Fractured supply chains have been a feature of commercial life for all businesses in 2021 as economies have swung back into gear in the wake of the pandemic. The timber and corrugated packaging supply chain is of course no different, with multiple, fluctuating economic and commercial factors in play, conspiring to create unique challenges and push up operational costs for manufacturers on several fronts. To help packaging buyers make sense of this complex landscape and what’s likely to be on the horizon, we’ve put together a series of updates around the key drivers.
What is happening in the global shipping industry?
The knock-on effect of the pandemic to the world’s highly interconnected shipping and logistics industries has been marked. Record latent demand for goods and materials that built up during lockdown periods, combined with major supply chain disruptions like congested major ports and the Suez canal blockage, have caused freight rates to jump to record highs and cause backlogs at ports across the globe.
The problem has become so acute that some companies have resorted to chartering air cargo planes for as much as $2million for a single flight. What’s more, it’s an issue that’s set to be in play well into 2022, with the UN warning just this November that elevated shipping costs will further fuel rising inflation around the world next year. That is a view echoed by prominent economists and business leaders across the globe, who believe shipping backups at major ports are unlikely to truly ease until well into 2022. The net result means continued elevated shipping costs for businesses across the supply chain and some uncertainties around the future supply of a range of materials.
What about logistics and haulage personnel shortages?
Personnel shortages have affected many industries in the wake of the pandemic, but especially so when it comes to transportation. Well-documented across the media, there has been a particular challenge around the availability of HGV drivers in the UK for some months now, with a shortfall of some 100,000 personnel in the market according to the Road Haulage Association. In response, the UK Government announced a package of measures designed to ease the situation but many commentators point to the fact these changes will take time to embed. Indeed, a recent survey of UK businesses indicates one in four expect to experience recruitment difficulties in the coming six months, with almost half indicating they will have to further increase pay rates to attract recruits. Of course, the packaging sector has not been immune from these pressures. To safeguard continuity of product supply for customers, manufacturers like us continue to experience significantly increased costs around staff recruitment and retention and funding mitigating measures like using our own HGV fleet to make inventory collections direct from ports. What’s more, many suppliers have shifted from using return loads to employing dedicated hauliers to ensure availability, adding further considerable cost pressure into the mix.
How are rising energy costs impacting manufacturers?
A worldwide squeeze on gas and energy supplies is also conspiring to increase the many cost pressures on manufacturing businesses, with recent warnings this will continue to feed into higher prices going forward. A particularly cold winter in Europe last year exerted extra pressure on gas supplies and, as a result, stored gas levels are now much lower than usual. This, coupled with been increased demand from Asia (especially China) for liquefied natural gas has helped push up wholesale gas prices across the world. Indeed, since January, they have risen by a massive 250%.
Once again this is a global issue impacting the length and breadth of supply chains, with businesses forced to absorb the full impact of rising prices. Energy-intensive sectors such as the recycling and paper industries, are of course particularly exposed to this scenario, but every business that has to pay energy bills is affected. Sadly, there is little prospect of cheaper prices on the horizon any time soon, with recent reports indicating that higher prices are set to be more of a medium term issue that could continue to persist for a further 18 months.
What is the impact on inflation?
Driven by these soaring energy prices, inflation in the UK has risen sharply since the ending of Covid restrictions and opening up of the economy, hitting over 4% in the year to October. It’s a scenario impacting multiple economies and industries across the globe, with the UN advising just this November that global food prices had hit a ten-year high on the soaring cost of cereals and oils and the knock-on impact labour shortages and shipping disruptions.
Price inflation in the packaging sector has been further well documented, with timber futures in the US hitting a record high of $1,711 in May earlier this year, leaving wood packaging manufacturers across the world with no choice but to increase their own pricing. Aside of increased timber costs, which are highly unlikely to return to pre-pandemic levels any time soon, packaging manufacturers remain subject to significant extra inflationary pressures on the cost of business-critical items such as labour, key components like nails and composite blocks, corrugated materials and day to day operational essentials such as fuel, haulage and energy. Looking ahead, these pressures seem likely to endure, with the governor of the Bank of England recently indicating he expects the headline rate of inflation to peak in April next year at 5%.
Finally, are materials shortages still an issue?
With huge global demand for many goods as economies fire back up following lockdowns, the above challenges continue to feed into materials shortages in some sectors. Indeed, in the latest CBI Survey of some 263 manufacturers, two thirds of businesses warned that shortages of various materials and components would hit factory output in the next three months. Meanwhile, the ongoing global shortage of computer chips is now affecting more than 100 industries according to latest reports, adding further costs down supply chains.
The bottom line
Such an unprecedented coming together of challenging market dynamics all adds up to continued pressures ahead for pallet and packaging manufacturers looking to balance customer service alongside escalating operational costs.
Throughout the pandemic, we have worked hard to continue to mitigate the knock-on impact of these challenges to customers and will continue to do so, ensuring continuity of product supply and keeping prices aligned with market conditions thanks to our longstanding links with our strategic partners throughout the supply chain.
With this uncertain and unpredictable climate looking likely to last well into 2022 however, we would urge customers to continue to approach us with their requirements at the earliest possible opportunity, so we can effectively meet their demands, whatever the prevailing market conditions.
