Caption: Despite self-sanctioning, Europe still depends on Russian aluminium. Credit: Wood Mackenzie

Supply chain stress on course for return to pandemic levels

 

By Carly Fields

 

Delayed shipping capacity more than doubled over the six months to May, nearing the level of the pandemic-induced shipping supply chain stress, according to data from the World Bank.

The World Bank’s Global Supply Chain Stress Index, a measure of delayed shipping capacity, increased to 1.4 million teu in May, due to continuing disruptions in the Middle East and the Mediterranean Sea.

Shipping costs, meanwhile, rose by 11% in May 2024 compared with the average level over the first quarter of the year, which had already nearly doubled from the fourth quarter of 2023.

The figures, taken from the World Bank's latest Trade Watch, reveal a sector under pressure. The report offers a nuanced outlook on global trade, acknowledging signs of a moderate recovery in goods trade this year while highlighting persistent challenges. Those challenges include ongoing geopolitical tensions and disruptions in key shipping routes, which threaten to derail the nascent recovery.

The World Bank's Global Supply Chain Stress Index hit a 16-month high in May, driven by disruptions on key trade routes.

Bottlenecks shift east

Shipping delays and elevated shipping rates continue to be a major pain point for businesses. The World Bank's Global Supply Chain Stress Index hit a 16-month high in May, driven by disruptions on key trade routes. The report emphasised a significant geographic shift in the sources of stress, stating that the Middle East and Mediterranean region now accounts for "over 31% of delayed shipping capacity”, a sharp increase from "just 8% a year ago”, said the report. This disruption has forced rerouting of ships, causing additional strain on already stressed global supply chains.

However, a glimmer of hope exists: despite the recent surge, shipping costs remain below their 2022 peak. This is attributed in part to increased capacity from shipping companies who expanded their fleets after the pandemic. However, the relief may be short-lived, as the report warned that "global container capacity stress and shipping rates remained high in May 2024, primarily due to disruptions in the Middle East and the Mediterranean Sea”.

Early data suggests a mild uptick in global trade values in 2024, likely fuelled by factors like restocking of inventories and stabilising demand from China. However, the positive outlook was tempered by trade policy uncertainties and geopolitical tensions.

The recovery is also uneven across regions and sectors. Trade in heavy machinery and mining is leading the charge, with growth of 6% in the first four months of 2024 compared with the same period in 2023. In contrast, sectors like transportation equipment have seen a slowdown, with growth dropping from 10.5% in the fourth quarter of 2023 to 3.8% in early 2024, likely due to rising interest rates and elevated prices.

The report notes that the decline in fuel trade, though still the fastest-falling product group at 12.9%, is an improvement over the steeper 19.9% drop in the fourth quarter of 2023.

The report found that "China accounted for 11% of total US trade in the 12 months to April 2024, down from 15.4% in 2018.

Reshaping trade relationships

The war in Ukraine has significantly impacted global trade flows, added the report. Sanctions against Russia have caused its share of the EU market to plummet to just 1.4% in the 12 months ended April 2024, down from 5.6% two years earlier. This has created an opening for the US, whose share of EU trade has grown to 16.6% from 14.2% in the same period.

Tensions between China and the US are also taking a toll. China's trade with the US has declined at a faster pace as tensions escalated. The report found that "China accounted for 11% of total US trade in the 12 months to April 2024, down from 15.4% in 2018." Meanwhile, China has seen its trade partnerships with Russia and other regions expand, partially offsetting the decline in US trade. The US has also seen a shift in its trade partnerships, with Mexico, Canada, and the EU taking a larger share. This trend of "reshoring" and "friend-shoring" aims to reduce reliance on China but may not fully compensate for the lost trade.

Examining how different regions are faring, the Trade Watch report said while South Asia, China, and parts of East Asia have seen some growth in exports, Europe and Central Asia have experienced declines. This highlights the uneven nature of the recovery and the need for tailored strategies for different markets.

The report also considered how specific industries are performing. The strength of heavy machinery and mining trade suggests an ongoing focus on infrastructure development and capital investment in some parts of the world. Conversely, the continued struggles of the fuel trade sector reflect ongoing adjustments to the global energy mix.

In summary, the World Bank acknowledges ongoing challenges but remains cautiously optimistic about the growth of global trade in the future.