Supply Chain Resilience

If the Teamsters strike when the current contract with UPS expires on July 31, distribution of some pharmaceuticals and medical goods will be seriously disrupted. This disruption will result directly from reduced and delayed deliveries by UPS and from related network congestion slowing and delaying other parcel deliveries. Prior posts have given particular attention to the potential impact on home-delivery of chronic care medications (here and here).

On Friday a letter was delivered to President Biden from a coalition of US business organizations. The letter includes the following paragraph. I have added the bold highlight.

UPS is a vital lifeline for America, moving between 5% and 6% of U.S. GDP, or $3.8 billion in goods, per day. Parcels delivered by UPS include cancer screening tests, semiconductor chips, baby formula, back-to-school kits, critical parts for agricultural, construction, and telecommunications equipment, and the everyday supplies needed to keep thousands of small businesses running.  America also relies on critical medical deliveries enabled by the predictability and reliability of the UPS network, such as vaccines, medical devices, and life-saving medication.  Meanwhile, UPS’s competitors have stated publicly that, in the event of a work stoppage, they do not have the capacity to absorb the 20 million packages the UPS delivers per day. 

Each of the arguments listed are valid. I am especially glad to see the bold sentence included.

One of the signatories to the letter is the Health Industry Distributors Association (HIDA). The CEO of HIDA has added, “The supply chain relies on small parcel delivery to get supplies to patients in their homes, doctors’ offices, first responders, and clinics… We strongly urge the parties and the Biden administration to avoid a work stoppage at all costs.”

Since my July 12 post raising these concerns I have had substantive discussions with a variety interested parties. I have been interviewed by several major media. Despite my efforts, the healthcare implications of this potential supply chain disruption have not been emphasized. Instead, there has been attention to labor/management conflicts and broad economic consequences. These are certainly relevant, but I wonder why healthcare implications have almost been avoided.

The healthcare implications of the strike involve risks where proactive measures taken by patients and clinicians could mitigate consequences — at least that was the case ten days ago. Mass mitigation actions concentrated over the next nine days carry some new risks of their own. The difference between prudent self-care and self-harming (system-harming) beer-game swilling supply-chain killing explosive consumption typically involves how-much-how-quick and how-well-calibrated with authentic needs. This is seldom compatible with a panicky Fear-Of-Missing-Out.

What was possible on July 12 is less doable and constructive on July 22. If there is a strike, mitigation potential will be even worse on August 2. Especially when dealing with high volume, high velocity complex adaptive systems — such as many contemporary supply chains — sparse actions taken earlier are almost always more helpful than dramatic actions taken later.

For many reasons, I hope next week’s renewed UPS-Teamsters negotiations are successful and a strike is avoided.

Every four to five weeks I update the following indicators. Here are the June and May updates. These are not comprehensive indicators. For comprehensive please see other sources, such as the Global Supply Chain Pressure Index or the Logistics Managers Index. But combined with more comprehensive measures, these five factors give me a finer sense of overall flow capacity, current discharge, and emerging conditions.

North American Agricultural Production:  On July 14 the USDA reported mostly robust conditions, “The 2023/24 U.S. feed grains supply forecast is raised to 444 million metric tons this month, up 0.9 million tons—as increased acreage for corn, sorghum, and barley raised production by 2.4million tons. Yield reductions in corn, barley, and oats tempered greater supply growth. Beginning stocks are down 1.5 million tons to 38 million. Supply is projected at 46 million tons above the last marketing year. Projected feed grain use is raised slightly to 384 million tons. Ending stocks are projected at 190 million tons, down slightly from last month but 22 million tons higher than 2022/23.” Early July rains have, for now, reduced concerns about US harvests. Recent rains in Alberta and Manitoba improved crop conditions. But drought persists in Saskatchewan, Canada’s largest grain producer. A second year of drought (more) and extreme heat is seriously impacting Mexico’s agriculture and human hydration (more). Monday’s cancelation of the agreement facilitating grain shipments from Ukraine through the Black Sea will reduce global supplies and support higher-than-otherwise prices (more and more). [July 20 Update: global wheat prices soar on warning that Russia has mined Ukrainian grain ports.]

Global Natural Gas Demand and Supply: Extreme, sustained heat in North America, Europe, and Asia (more and more) has prompted record-setting electric generation — and increased the electric utility sector’s demand for natural gas. But manufacturing sector demand, especially in Europe and China, remains comparatively low. As a result, front-month European futures prices for natural gas are well below last year’s very strong pull (see chart below). But Tsvetana Paraskova warns longer-term price behavior is beyond confident prediction, “Volatility… will continue as prices and demand ahead of and during the coming winter will depend on two factors that are out of EU control—the weather and the contribution of renewable energy sources to the mix depending on the weather.” For a mind-bending bit on possible natural gas supply dynamics, please see this July 10 post.

China Export Volumes and Value: Reuters reports, “Outbound shipments from the world’s second-largest economy slumped a worse-than-expected 12.4% year-on-year in June, data from China’s Customs Bureau showed… following a drop of 7.5% in May. Related, China’s GDP growth decelerated significantly during the second quarter ending June 30. According to the New York Times, “output was only 0.8 percent higher in the second quarter than the first quarter. When projected out for an entire year, that is a growth rate of a little over 3 percent a year, down from about 9 percent in the first quarter.” The South China Morning Post headlined, “Recovery is going from Bad to Worse” (until the headline was edited). In any case, global demand has slowed, as a result China’s — still enormous outbound flows — are not growing nearly as fast as in the past. (More and more.)

North American Grid Capacity: North American grids — and plenty of others — are undergoing a significant transition. This transition will be especially intense over the next decade (here and here). Part of this transition is to better network current grids so that each can share the strength of all. The sometimes treacherous nature of this transition is exemplified by what happened in Texas during Winter Storm Uri and other grids on Christmas Eve last year (more and more). I was expecting this summer to challenge the grid. It certainly has (here and here and here). But, so far, the North American grid has met this challenge. Capacity has been sufficient to meet several record-demand days, especially when grid operators have not been stingy with their demand projections.

US Personal Consumption Expenditures: The May PCE suggested real (inflation adjusted) expenditure growth to be flattening (more). Yesterday’s report on retail sales indicate this behavior mostly persisted in June (see second chart below). According to Bloomberg, “The value of retail purchases rose 0.2% in June after an upwardly revised 0.5% increase in May, Commerce Department data showed Tuesday. The figures aren’t adjusted for inflation… Sales increased in seven out of 13 retail categories last month, including advances at non-store retailers, electronics stores and furniture outlets. The value of purchases at building materials stores, gas stations and grocery stores declined.”

Audacious (foolish?) generalization: With notable and deeply unfortunate exceptions, global capacity for effectual demand is significant. Compared to some prior periods, the rate of demand growth has moderated. The current level of demand is mostly being fulfilled… and prices for fundamentals (e.g., food and fuel) have fallen back from much higher 2022 patterns. Because the growth-rate is modest, supply capacity is well-adapted and mostly well-matched with demand capacity and even demand velocity. Risks to this equilibrium may be emerging, but as a general rule are not the predominant feature of mid-July high volume, high velocity supply chains.

+++

July 25 Update: S&P Global has a helpful roundup of US refined product exports, “US refineries are finishing their ramp-up to full rates following a heavier-than-normal maintenance season, eclipsing restarts from around the globe. With ongoing refinery downtime in other regions like Latin America and Asia expected to continue through August, export demand for US refined products is expected to stay robust.”

Since February US demand for food — especially Food-At-Home (groceries)– has moderated. The June Consumer Price Index suggests this trend is continuing (see chart below). As demand growth has flattened it has been easier to fulfill. Demand and supply — pull and push — are currently close to equilibrium. Yesterday the Bureau of Labor Statistics reported, “The food index increased 0.1 percent in June after increasing 0.2 percent the previous month. The index for food at home was unchanged over the month while the index for food away from home rose 0.4 percent in June.” Here are a few more details on Food-At-Home.

Two of the six major grocery store food group indexes increased over the month. The index for fruits and vegetables increased 0.8 percent in June, following a 1.3-percent increase in May. The cereals and bakery products index rose 0.1 percent over the month. The index for meats, poultry, fish, and eggs decreased 0.4 percent in June, as the index for eggs fell 7.3 percent over the month after falling sharply in May. The other food at home index decreased 0.2 percent in June after increasing 0.4 percent the previous month. The index for dairy and related products fell 0.3 percent over the month, and the index for nonalcoholic beverages declined 0.1 percent in June.

What I perceive is happening (though reasonable people can disagree) is that with the case of Food-At-Home, both costs and demand have increasingly stabilized. Meanwhile Food-Away-From-Home (restaurants, food service, fast food) continue to see higher costs, (especially related to wages) and increasing seasonal demand. As a result, the greater pull on constrained push generates more price pressure (aka inflation) for FAFH than for FAH. (More and more and more.)

+++

July 14 Update: According to Bloomberg, “In food, overall units sold are down 2% this year, with some of the biggest declines coming in frozen meals, fruit juice and soup.”

July 15 Update: There are many factors that influence food purchases. I am inclined to focus mostly on “demand capacity” which is closely related to both real and perceived wage growth (or the opposite). Nominal wages have been increasing at a rapid rate (see chart below), but not always as sharply as increased prices (inflation). During May and June wages have outpaced inflation (here and here and here). According to Marketplace, “In May, wages just barely outpaced inflation by 0.2%. But in June, wages grew 1.2% faster. And while two months do not a trend make, this still feels significant. It’s a sign of a healthy economy when wages grow faster than inflation.”

Starting in June last year I worked with many more qualified folks who were worrying — make that actively engaging — make that actively mitigating — make that pulling and pushing as much as possible — to deliver natural gas into Europe in anticipation of war-time winter. We did not have high hopes. It was much more a commitment to do the best possible.

Thanks to a mild winter, significant and sustained demand motivation, and myriad urgent, smart efforts across the planet by both public and private sectors, energy flows to Europe — and especially natural gas flows and inventories — exceeded our expectations.

So, it was with considerable and conflicting emotions that I read John Kemp’s July 6 column from Reuters. It is headlined, Europe’s Gas Storage is Filling too Fast. Here is a meaningful chunk (but you really should read the whole argument):

… storage sites were already almost 79% full on July 4, compared with a prior 10-year average fill of just 60%…. the technical capacity of the storage system is only 1,130 TWh so space is on track to run out well before the start of winter 2023/24 on October 1… futures prices are under persistent pressure, pushing calendar spreads into a steep contango to boost consumption this summer while conserving it in the middle of winter 2023/24.

My head is spinning. If I am accurately tracking — and I welcome corrections — Europeans seem likely to fill their natural gas storage facilities much sooner than usual with comparatively low-priced current flows of natural gas. With fat — and fixed — inventories and anemic current demand, near-term futures prices have fallen precipitously since late last year (see chart below). For producer purposes, demand is too low now and looks likely to fall farther before the winter heating season begins.

Natural gas producers/shippers are wanting/trying/needing to motivate much more current consumption. One result is current low prices. Longer-term futures pricing suggests that without more consumption (and higher prices) now and into the autumn, there is likely to be less supply (and much higher prices) this winter... when fixed inventories and constrained flow capacity can be seriously challenged by any loss of supply (here) or sharp shift in demand.

Such as a stubborn polar vortex. According to Bloomberg, “Early winter cold is the scariest thing,” Samantha Dart, an analyst at Goldman Sachs Group Inc., said in an interview… Prices above €100 are still “very realistic.” S&P Global reports, “Potential risks for global gas requirements this winter are likely being underestimated, with a “strong tug of war” for LNG supplies likely between the developed Asian markets and Europe if demand surges because of the cold weather.”

So… despite current abundance, there is still reason for worry, engagement, mitigation, and much more.

Below: DUTCH TTF (benchmark) FRONT MONTH FUTURES FOR AUGUST

+++

July 18 Update: When I first saw this heading, “Gas, power markets face stress test as S Europe heatwave intensifies” — I wondered if this increased current demand might help mitigate the too much, too fast problem. According to S&P Global, “With scorching temperatures likely to persist across southern Europe, the region’s gas and power markets are set to come under strain, with demand on a steep upward trend.” But while this demand is well-above seasonal norms, it is not enough to slow the draw of natural gas into storage or even increase prices in sustained, substantial way. “Analysts at S&P Global Commodity Insights expect some price volatility if the heatwave persists. But they noted that the level of cooling demand was slightly lower than at the same time last year due to ongoing price sensitivity and because of cooling limits in public buildings in some cities.”

Rain last weekend has mitigated drought threatening the heart of US corn and soybean country. Please see maps below. Long term prospects remain treacherous, but crops — and yield potentials — have survived another week. The next USDA crop progress report should show an improvement from late June’s eroding chasm of poor crop conditions. On July 5 observers at the University of Illinois and Ohio State University wrote, “Much-needed rains recently came through the Midwest, increasing yield prospects and decreasing the chance of a significant drought like that in 2012.”

+++

July 15 Update: Yesterday, July 14, Agweek reported, “The recent rains have helped to improve the corn and soybean crops, but rain continues to be hit or miss… The July 6 Drought Monitor map is starting to show improvement. The report is now showing 67% of the nation’s corn crop is in some stage of drought, 3% less than last week. Soybeans now have 60% of their crop in some stage of drought, also 3% less than last week.” Faint praise? See the July 10 Weekly Crop Progress report here (the “next” report, referenced above, was meant to point to July 17).

Bloomberg is reporting, “Water levels on the Mississippi and Ohio rivers are falling for a second straight year, raising the prospect of shipping problems along the all-important US freight routes… Widespread drought across the Midwest and lower than normal rains in parts of the eastern US are behind the falling river levels, which last year also plummeted to concerningly low depths. The Mississippi and Ohio rivers and their tributaries are major US freight arteries for moving coal, oil, natural gas, chemicals and commodities… Currently about 64% of the Midwest is in drought, the most in more than a decade.”