs

Here again is my irregular update on five subsurface indicators of supply chain fitness that may help us anticipate the next six months or so.

Southern Hemisphere Agricultural Production: Argentina’s crops are in trouble (more). But Brazil is expecting bumper crops, especially of soybeans (more). Argentina is even buying from Brazil to fulfill its domestic needs. Western Australia crop yields are pushing that nation’s wheat exports toward an all time record. (Even while Ukraine’s flows slow and US wheat exports are less price competitive.)

Global Diesel Demand, Production and Price: Reuters reports, “European traders are rushing to fill tanks with Russian diesel as the clock runs down on a Feb. 5 European ban expected to tighten supplies, redraw global shipping routes and increase price volatility.” (more and more). US diesel stocks have been slightly lower, especially as exports respond to European demand and freezing weather constrained end of year production. Global flows of refined product — including diesel — are being supported by Russian oil being processed by India and China. S&P Global reports, “With India becoming the largest buyer of Russian crude in late 2022 and China posting close to double-digit growth in Russian inflows over January-November, refiners in South Korea, Japan and Thailand are finding it easier to procure term and spot crude supplies from Middle Eastern producers…” The February benchmark price for European diesel is moderately higher, off a low early January starting position (see chart below).

Covid Hospitalizations (and mutations): While there is a “new” highly transmissible variant making the rounds, for many nations hospitalizations have fallen from a New Years peak. The situation in China is emergent. Please see here for several updates from January 5 until today. My best guess is that by this time next month (post-Lunar New Year) we will have a more confident sense of China’s health outcomes. The implications for global health — good or bad — might take a few weeks more to confirm (and mutations are ubiquitous). See January 20 Update below.

China’s Export Volumes and Value: As reported in my end-of-year update China’s exports have declined considerably in 2022. December results were almost ten percent below 2021 as valued in US dollars. Earlier today China’s National Bureau of Statistics confirmed an accelerated decline in population plus comparatively anemic 2022 GDP growth of 3 percent (more and more and more).

North American Electricity Supply and Demand: The Christmas eve crisis that impacted several US electric utilities has continued to resonate (more and more and more). There were significant financial costs to fulfill higher-than-expected demand (more). Extreme weather in California has reinforced concerns. At the end of November I wrote regarding grid continuity, “The worse this winter’s weather, the more cause for worry.” But even I was surprised to see PJM — and the Eastern Interconnect — experience such a very close call.

Food and fuel flows are doing much better than widely expected just three months ago. More evidence is needed before assessing covid trends. China’s economic performance confirms the slow-down in global goods and wealth flows. Recent experiences of the North American grid reflect our amplified risks as legacy infrastructure and transitioning from fossil fuels encounter amplified extreme weather. In terms of current Supply Chain Resilience we have robust and resilient flows with plenty of early warning signs for mitigation investments.

+++

January 20 Update: Bloomberg reports, “The sudden dismantling of China’s Covid Zero restrictions in December means hundreds of millions of people are headed home for the Lunar New Year holiday for the first time since 2019. The crush of travel risks supercharging the world’s biggest Covid outbreak, spreading it to every corner of the country… ” (More and more)

Torsten Slok talks supply chains

As regular readers (or even occasional readers) know, I am biased toward demand. In my experience contemporary high volume, high velocity supply chains reflect and serve demand. Sustained effectual demand shapes supply capacity. Where effectual demand can be communicated, effectual supply will flow — perhaps with difficulty, perhaps with stubborn delays, but push follows pull.

I have argued (here and here and here and here) that the most severe supply chain problems have been rooted in extreme or volatile or weird — and often unsustainable — demand. I perceive that since the second half of 2022, most (but not all) of this extremity, volatility and weirdity has been squeezed out of the system.

I am not alone in considering these factors. I especially appreciate the work of the Federal Reserve Bank of San Francisco on related issues. Please see a summary and recent update here.

Yesterday on Bloomberg Surveillance, Torsten Slok, Apollo’s chief economist, addressed the potentially vital implications of those weirder supply constraints still echoing within certain chords of global demand — especially pricing. It is a bravura performance. I am looking for a transcript that will support a more detailed translation and exegesis. Until then please click on the image below. This takes you to the full show, please advance to about the 1 hour 14 minute 48 second mark. The first half and final tenth of this interview is especially relevant to Supply Chain Resilience.