Supply Chain Resilience

Most freight movements are local. But local deliveries often depend on significant upstream flows. Below is a map that the US Bureau of Transportation Statistics developed showing upstream flows by proportional ton for the United States. Some crucial domestic flows depend on global flows (mostly maritime flows) suggested by the screen capture farther below of August 22’s ocean vessel traffic.

Late in the pandemic volumes delivered to US east coast ports — through both the Panama and Suez canals — grew in part to avoid congestion at US west coast ports. Flows through the Suez Canal now have dwindled due to the Houthi threat in the Red Sea. Flows around the Cape of Good Hope have surged, but mostly toward European destinations. The transpacific channel, especially into the ports of Los Angeles and Long Beach, has grown for many reasons including a possible October 1 dockworkers strike for US east coast and Gulf ports. The continuing risk of a rail shutdown in Canada has pointed even more vessels toward US west coast ports.

Pandemic era congestion and other sources of domestic freight friction prompted an expansion in US freight capacity. In December 2019 there were just about 1.65 million carriers in the United States. By December 2022 there were over 2 million carriers. That’s where the US has more or less remained even as the number of trucks, drivers, and hours driven has slowly declined from a summer 2022 peak. (Here and here and here.) Despite softening consumer demand, volatile fuel costs, and many other pinch-points, US freight capacity continues to be robust — probably even a bit higher than needed.

Demand growth for freight has slowed, especially for direct purchases of goods. But demand remains at least five percent above pre-pandemic trend even for goods. Food inflation is way down. Upstream food flows are abundant. Fuel prices and inflation are not flat, but despite geopolitical and other storms fuel stocks and flows have been entirely sufficient. Affordable fuel costs and persistent demand keep trucks and truckers hauling. Tender rejection rates are below five percent in most markets.

Todd Davis at Freightwaves comments, “intermodal capacity appears to be more capable of handling current levels of demand and may keep the truckload market from experiencing significant tightening. A caveat: The bulk of hurricane season lands this time of year.”

So far Hurricanes Beryl, Debby, and Ernesto have claimed my sustained attention. Beryl was the earliest-forming CAT5 on record. All three caused significant flooding. Two of the three (Beryl and Ernesto) resulted in extended, wide-area US grid loss. Yesterday Accuweather forecast six to ten named Atlantic tropical storms for September.

Where there is extensive and extended grid loss, water, food, and fuel supply chains are disrupted. If storm damage and grid loss reduces cell coverage and/or other telecommunications, supply will be more difficult to calibrate with demand. If major public water systems or grocery distribution centers are taken down this will be shock to any regional ecosystem of supply. As previous posts have emphasized, in the United States there is substantive Supply Chain Resilience unless major capacity concentrations — nodes or channels or modes — are lost.

Water, food, and fuel capacity concentrations — and the channels by which each capacity flows — are where I focus. All of these capacity concentrations are important. But fuel is especially important. When the grid is gone, fuel for the emergency generators supporting water pumps and treatment facilities is how water flows persist. Trucks and truckers hauling food and bottled water can be creative and courageous finding alternative routes, but even the most tenacious trucker can’t make up for lack of fuel. So, inside every cone of uncertainty where are the refineries, pipelines, fuel storage facilities, and loading racks? Do they survive? Is the grid still connected — if not, how quickly can it be? What can be done to facilitate continuous flow of fuel to support continued flows of water and food and more?

The second half of 2024 has opened with moderating pull and sustainable push for food, energy, and most aspects of crucial freight. The Red Sea (Suez Canal) pinch point continues to prompt higher prices and some Asia-Europe port congestion. But current — and prospective — flows are mostly well-calibrated with fundamental demand.

Food Flows

Once a month I try to track yield projections and anticipated prices for wheat, rice, corn, and beans as rough upstream indicators and compare this upstream capacity with close-to-actual downstream demand. My purpose is to discern the match or mis-match of upstream push to downstream pull.  The global market often reflects price functions (greed, fear, surprise, etc.) that I don’t follow close enough to have a well-informed judgment (many readers will have a much better sense of these factors). But if prices are stable or declining or slowly increasing, that is usually a dependable signal that supply is reasonably calibrated for most effectual demand. Based mostly on outcomes during the second half of June, the USDA’s World Agricultural Supply and Demand Estimates reports:

This month’s 2024/25 U.S. corn outlook is for larger supplies, greater domestic use and exports, and slightly lower ending stocks. Corn beginning stocks are lowered 145 million bushels, mostly reflecting a greater use forecast for 2023/24. Exports are raised 75 million bushels based on current outstanding sales and shipments to date. Feed and residual use is up 75 million bushels based on indicated disappearance in the June Grain Stocks report. Corn production for 2024/25 is forecast up 240 million bushels on greater planted and harvested area from the June Acreage report. The yield is unchanged at 181.0 bushels per acre. Total use is raised 100 million bushels with increases to both feed and residual use and exports based on larger supplies and lower expected prices. With use rising slightly more than supply, ending stocks are down 5 million bushels. The season-average farm price received by producers is lowered 10 cents to $4.30 per bushel.  

The same USDA report says, US “Soybean production is projected at 4.4 billion bushels, down 15 million on lower harvested area. Harvested area, forecast at 85.3 million acres in the June Acreage report, is down 0.3 million from last month. The soybean yield forecast is unchanged at 52.0 bushels per acre. With slightly lower beginning stocks, reduced production, and unchanged use, ending stocks for 2024/25 are projected at 435 million bushels, down 20 million from last month. The U.S. season-average soybean price for 2024/25 is forecast at $11.10 per bushel, down $0.10 from last month.”  Both wheat and rice yields — and overall supplies — are expected to increase slightly.

Recent global crop conditions are better than the last couple of years in most places. (Here’s a helpful map.)  La Nina’s return could impact the northern hemisphere’s harvest season. These El Nino to La Nina transitions have often reduced actual yields below forecast by five to ten percent (with related price increases). But I consider it too early to confidently project where, when, or how this climate transition might impact the second-half’s balance of food demand and supply.

Energy Flows

The Energy Information Administration reports:

U.S. power plant operators generated 6.9 million megawatthours (MWh) of electricity from natural gas on a daily basis in the Lower 48 states on July 9, 2024, probably the most in history and certainly since at least January 1, 2019, when we [EIA] began to collect hourly data about natural gas generation. The spike in natural gas-fired generation on July 9 was because of both high temperatures across most of the country and a steep drop in wind generation. According to the National Weather Service, most of the United States experienced temperatures well above average on July 9, 2024. Temperatures were particularly high on the West Coast and East Coast. Wind generation in the Lower 48 states totaled 0.3 million MWh on July 9, 2024, much lower than the 1.3 million MWh daily average in June 2024.

Despite this demand spike, US natural gas prices have remained comparatively low. Natural gas stocks in Europe are well above long-time seasonal averages. East Asian natural gas demand in 2024 has increased but unevenly and more modestly than many expected (more and more).

Crude oil prices have been remarkably calm (see chart below), especially given so many geopolitical uncertainties. Yesterday  CNBC reported, “U.S. crude fell more than 1% on Friday, posting a third weekly decline as worries about demand in China outweigh strong economic growth in the U.S. West Texas Intermediate oil fell 3.7% this week, while Brent dropped 1.8%. The U.S. economy grew at a 2.8% pace in the second quarter, much stronger than expected. But oil imports to China were down 10.7% year over year in June, and refined product imports fell 32% during the same period, according to customs data. China is the world’s largest crude importer.”  

Despite various efforts to reduce supply and increase oil prices, the global market for refined petroleum products has — for the moment — achieved a rough equilibrium that can supply energy at an affordable price for most needs.  The New York Times recently commented, “That the price and demand for oil have been so strong suggests that the shift to renewable energy and electric vehicles will take longer and be more bumpy than some climate activists and world leaders once hoped.”

In 2023 a bit more than one-fifth of electricity consumed in the United States was generated by renewables.  Electric power consumption is growing fast in many places.  The US proportion delivered by renewables is steadily growing, though fast-enough remains an open question.  About half of the European Union’s grid output depends on renewables.  Global deployment of renewables — outside China — is proceeding at a pace that some consider inadequate to avoid even more extreme climate consequences.

Freight Flows

Earlier this year constrained capacity at the Panama and Suez canals caused delays, congestion, and increased costs worldwide.  Better rains have since increased throughput at Panama.  Houthi attacks continue to slash Suez sailings.  But maritime flows have successfully shifted to other routes.  This shift has reduced — and complicated — velocity with a predictable months-long impact on volumes (and prices).  But in the last couple of weeks spot market prices indicate the higher pressure flows are beginning to even-out.  On July 26 Loadstar reported, “Drewry’s World Container Index (WCI) Shanghai-Los Angeles declined 5% week on week, to yesterday’s level of $6,934 per 40ft, while Xeneta’s transpacific XSI saw a 6% drop, to $7,322 per 40ft, and the Freightos FBX dropped 4%, to $7,738 per 40ft. Meanwhile, pricing on the Asia-North Europe route was either flat or saw slight declines: the WCI and XSI were flat, at $8,260 and $8,474 per 40ft respectively; while the FBX dropped 2% week on week, to finish at $8,420 per 40ft.”

US freight flows reflect sustained — if moderated — consumer demand.   The frontloading of holiday imports is requiring more trucking capacity than can often be the case later in the summer. Traditional rail and truck shipment metrics continue what seems to be a slow, systemic decline.  But Todd Davis at FreightWaves comments, “June was possibly the best month for freight in nearly two years from a service provider perspective. Tender volumes hit their highest monthly values since August 2022, and rejection rates breached 6% for the first time since the same month. While neither of these values broke any records, both are signs of a healthier freight market.” 

For the last two years, by late July  Mississippi River levels have gotten iffy for barge movements.  But  this year — so far — river levels (here) are one-third higher or better along much of the Lower Mississippi.  

As of the end of June the New York Fed’s Global Supply Chain Pressure Index was about as close to its historic average as it gets.

Push Reflects Pull

Global flows are huge, but without much pent-up demand.  China’s economy is growing, but not as fast as pre-pandemic.  Japan’s GDP prospects are for no-growth or worse.  The Eurozone’s economy has improved, but is not expected to grow much better than Japan’s (more).  Among the biggest economies, only the US has recently shown the ability to surprise to the upside.  Real (inflation adjusted) US Personal Consumption Expenditures (see second chart below) are mostly maintaining their post-pandemic levels — with modest rates of growth.

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July 28 Update: About 12 hours after I posted the above, the Financial Times published a lead story headlined, “US consumers show signs of flagging.” The second and third sentences read, “This week’s shaky start to the corporate earnings season has fuelled concerns that consumer strength has peaked, despite data on Thursday showing stronger than expected GDP growth in the second quarter, thanks in part to consumption spending. Kathy Bostjancic, chief economist at Nationwide Mutual, said she expected “consumers to rein in their spending as we head through the second half of this year” because “pandemic savings [are] depleted, lower income households increasingly maxed-out on credit and . . . employment growth will continue to cool”.

Cooling, slowing, walking not running are all consistent with what I also perceive for US demand pull. This means less pressure on supply chain volumes and velocity, more opportunity to invest in resilience, efficiency, and serving what is still very strong demand.

Last week McKinsey reported, “The decline in postpandemic logistics funding continues. After reaching an unprecedented $25.6 billion in 2021, venture funding for logistics start-ups fell to just $2.9 billion in 2023—a two-year plunge of nearly 90 percent, and the lowest level of funding since 2015.”

The consultancy offers several credible explanations for the decline. I will offer another: between 2020 and 2021 VC funding for logistics doubled from about $13 billion to almost $26 billion. Many of those investments have not paid off. Many of those investments were poorly conceived. Too many of those investments were misspent in the maelstrom of pandemic volatility. Manic demand was often prompting schizoid supply. Investors are pausing to assess lessons-learned.

There is absolutely the need (and opportunity) for VC and other supply chain investments that anticipate increased uncertainty, consumer volatility, technological change, persistent stress, and recurring systemic shocks. Today’s flows of pull and push are a much more promising context for conceiving, refining, and scaling innovations with a sustainable Return-On-Investment than the fast floods and deep droughts of 2021 to 2022.

What are the structural — systemic — vulnerabilities of contemporary supply chains? There are many. Which deserve the most attention? Odd Lots, the Bloomberg podcast, recently interviewed Joseph Stiglitz, the Nobel Prize winning economist, on this theme. Following are some excerpts:

…firms don’t think about the consequences of underinvesting in capacity for others. They may take the price distributions as given, but their independent actions actually change the price distributions. And they change them in ways that, basically they’re free riding on others. But when they all are free riding on others — on the fact that somebody will have built that capacity — there’s a problem of under capacity. So that in a nutshell is the argument that if each firm says ‘Well, if I need it, I can always get it from somebody else,’ and they all go around doing that, in the end, there won’t be enough capacity. Capacity is like a public good that we all benefit from, and there’s a general proposition in economics that there will be under-investments in public goods.

… what is rational for the individual or firm maximizing its profits is not efficient for society. There’s another aspect of that that I should emphasize, that markets are often excessively short term. So [when] you say they’re maximizing their profits, they’re not really maximizing long-term profits. A lot of that just-in-time was maximizing short-term profits and then when you can’t produce, you lose a lot of profits and they didn’t take that fully into account...

[We need] to encourage firms to take more long-term decisions and rewarding more long-term behavior. Taxes affect that. The fact that, if you get more favorable treatment on capital gains, if it’s held long-term, can encourage people to hold onto investments and that will encourage more long-term thinking as opposed to the short-term thinking being so dominant and so much of the market economy...

Now there are further questions you then need to ask. Some of these [capacity concentrations] you don’t have to worry about, they’re pretty steady, but some of them are more vulnerable. So you would not only look at what I first talked about sort of as centrality — how important are they to the functioning of the economic system — but you have to also then look to some notion of vulnerability. The nature of the shocks they face, the reliability of those particular places.

My summary: As any system’s core capacities are more concentrated, the resilience of flows can incrementally wane. As network diversity declines and markets become more centralized, risks increase. For the last thirty-plus years there has been an increasing focus on near-term cost-containment, price competition, and profitability that has discounted the risks of lost capacity redounding from over-concentration. Just-In-Time is not going away. But stupid-short-termism will eventually be punished by being unable to deliver (or being compensated) until waay too late.

Joseph Stiglitz does not need my affirmation, but I agree. The podcast includes a related conversation about government carrots and sticks to nudge longer-term, more resilient behavior. Stiglitz does not begrudge most carrots, but would prefer more robust pointed sticks.

I wish Elinor Ostrom, another Nobel Prize winning economist, was still alive. I would love to hear Ostrom and Stiglitz have a conversation about how to facilitate more private investment to produce public goods. I consider high volume, high velocity contemporary supply chains to be mostly consistent with Ostrom’s definition of a “Common Pool Resource” (CPR). If so, extensive CPR field studies have demonstrated that enhanced resilience is less about carrots or sticks and much more about facilitating meaningful conversations and self-interested self-management among the critical players. (Here and here.)

Hurricane Beryl reached Category 5 much earlier in the Atlantic hurricane season than any other system on record. On July 1, as a CAT4, it devastated Carriacou. Jamaica’s south shore received a harsh passing swipe. On July 5 Beryl made landfall at Tulum as a high-end CAT2, continued across the Yucatan, then entered the Gulf of Mexico as a tropical storm. It was a strengthening CAT1 hurricane as it came ashore at Matagorda, Texas on July 8 (more and more).

Before dawn, eastern time, on Saturday, July 6, I sent the following note to clients, colleagues, and friends:

This morning our cone of uncertainty extends from the mouth of the Rio Grande to Houston. Until we are more certain of how much force on which specific targets — we can ask ourselves questions, preparing our minds (and more) for a range of potential answers.

There will be lots of rain where there has recently already been lots of rain, so there will be flooding. Bad enough to bring down bridges and stop trucks?  Bad enough to swamp water treatment facilities? Are major grocery distribution centers and such at risk?  Here’s one place to watch and to find other places to watch.

There will be storm surge.  Bad enough to disrupt LNG infrastructure? (Here and here and here) How about other energy nodes and channels (here and here)? Here are a couple of places to watch: Enbridge Corpus Christi and Aransas Pass.

Starting Sunday night there will be tropical force winds. We can be almost certain of disrupted local electrical distribution networks.  Transmission networks?  Generation facilities? Will the grid-free zone be sufficiently narrow to support continued inbound trucking?  If the grid is gone for several days for tens-of-thousands, the ten day forecast looks dangerously hot with even nighttime temperatures at 80 or above. 

Right now the forecast does not support my worst-case worries. Right now it looks like the storm will avoid the largest concentration of migrants without shelter.  Right now grocery DCs are likely to survive, the roads serving most places will be fine, and refueling should be possible.  But we also know that late stage intensification is a growing problem.  So, I am mostly scanning for capacity concentrations while waiting for both force and targets to be clarified. 

I was recently reminded that reconnaissance is meant to help us “recognize” — rethink — reality.  Beryl may yet cause me to recalculate what I think I know: adapt, adapt, adapt… 

One week later how does that rough two-days-ahead risk assessment (Threat x or / Vulnerability) hold up?

Late yesterday S&P Global reported, “Almost 1 million electric customers remained offline in East Texas July 12, five days after Hurricane Beryl barreled into the Gulf Coast, and about 500,000 customers may remain in the dark July 15 amid a continuing National Weather Service heat advisory.” In the three days after Beryl’s passing daytime temperatures in Houston were above 90 Fahrenheit with dewpoints over 70. All HEB stores and most other grocery retailers were open on Tuesday. Public water disruptions have been minimal. Retail fuel has continued to flow. The big Marathon and Valero refineries are operating. Fuel racks are dispensing product. Fuel tanker trucks are delivering. The port of Houston has reopened. While the electrical distribution system was left in tatters, the transmission network and generating capacity remains intact. In fact, ERCOT has had surplus capacity because demand was suppressed by lost connections.

On Tuesday there was the typical demand surge for gasoline that drained several retailers. Many stations without back-up power were closed. Much of Wednesday and Thursday was spent refueling sold-out retailers. There are still several gas stations without power to pump. But there are even more that are open for business (more and more) I have not (yet) found a major truck stop that is closed. Yesterday (Friday) the Freeport LNG terminal had not returned to full operations, but there were widespread expectations that it would restart late yesterday or this weekend. Early estimates of insured losses in Texas are running above $2.5 billion (more).

There have been many supply chain challenges. Anytime the grid is gone there will be serious challenges. When the grid is gone for an extended period is exactly when Supply Chain Resilience is tested. In my judgment, the metro-Houston supply chain has passed this (early-in-the-semester) test. This does not diminish continuing human (and economic) consequences of flooding, wind damage, storm surge, and grid failure. But in the aftermath of a hard hit, water, food, fuel, and other crucial freight has continued to flow at velocity and volumes sufficient to supply millions. The grid-loss has been very tough, but consider how bad it would be if amplified by the absence of public water and commercial grocery and fuel operations.

In retrospect there were two errors in judgment — implicit but influential — in my July 6 risk assessment. I failed to consider the increased grid vulnerability resulting from mid-May’s derecho in the Houston area (more and more). This almost certainly pre-set ground and tree conditions that explain some portion of Beryl’s impact. Tree roots that were weakened in May gave way. Repairs not quite completed since May were even more vulnerable to the hurricane.  Recurrence is a key principle of risk assessments. I did not give this principle enough attention. My expectations for a slightly more westerly track by Beryl — not quite as Houston-specific — did not fully adapt to updated weather forecasts. As the map below suggests, by Sunday morning a bulls-eye on the urban matrix was reasonably certain. But my attention was distracted by my own expectations and lack of concentration (on Sunday I was engaged in many non-Beryl personal activities). Combined with neglecting derecho impacts, this distraction resulted in a level of grid loss that surprised me, despite plenty of evidence that could have generated more accurate anticipation. In this particular case, improved anticipation would not have resulted in different actions. But in other contexts, accurate anticipation can be the best action advantage available.

No new storm in the Atlantic this morning. Beryl was a helpful prompt to pay closer attention next time.

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July 16 Update: As of late Monday afternoon, roughly 200,000 Houston area electric customers remained off-the-grid. Inbound deliveries of feedgas to the Freeport LNG facility resumed over the weekend. But outbound train-flow is not yet moving. A Freeport LNG spokesman said they are repairing, “damage sustained to our fin fan air coolers in the hurricane and anticipate restarting the first train this week.” S&P Global explains, “Fin fan air coolers are used to dissipate heat at liquefaction plants. They need ample air supply to operate, so they are often more exposed to weather events than other pieces of equipment.” US natural gas prices have dipped a bit on the loss of Freeport’s demand. The Dutch TTF benchmark was lower on Monday and today, Tuesday, has opened trading in a narrow range. Europe’s natural gas storage domes are already just about full for winter (here). July 17 related piece by Bloomberg, “Gas futures for next-month delivery sank 7% to settle at $2.035 per million British thermal units on Wednesday. October futures slid 5.3%, while the January contract dropped 2.3%. The outage at the Freeport liquefied natural gas terminal has dented consumption and US data continues to show larger-than-expected weekly additions to “already bloated inventories…”

July 20 Update: According to the Houston Chronicle, “The Texas Windstorm Insurance Association (TWIA) said in a meeting this week that it anticipates draining half of its catastrophe reserve funds to cover windstorm damage payouts. The TWIA is an insurer of last resort for many Texans, giving policies only for wind and hail damage to customers who have been denied coverage in the public market. Chief Actuary Jim Murphy said that the agency expects to use about half of its over $450 million catastrophe fund to pay for the 16,000 claims it has already received. That figure could go up to 20,000 claims for an estimated more than $200 million in payouts. ” According to Reuters, Freeport LNG is receiving inbound feedgas, but as of Friday had not yet begun loading at least six LNG tankers anchored nearby.

July 26 Update: S&P Global reports on CenterPoint’s plans to do better next time. Freeport LNG outbound flows restarted on July 22. Estimates of US insured losses now seem to be settling into a range of $2.5 billion to $4.5 billion, with another $2 billion or so related to insured damages caused before the Texas landfall. Since shortly after Beryl’s transit near record Sahara dust storms have suppressed formation of new Atlantic hurricanes. This effect is not atypical for late July and usually dissipates by mid-August.

What were you doing thirty to sixty days ago? Well, according to the Bureau of Economic Analysis during the month of May the increasingly mythical “average American” was making just little bit more and so consuming a bit more goods and services that in aggregate cost a tiny bit less and even saving itty-bitty more than in most recent months. (Bit = a fragment, a morsel, a small bite.) Bloomberg reported, “The so-called core personal consumption expenditures price index, which strips out volatile food and energy items, increased 0.1% from the prior month. That marked the smallest advance in six months. On an unrounded basis, it was up just 0.08%, the least since November 2020.”

Many use Personal Consumption Expenditure to measure inflation. I find the inflation-adjusted “Real PCE” estimate my best-available signal of existing effectual demand. The first chart below shows Real PCE with its goods and services components. The May 2024 Real PCE was about 12 percent more than the May 2019 Real PCE. This is consistent with the May 2014-May 2019 increase in Real PCE. So, I perceive robust demand. This kind of growth is a healthy foundation for supply chains. The second chart below is Real PCE for Food-At-Home. Demand for groceries is still above pre-pandemic trends, but has fallen considerably from a steep peak three years ago. Upstream and midstream players have been able to adapt to the demand levels of the last two years.

Four years ago demand suddenly collapsed for most goods and services, even as it surged for a few others (e.g., Food-At-Home). This supply chain shock set the stage for two years of significant systemic stress and ongoing volatility. Healthy supply chains are seldom “stable”, but current direction, speed, and magnitude is much more conducive to confidently fulfilling demand than anytime between March 2020 and late 2021.