Supply Chain Resilience

In November 2018 US consumers spent 983.7 billion chained-2012-dollars on food-at-home. In November 2019, 991 billion chained-2012-dollars were spent on food. This November (according to this morning’s report and Federal Reserve analysis) the amount spent was 1033.6 billion chained-2012-dollars. This is an inflation-adjusted figure. We are spending above trend on food-at-home — establishing a new trend? — despite inflation (which eased again in November), despite other increased costs (e.g. energy and shelter), and despite very robust competition for consumer spending. See chart below.

[Updates Below] In late 2019 and early 2020 something strange was happening in China. Sparse reports and lush rumors swirled. As is often the case with China, we were left listening to the contours of silence much more than anything else.

I watched and listened with increasing alarm, but also with deep uncertainty. It was not until the third week in January that I decided to risk my own credibility and start raising concerns among my colleagues and clients.

Humility is a practical virtue. Fear of ridicule is never helpful. I should have written and said much more, much sooner.

Today’s reports on coronavirus in China are more prominent than three years ago. Yet too much still depends on listening to “silence as a cancer grows.” (Here, here, and here, to sample just a few.) But there are also plenty of signals. Here is what Reuters reports this morning:

China’s chief epidemiologist Wu Zunyou on Saturday said the country was in the throes of the first of three COVID waves expected this winter, which was more in line with what people said they are experiencing on the ground… Beijing city official Xu Hejian told reporters on Monday COVID was spreading fast in the capital, putting pressure on medical resources. Still, more restrictions will be lifted, with previously-closed venues located underground, from bars to internet cafes, allowed to re-open, Xu said.

Over the last three weeks — following widespread protests — China has diverged from a rigorous process of required testing and radical social distancing. The sudden shift has, so far, prompted a fearful self-distancing that quickly gutted the protests and has probably slightly slowed virus transmission. But transmission is well-underway and will not now be contained… during winter in a dense population that is unevenly-vaccinated and in which immunity to a wide range of viral activity is now reduced (as we have seen with seasonal flu and RSV in the United States).

Recent strains of the 2019 novel coronavirus are not as lethal to otherwise healthy hosts as earlier variants. But in coming months the scope and scale of illness and death in China is likely to be extreme. The Institute for Health Metrics and Evaluation has projected a sharp spike early next year. This will seriously disrupt China’s economy. Over the next six months this disruption is likely to be more troublesome than the economic constraints that the Zero-Covid policy caused. This has global supply chain implications with reduced outbound flows from China and less predictability just about everywhere.

The coronavirus continues to evolve. Future mutations are beyond confident prediction, but more evasive and lethal versions are possible. The more infections, the more mutation possibilities. Several million more mutation factories will open in the months ahead.

Risk is the outcome of threats interacting with vulnerabilities to a range of consequences. Likelihoods — best guesses — involve both upside and downside potential. Especially with the virus that causes covid, there are very few certainties.

But there is a strong likelihood of discounting risk. We see discounting (or denial) on a wide range of risks, but it was especially obvious in 2020 as illness and death in Wuhan and elsewhere was being reported. From the December solstice to the March equinox much of the world behaved as if what happens in China stays in China. When this perception was disproven, much of the world responded with a level of surprise that amplified risks too-long denied.

As we approach Wednesday’s 2022 solstice, deja vu all over again?

I hope not. It is, however, in our shared self-interest to soberly, systematically recognize this emerging risk; thinking and talking through appropriate mitigation measures: personal and social, local and global, especially in regard to flows of water, food, fuel, pharmaceuticals, and other critical freight. If we had 2020 to do over, what would we do differently? I don’t suggest the answers are obvious. But meaningful discussions now can displace surprise and amplify readiness (instead of risk).

The title of this post is taken from a Tang dynasty poem:

九曲黄河万里沙
浪淘风簸自天涯。
如今直上银河去…

My translation:

Nine bends of the Yellow River flow with sand from far away
Emerging of sky’s edge wind-blown rolling waves never stay
Searching for the source I travel deep into the Milky Way…

My making of meaning: Knowing source and cause may well be beyond our capacity, but flow and its contents are clear enough. Given what we do know, we should prudently engage flows to minimize harm and maximize benefit.

Too poetic? Insufficiently empirical? Probably. But confronted with deep uncertainty, I have experienced the poetic and empirical to be effective partners.

Best wishes for the New Year fast approaching.

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December 20 Updates: A reader has sent me a new World Bank update on China. Thank you. Here is an excerpt from the Executive Summary:

High frequency indicators suggest another growth slowdown in the fourth quarter amid a return of high COVID-19 cases. Despite fiscal and monetary policy support, real GDP growth is expected to slow to 2.7 percent in 2022—1.6 percentage points lower than projected in the June China Economic Update. In 2023 growth is projected to recover to 4.3 percent but remain below the potential rate. China has been moving quickly toward reopening since November 2022, with public health measures being eased rapidly. During the initial stage of reopening COVID infections will rise sharply and might lead to voluntary reduction in social interactions, which will weigh on consumer demand and may lead to continued disruption even after restrictions are lifted. These impacts of the initial exit wave are expected to be concentrated in the first quarter of next year…

Later in the report China’s strategic risks are summarized, including climate change, an unstable real estate market with related macroeconomic challenges, and “uncertain global growth prospects, sharper-than expected tightening in financial conditions, and heightened geopolitical tensions…” The World Bank authors do note, “In China, 69 percent of over 60-year-olds had received a booster dose as of mid-November 2022, but the vaccination rate was just 38 percent for over 80-year-olds…” Risks of the so-called exit wave spawning mutations are not referenced. The report is titled, “Navigating Uncertainty: China’s Economy in 2023“.

The Washington Post editorial board apparently shares the concerns I have outlined above. The headline: China’s new covid nightmare could become a global catastrophe.

December 21 Updates:

Bloomberg reports: Chinese cities and factories tell people with covid to go back to work and China’s covid tsunami could spark a dangerous new variant that infects the world

Reuters reports: Corporate China struggles with supply snags and demand slump as covid cases spread

South China Morning Post reports: China to track covid mutations through national hospital network

December 22 Updates:

Wall Street Journal reports: Undercounted deaths cloud China’s zero-covid exit

Reuters reports: Shanghai hospital warns of ‘tragic battle’ as covid spreads

December 23 Updates:

The Financial Times reports: Covid overwhelms Beijing’s hospitals

Bloomberg reports: Shanghai port strives to keep global trade moving despite covid (successfully so far) and China’s soaring covid cases push economic activity off a cliff.

In the South China Morning Post, Wang Xiangwei comments: Morgues overwhelmed: why China’s new covid crisis is all of its own making

In the Wall Street Journal, Dr. Ezekial Emanuel comments:

Over the past three years, there have been more than 650 million confirmed Covid cases world-wide. Public-health authorities have identified six “variants of concern”—those that have increased transmissibility, increased disease severity, reduced neutralizing antibodies or reduced effectiveness of existing treatments and vaccines… Having 800 million people in China infected will increase the likelihood of dangerous new variants. Making matters worse, the Chinese New Year is Jan. 22, and hundreds of millions of Chinese will travel and gather to celebrate. (Three years ago the city of Wuhan went ahead with a massive New Year’s banquet amid the original outbreak.) The easing of China’s international travel restrictions will disperse any new variants to other countries.

January 12, 2023 Update: “Poetry knows we are as close as a feather to disaster.” Marianne Boruch

In a good overview, the Wall Street Journal reports, “The hierarchy of U.S. ports is getting shaken up. Companies across many industries are rethinking how and where they ship goods after years of relying heavily on the western U.S. as an entry point, betting that ports in the East and the South can save them time and money while reducing risk.” Below is a chart showing the shift in container volumes over the first nine months of this year. There are certainly several factors at play here, some ephemeral, some that will probably be more persistent. What is fundamentally true: diversifying nodes and channels increases resilience.

[Update Below] Twelve days ago I set out five vital signs to regularly monitor. Here’s a very quick update:

Southern Hemisphere Crop Production: Drought is casting doubt on Argentina’s corn crop as well as Brazil’s soybeans. Australian wheat is mixed, but record yields in the west seem to be making up for flooded fields in the east. (More) Indonesia’s palm oil inventories continue to be in good shape despite higher demand and continued price advantages compared to sunflower and soy oils.

Global Diesel Demand, Production, and Price: According to the IEA November update:

Diesel prices and cracks (differential to crude oil price) surged to record levels in October, and are now 70% and 425% higher, respectively, than year-ago levels while benchmark Brent prices increased just 11% during the same period. Distillate inventories are at multi-decade lows. French refinery strikes last month and upcoming embargoes propelled diesel prices in Rotterdam, Europe’s main trading hub, to more than $80/bbl above North Sea Dated at one point, before easing somewhat. Diesel premiums in the United States have also soared ahead of the winter heating season in the Northeast.

But January futures contracts for New York Harbor have seen significant price declines since Halloween. More details on US diesel inventories will be released in a few hours. I plan to give these results more attention tomorrow.

Covid Hospitalizations (and Mutations): In much of the world, the number of hospitalized patients with covid is less than half that of this time last year (recent increases notwithstanding). There seems to be a meaningful shift in China’s covid zero policy. If this policy shift persists there are potentially significant implications, both epidemiologically and economically (including for diesel demand).

China’s Export Volume and Value: Reuters reports: “China’s exports and imports likely contracted further in November due to weakening global demand, production disruptions and waning demand at home amid widespread pandemic controls, a Reuters poll showed on Monday. Data for November are expected to show a 3.5% fall in outbound shipments from a year earlier, after October’s figures were down an annual 0.3%, according to the median forecast of 28 economists in the poll. That would mark the worst performance since May 2020.”

North American Electricity Demand and Supply: Late autumn demand has been seasonal and within current generating capacity. The price per kilowatt hour has increased. (More)

While the original conceit for these vital signs relates to human health, the outcomes above seem better suited for a weather analogy. Taken together I perceive seasonal to warmer temperatures with clouds, chance of spotty precipitation, and an uncertain mid-term forecast.

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December 9 Update: Bloomberg reporters offer their own perspective on what is ahead as China backs-away from ultra-covid-zero:

The (infection) curves have been consistent all over the world, rising exponentially for about three to four weeks and then falling at a similar rate. The experts I’ve talked to don’t expect anything different in China. It’s pretty clear that a month from now will be near the peak… One data set, from the London-based research firm Airfinity, has a range of 1.3 million to 2.1 million (fatalities). Officials at the Institute for Health Metrics say that’s much too high. They are coming out with new numbers in the next few days.  I don’t see a scenario where China avoids the devastation we’ve seen in other places. Given its size, it’s likely to be scary. 

CNBC reports, “U.S. manufacturing orders in China are down 40 percent, according to the latest CNBC Supply Chain Heat Map data. As a result of the decrease in orders, Worldwide Logistics tells CNBC it is expecting Chinese factories to shut down two weeks earlier than usual for the Chinese Lunar New Year — Chinese New Year’s Eve falls on Jan. 21 next year. The seven days after the holiday are considered a national holiday.”

S&P Global reports, “Diesel and gasoil stocks in the Northwest European hub of Amsterdam-Rotterdam-Antwerp sat at 1.716 million mt, 24.9% below the five-year average late November and their lowest since 2008 for the time of year, data from Insights Global showed. Inventories elsewhere have faced a similar fate as demand outstrips supply, with diesel stocks across the Atlantic around 37% below the five-year average at the end of November and middle distillate stocks in Singapore around levels last seen in 2004 for this time of year, US Energy Information Administration and Enterprise Singapore data showed… US Gulf Coast exports of ULSD to Europe surged 117% on the month to 484,200 mt in September, before crashing to 284,000 mt in October and rising to about 418,800 mt in November…”

According to the USDA and Bloomberg, “Wheat posted a fifth straight week of losses as prospects brighten for getting global grain shipments out of the war-stressed Black Sea. The US Department of Agriculture raised its outlook for world wheat trade in part on higher exports from Ukraine and Russia, the agency said Friday in its monthly World Agricultural Supply and Demand Estimates.”

[Update Below] According to the US Department of Commerce, Bureau of Economic Analysis, “Personal income increased $155.3 billion, or 0.7 percent at a monthly rate, while consumer spending increased $147.9 billion, or 0.8 percent, in October. The increase in personal income primarily reflected increases in compensation and personal current transfer receipts. The personal saving rate (that is, personal saving as a percentage of disposable personal income) was 2.3 percent in October, compared with 2.4 percent in September.”

Given my focus on supply chains — the real movement of real stuff — for several months I have been giving close attention to US inflation-adjusted expenditures on Food-At-Home (FAH) (see chart below).

The pandemic prompted considerably higher demand for FAH, mostly purchased from various categories of grocery stores. This sustained increase made enormous sense given the significantly reduced expenditures on Food-Away-From-Home. But I have been surprised how this increase persisted even after US consumers began to expend as much (or more) than ever at restaurants, fast food outlets, and so on in Spring 2021. As shown below, Food-At-Home expenditures remained about 8 percent higher than pre-pandemic even when Americans resumed eating out. This significant and surprising (to me) sustained shift above the previous demand trend is a big part of persisting supply chain challenges in the US grocery industry.

Six months ago, based on long-term real personal expenditures on Food-At-Home, I decided that a combination of inflation, more competition for spending, reduced personal savings, and, perhaps, even some satiation would result in FAH expenditures falling to something close to $1,010 billion to $1020 billion per month of chained 2012 dollars. In June I announced a “bet” on how expenditures would adapt and adjust over the summer.

So, despite nine months of unfulfilled anticipation (or because of it), I hypothesize that between May and September we will see food-at-home real consumption gradually decline by another seven to ten percent and then flatten or incrementally increase. I hypothesize that durable goods and services will begin to show slopes similar to 2022 food consumption. I also hypothesize a more rapid rate-of-change than that for food between last November and April. These are deniable hypotheses. I am not sure. It does seem plausible. If this happens, demand and supply will be closer to equilibrium. [Excerpt from June 26 blog]

I was way off. The decline in real food expenditures from May to the end of September was a scant 1.4 percent… and real expenditures on food for October were almost a billion (real) dollars more than May. After five flat months, real durable goods expenditures increased in October. Real services expenditures have continued along the softly increasing curve assumed in summer 2021.

Why was I wrong? As usual, there are so many possibilities. Let us count the ways. But today I am focusing on one fundamental factor that I expect has had high-proportional impact: real personal income (see second chart below) is even more above its pre-pandemic trend than food expenditures. Yet another example of how comparative change and effectual demand matter.

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December 2 Update: This morning’s payrolls report from the Bureau of Labor Statistics also suggests why food purchases have continued to be so robust. Despite some high-profile lay-offs, the overall number of new jobs created in November far exceeded most expectations. (See chart below.) Employment in food manufacturing increased 3.4 percent. Employment in retail food increased 4.5 percent.