Supply Chain Resilience

[Important updates below] The summer solstice is forecast to bring triple digits to wide areas of Texas with the heat index rising above 110 F for three consecutive days in many places including metro-Houston, Austin, and most of the Texas Triangle.

The Electric Reliability Council of Texas (ERCOT) has announced a “Weather Watch” through June 21. Grid capacity, supply, and demand can be monitored at the ERCOT dashboard. The Houston Chronicle has published a helpful primer on how to interpret the dashboard’s outputs.

S&P Global offers its own Texas forecast for next week including, “The load forecast keeps changing and has had a great deal of error due to unpredictable convective risks,” said Campbell Faulkner, senior vice president and chief data analyst at OTC Global Holdings, an interdealer commodity broker. “What will determine if load records are broken will be if the high pressure heat ridge intensifies in a way that the various weather models are currently struggling to nail down. But ERCOTs price sensitivity to heat load became very clear last year due to issues with being able to cleanly forecast both solar/wind output and gross line congestion across the system.”

ERCOT’s electric generating capacity is — or should be — sufficient to meet historical demand. There is, however, real risk of demand exceeding its historic parameters. There is also the risk of losing capacity inputs at just the wrong time and place. The risk of “gross line congestion” can be an even more insidious factor. As this blog noted a few days ago, Texas and the entire US grid needs many more “major high-voltage power lines that connect different grid regions.” (More and more)

According to the NERC Summer Reliability Assessment:

Given an Anticipated Reserve Margin of 23% and Reference Reserve Margin of 13.75%, ERCOT expects to have sufficient operating reserves in expected normal summer system conditions… ERCOT’s probabilistic risk assessment indicates a low probability of energy emergency conditions during the summer peak load period, but the risk increases into the early evening hours due reductions of solar PV generation. There is a 4% probability that ERCOT will declare an EEA1 [Energy Emergency Alert 1] during the expected daily peak load hour increasing up to 19% probability at the highest risk hour ending at 8:00 p.m. System stability and strength stemming from the growth of IBRs [Inverter Based Resources] remains a concern. ERCOT is also experiencing large increases in renewable production curtailments due to transmission constraints, and these curtailments are increasingly occurring at solar PV sites.

This is not just a Texas problem. This blog has given particular attention to the risks emerging from last year’s Christmas Eve surprise that impacted some of the most robust and resilient regional grids (more). According to the Summer Reliability Assessment, six other sectors of the North American grid have lower Anticipated Reserve Margins than ERCOT (in case of high demand, outages, and derates). The particular problem areas are shown in orange on the map below.

As they say, this is a developing story. Look below for more next week.

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Saturday afternoon additional comment: A couple of readers have wondered about my focus on Texas heat rather than a possible Caribbean hurricane. I am watching the NHC forecasts too. But — right now — I am more attentive to Texas because we have a much more precise sense of force-on-target (even measurable force on concentrated capacity) than is yet possible for so-called Disturbance 1. In response-mode Supply Chain Resilience is mostly about recognizing if and how crucial capacity concentrations will be impacted and taking mitigation action. By Tuesday it may be possible to give similar attention to capacity concentrations in both East Texas and the Eastern Caribbean.

June 20 Update: Today’s Texas temperatures — and heat index — will still be tough. But at least early this morning, this week is now not expected to be quite as extreme as forecast and less troublesome than what is now forecast for next week. In the Caribbean, Bret is strengthening but force-on-target is still not predictable. A further update as of midday: The anticipated capacity deficit has now been discerned as unfolding in real time. ERCOT has warned of a “projected reserve capacity shortage with no market solution available” after 1500 hours Central Time today. Consumers are requested to reduce demand. Part of what is happening is the Houston forecast of 101 F has now been ratcheted up to 103 F. Austin may hit 106 F. Without reduced consumer demand, rolling black-outs may be instituted. (More and more and more.)

June 21 Update: The Texas grid avoided the worst… one more time. As the following chart suggests, it was a close. Demand for electricity hit new records on both Monday and then on Tuesday. But it also appears that many consumers cooperated with requests for voluntary reductions in demand. It could — easily — have been worse. (More and more and more.) Mexico is also facing similar capacity-challenging demand. TS Bret is about to peak and then degenerate… without impacting significant aspects of concentrated capacity.

[Several updates through July 1 continue after the charts] Below are five very broad indictors that I revisit every four to five weeks. Consider these outcomes in the context of other more comprehensive and detailed measures, such as the Supply Chain Stability Index, the Logistics Managers Index (see first chart below), and the Global Supply Chain Pressure Index.

North American Agricultural Production: I have been worried by early signals of sustained drought across much of the mid-continent. But so far, USDA and others are encouraging (at least in terms of volumes, if not prices). The World Agricultural Supply and Demand Estimates (WASDE) continue to anticipate good harvests. According to the June 9 update, “The outlook for 2023/24 U.S. wheat this month is for larger supplies, unchanged domestic use and exports, and higher stocks. Supplies are raised as all wheat production is projected at 1,665 million bushels, up 6 million from last month…” Corn projections also look good. US livestock and dairy production is mostly fluctuating in response to demand. Fresh produce prices have fallen and supplies are abundant (more). Global food prices are also softened. A wide range of indicators suggest, however, that SNAP beneficiaries are struggling to adapt to the loss of pandemic supplements (here and here and here).

Global Natural Gas Demand and Supply: US natural gas inventories are comfortably within the five-year average range (more). EU natural gas storage facilities are over seventy percent full. Natural Gas prices have returned to pre-war levels and are toward the low end of pre-pandemic prices. According to Bloomberg, “Futures for December 2023 (EU benchmarks) are trading at a discount of about 8% to December 2024, according to ICE Endex data. That’s a reversal from January, when the nearest winter contract traded at a premium. The shift indicates Europe is relatively well-prepared for the coming heating season following a mild winter that allowed it to build up inventories with an influx of liquefied natural gas. But the coming years are more uncertain, as the region adjusts to a new reality with scant help from former top supplier Russia.” Asian demand for LNG has been insufficient to push up global prices.

China Export Volumes and Value: According to a June 7 report by Reuters, “China’s exports shrank much faster than expected in May while imports extended declines with a grim outlook for global demand, especially from developed markets, raising doubts about the fragile economic recovery.” As the domestic economies of several customers of China slow-down, orders for China’s manufactured goods have also declined (see chart below). Without this external stimulus, China’s domestic consumption has been flat. Recent action by China’s Central Bank confirms the domestic slowdown and efforts to turn this around (more). It is worth noting that volumes (and value) continue to be above pre-pandemic levels and trend-lines. This is not a collapse. So far, it is much more of a correction that reflects more sustainable demand velocity.

North American Grid Capacity: As previously noted by this blog, current capacity should probably be okay this summer unless there is a surprising spike in demand (probably due to a “surprise” extreme weather event). US electricity generating capacity is growing, especially in those regions with increased demand (more and more). On June 12, the New York Times published a long piece titled Why the US Electric Grid is not Ready for the Energy Transition. This (and other) reports focus on the increasing mis-match between generating capacity and transmission capacity. According to the NYT, “In recent decades, the country has hardly built any major high-voltage power lines that connect different grid regions. While utilities and grid operators now spend roughly $25 billion per year on transmission, much of that consists of local upgrades instead of long-distance lines that could import cheaper, cleaner power from farther away.”

US Personal Consumption Expenditures: Yesterday’s May Consumer Price Index (more) suggests that expenditures by US consumers are gradually decelerating — even with continued strength in the labor market. Slower pull is unfolding into slower (and less expensive) push (more). Flows remain huge. But current flows are flat or even receding, especially compared to late-pandemic bounce-backs. This is not a drought. But compared to flooding during the first half of 2022, consumers are less thirsty. As a result, suppliers don’t need to sweat as much (which is not always good news if sweating is part of what you sell).

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June 15 Update: The Financial Times headlines, “Chinese economic data fuels gloom over recovery.” Bloomberg piles on with, “An undershoot in [China] retail sales showed the consumption recovery lost more momentum. A sharper-than-expected slowdown in fixed asset investment showed sinking private spending, particularly in the property sector, is overwhelming government stimulus in the form of outlays on big projects.” (More and more.) But… the energy market was much more positive regarding new data showing “China’s oil refinery throughput rose 15.4% in May from a year earlier, hitting its second highest total on record.” Please choose your preferred retrospective leading indicator.

June 16 Update: S&P Global delivers a very helpful round-up of anticipated Southern Hemisphere Agricultural Production given historical El Nino effects.

June 19 Update: I am not the only one worried about Midwest precipitation and lack thereof. According to S&P Global, “The prolonged dry weather across the key regions of the US — especially in the eastern Corn Belt and northern parts of the Midwest — has stoked fears of drought for the corn and soybeans farmers.” Talking with locals over the weekend, yields could still be okay if rain arrives “soon” (as in the next five days). But this is not what the forecast currently projects for most of this morning’s dry places. There is some possibility of precipitation-on-target inside the next seven days — for some places. Just in Time?

LATE JUNE UPDATE (July 1)

Too much is happening for me to feel confident that I am tracking even general directions. So, here is a quick effort to recalibrate (or at least confirm or clarify).

North American Agricultural Production: Rain in the Upper Mississippi River basin has helped temporarily recover water levels for navigation (see mid-Mississippi too). But the drought at the heart of corn and soybean country has persisted. Commodity prices have been reflecting worry, but are not yet signaling deeply discounted yields (more and more). A great deal depends on rain that is expected over the next few days (July 1-3) and later in July. Fresh fruits and vegetables are mostly abundant. Produce prices were up an average of 1.3 percent in May. Since then, according to industry sources, prices (and demand) have been “steady”… especially in contrast with late 2022 price hikes (here and here).

Global Natural Gas Demand and Supply: With the recent — current in some places — heat wave, US demand for natural gas has far exceeded multi-year averages. There has also been significant demand for US LNG exports. Prices have, however, not surged given sustained production/distribution flows and competition from other energy sources. Below please see an S&P Global Infographic with a good overview of the natural gas context in Europe. Slow economic growth in Asia combined with comparative high prices (and given the war, less demand urgency than Europe) has reduced LNG flows to Asia.

China Export Volumes and Values: Recent reports on China’s economic performance continue to emphasize slow to negative outcomes. Bloomberg reports, “It was meant to be the year China’s economy, unshackled from the world’s strictest Covid-19 controls, roared back to help power global growth. Instead, halfway through 2023, it’s facing a confluence of problems: Sluggish consumer spending, a crisis-ridden property market, flagging exports, record youth unemployment and towering local government debt. The impact of these strains is starting to reverberate around the globe, impacting everything from commodity prices to equity markets.” (More and more.) China has the capacity to export more and wants to export more, but especially as North American and European central banks try to depress demand to moderate inflation, existing pull is not motivating anything close to maximum push.

North American Grid Capacity: Texas has been providing a constructive use case playing out in real-time. Here is this blog’s recent coverage (be sure to see updates below the graphics). Here is a blurb that I have inserted in many recent emails: There are systemic, structural issues of grid transformation that increase the likelihood of grid failures — and these factors will almost certainly NOT be resolved in the next decade. There are specific issues of increasing demand (e.g., EV and other electrification, especially in high-growth regions), transmission/distribution (e.g., paucity of long-distance high capacity confident connections), and generation (e.g., changing mix of sources) that conflate to amplify risk. So, given this higher risk of long-term, wide-area grid failure, it is especially important that we (meaning private-public collaboratives) have the ability to facilitate flows of water, food, fuel, and other crucial freight when and where the grid is gone for an extended time over a wide area.

US Personal Consumption Expenditures: This blog tends to give particular attention to food PCE (both nominal and real). This was updated yesterday here.

Soooo… many aspects of demand have moderated and demand/supply equilibrium has been (is being) reestablished. Where and when demand has increased, there has — so far — usually been sufficient push capacity to fulfill pull capacity. There are upstream factors that threaten to constrain some push capacity. There are risks of sudden spikes in demand. There is probably enough buffer capacity to handle short-term and tightly targeted spikes. If demand spikes evolve into longer-term surges there is an increasing risk of demand/supply disequilibrium amplified by any lags in distribution capacity or loss of production capacity… especially as disequilibrium expands over time and space.

Last week a very high-end typhoon — similar to a CAT4 to 5 hurricane — impacted Guam, a US territory in the Western Pacific. Guam is roughly 30 miles long.  It is one mile to almost nine miles wide (roughly the same total area as Columbus, Ohio).  About 170,000 people reside on the island. Guam is located almost 4000 miles west of Hawaii, over 6000 miles west of Los Angeles, and 1600 miles south of Tokyo and east of Manila.

Typhoon Mawar approached Guam from the southeast with sustained winds of about 150 mph (see maps below).  Matson’s container ship,  Maunawili (departed Long Beach on May 11) was scheduled to dock on Tuesday but maintained a safe distance until the typhoon passed. (Matson service to Guam from Long Beach generally takes 13 to 14 days.)  As the typhoon approached, three US flag cargo vessels were scheduled to arrive at Guam before the end of the month:

Maunawili (Matson, US Flag) scheduled GUAM ETA 2023-05-23 15:00 LT (UTC +11)  DELAYED

Herodote (CMA CGM, US Flag) scheduled GUAM ETA 2023-05-26 12:30 LT (UTC +11)

Manoa (Matson, US flag ) scheduled GUAM ETA  2023-05-30 17:00 LT (UTC +11)

There were also two non-US flag fuel tankers scheduled to arrive Guam:  LPG Tanker Epic St. Kitts (ETA 5/26) and Oil Products Tanker Topaz Express (ETA: 5/29).

This line-up suggests ordinary flow (volume and velocity) providing food and other crucial freight to residents.

On Wednesday, May 24 Mawar’s large eye skirted Guam’s northern tip basically battering the island — especially the northside — for over 24 hours.  The Guam Daily Post reported the gradual loss of grid power and public water services over the day and into the night.  By Wednesday afternoon all but 1000 customers had lost power.  Boil Water Advisories were released. 

Strong winds and heavy rain continued on Thursday morning impeding response and recovery actions (more). By Thursday afternoon winds had receded enough that some grocery and fuel outlets reopened, all reported doing cash-only transactions because of the loss of grid power, telecommunications, and point-of-sale (POS) technology.  Travel was complicated by debris, but most roads were passable. 

Thursday afternoon saw the start of sustained grid and water system restoration.  Guam Power Authority (GPA) “critical restoration priorities include hospitals, critical water well and wastewater facilities, critical infrastructure facilities, schools/designated shelters, public safety/health facilities, and ports of entry.”  With the grid down, use of  private generators increased demand for fuel, but many fuel retail stations remained closed because of lack of grid power, lack of staff, and inability to operate digital POS transaction devices.  Telecommunications restoration started.  The airport was capable of handling limited emergency cargo flights.

By Friday, May 26 the Joint Information Center reported less than five percent of grid customers were reconnected.  About 40 percent of electrical substations had been reenergized.  The Guam Water Authority reported that the water system was operating “normally” but at 50 percent capacity. Boil Water Notices continued. According to the JIC, “The Port Authority of Guam (PAG) has received clearance from the U.S. Coast Guard (USCG) to begin major recovery efforts dockside. PAG weathered Typhoon Mawar with visible damage to Piers F3, F4, F5 and F6, particularly the Bull Rail. Portions of the Fender System also are damaged or broken off. The storm also caused damage to the Agat and Agana Marinas. PAG continues assessments on their wharves, docks, cranes, and facilities…”

On Friday and Saturday long lines were reported at the comparatively few operating retail fuel stations and strong demand exceeded tanker truck refilling capacity (more and more).  There was plenty of fuel at the terminal/racks, but tankers available to distribute the fuel could not keep up with demand. [Please see June 4 update below maps.] Repairs continued at the port where damaged cranes were a particular problem.

On Sunday, May 28 according to the Joint Information Center, water authority crews worked to restore non-operating wells.  More than 30 percent of wells needed power or minor repairs. Almost one-fifth of wells required pump motor replacements. The JIC also reported that by Sunday afternoon:

• 16.2% of the System Load (Customer Demand) has been restored.
• 65.4% of GPA’s Substation Energization has been restored.
• 27.0% of GPA’s feeders/ circuits have been energized/restored.  

The Guam Daily Post reported continued strong demand — and mile long lines — for fuel. Velocity of demand, especially as a result of FOMO and increased demand to fill private generators remained significantly beyond the velocity of existing distribution capacity.  Actual on-island supplies of fuel products remained adequate to fulfill demand.

The port reopened on Sunday and the Maunawili was unloaded. Over 450 containers were discharged.  CMA-CGN Herodote also discharged cargo.  The Yasa Albatross oil tanker docked.  The Topaz Express arrived. Ships scheduled to arrive by May 31 include Matson’s Manoa, the LPG tanker Epic St. Kitts, CMA-CGN Dakar, and the container ship Kota-Ratu. (More.)

The airport reopened for regular flight operations on Monday afternoon.

Ongoing updates are available from the Joint Information Center and ReliefWeb and The Guam Daily Post.

The quick recovery of maritime port operations has been fundamental. Especially with the grid gone and disrupted public water, it has been crucial that food and bottled water flows persist. I am inclined to treat the Maunawili as a leading indicator. The typhoon delayed unloading for 48-plus hours. Recovering port operations required another 48-plus hours. With the port reopened food, fuel, and other flows could resume and catch-up with ordinary volumes and velocity. If anything had caused the port to be unable to resume operations, the population would have become more vulnerable with each passing day.

This is consistent with most contemporary supply chains: when concentrated capacity (the planned bottleneck) survives, supply chains may be delayed and constrained (such as by fuel distribution cycle times) but surviving bottlenecks can support creative and resilient flows. When bottlenecks become time-extended chokepoints, a realistic and well-exercised Plan B better be competently deployed sooner instead of later.

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June 4 Update: It is now confirmed by credible folks who should know that some of the fuel racks at the port were inoperable in the days after Mawar’s May 24 transit. I don’t know if these shut-downs were related to loss-of-grid, flooding, mechanical failure or whatever. I have seen only one especially vague written report. We will eventually find out. Disrupted supply plus surging demand equals manifest frustration (and worse). This, too, is a recurring classic of hardest hitting force-on-target events. I visited my first fuel rack the second morning after Superstorm Sandy’s 2012 visit to NYC and nearby. In that case with the grid gone, pumps to fill tanker trucks would not work. There were millions of gallons of refined products still sitting a few feet away, but nary a drop for tanker trucks nor, therefore, for cars or generators. Back then fuel racks (like food distribution nodes) never appeared on priority restoration lists. This remains unusual today. I can, however, report that every fuel rack I have visited along the US Gulf Coast now has an emergency generator to keep the pumps pushing.

EIA and S&P report, “US crude inventories fell 12.5 million barrels the week ended May 19 as refiners continued to boost runs while export demand remained strong.” See first chart below (more). This includes the US recently increasing its flow of diesel to Europe. According to Bloomberg, “cargoes from the US are set to be the highest since August 2020.” Steady demand for fuel plus reduced inventories pushed WTI and related crude oil prices slightly higher this week, despite global demand still being in the doldrums and plenty of arguments for demand to continue to be constrained. Downstream product prices as usual are tracking upstream behavior. See second chart below and much more from EIA.

Supply Chain Resilience is not prominent in the Group of Seven’s headline Joint Communique. But in the G7 Leaders Statement on Economic Resilience and Economic Security the language is stronger than that emerging from the Finance Minister’s meeting in Niigata. Here’s the principal paragraph:

The COVID-19 pandemic and Russia’s war of aggression against Ukraine has laid bare vulnerabilities in supply chains in countries around the world. Supply chain disruptions have had devastating impact for developing, emerging, and advanced economies alike. We recognize that transparency, diversification, security, sustainability, and trustworthiness and reliability are essential principles on which to build and strengthen resilient supply-chain networks among trusted partner countries both within and outside the G7. We encourage all nations to support these principles on resilient and reliable supply chains. We reaffirm our strong will to support the wider international community, particularly developing countries, in building their resilience, including through implementing the Partnership for Global Infrastructure and Investment. Our partnerships honor international law, are free and fair, and foster mutually beneficial economic and trade relationships. Drawing lessons from recent incidents of weaponizing energy and other economic dependencies, we stand firmly against such behavior. We will enhance resilient supply chains through partnerships around the world, especially for critical goods such as critical minerals, semiconductors and batteries. We will step up our efforts to strengthen channels of communication to address supply disruptions and share insights and best practices, including from respective scenario-based stress testing.

Hardly ground-breaking, but reasonable and actionable with sustained, constructive effort. These are principles that can and should guide the next generation of local to global supply chains.

In my reading, the strongest language related to Supply Chain Resilience in the Joint Communique is in a specific reference to China:

Our policy approaches are not designed to harm China nor do we seek to thwart China’s economic progress and development. A growing China that plays by international rules would be of global interest. We are not decoupling or turning inwards. At the same time, we recognize that economic resilience requires de-risking and diversifying. We will take steps, individually and collectively, to invest in our own economic vibrancy. We will reduce excessive dependencies in our critical supply chains.

It is worth noting that “excessive dependencies” are not only related to what is sourced from China. Over-concentration of capacity is a recurring — even innate — feature of high volume, high velocity demand and supply networks. Reducing the risk of excess concentration requires ongoing vigilance, creative action, and meaningful investment.

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May 24 Update: If you can, please read Martin Wolf’s May 23 commentary in the Financial Times: The G7 must accept it cannot run the world.