Logistically Speaking - Hot Sheet Week 17


Logistically Speaking - Hot Sheet Week 17

Warehouse Space Remains Tight
Prologis, the logistics real estate company, has said that the US warehouse market is likely to remain tight due to headwinds facing the supply side. The company stated that "true months of supply,” a measure of current vacancies and space coming online, is at 30 months. This is up from 25 months at the close of 2022 but remains below the 10-year average of 36 months. Prologis believes the recent increase is due to a significant amount of real estate coming online and is likely to revert quickly as leasing trends remain strong and deal financing becomes more challenging. The company expects vacancies to rise to the 4% range in 2023 from the low-3% range last year. However, the market is expected to normalize and the pipeline will continue to empty, pushing vacancies back to the 3% range next year.

Prologis' co-founder and CEO, Hamid Moghadam, told analysts on a call that the knock-on effects from Silicon Valley Bank’s failure, as well as broader macro concerns, have resulted in a pullback in construction plans as lenders have tightened the purse strings. Development starts were down 40% from the peak during the first quarter. Prologis has traditionally held pricing power even when vacancies climb to as much as 6% and 7%, which is twice as high as what is expected next year. Prologis reported a 45% increase in revenue due to prior acquisitions and increased rents and maintained its 2023 forecast of 10% rent growth in the US and 9% globally.

Dunavant Solution: We provide tailored solutions in our current warehouse facilities in Houston, TX and have developed strategic partnerships to support tailored solutions to meet your warehousing needs anywhere in the world. For warehousing solutions, please contact Dean Bay at 281.694.0100. Learn more https://www.dunavant.com/warehousing-distribution.

Supply Chain Normalcy is a Ways Away
The challenges faced by the global supply chain in the current economic climate are numerous. The demand for goods and services is volatile, and consumers are struggling due to rising inflationary pressures and debt. The supply chain is also facing constraints due to supply volatility caused by global events such as war, unrest, and trade tensions. While logistics availability and costs are back to pre-pandemic levels, the assumptions underpinning the global supply chain are at risk.

The traditional supply chain planning processes focused on cost reduction are too slow and unable to make quick decisions in the face of variability. Instead, the focus should be on developing a shared vision for the organization's supply chain excellence to improve resilience and drive reliability of business results. Businesses must build adaptive modeling capabilities and use market data to build planning processes, rather than relying on historical data. Additionally, supply chain companies need to rethink traditional supply chain models, such as S&OP, and shift the focus to valuing time and designing supply chain cycles to balance order and supply cycles. Finally, the industry should be cautious with the over-hype of digital transformation in the supply chain, define core capabilities, and develop a clear roadmap to avoid a lack of clarity on value.

Dunavant Solution: We have invested in our technology and people to provide the right solutions for each customer. This allows us to solve problems proactively before they arise rather than reactionary. 

Container Rates May Have More to Fall
Container shipping consultancy, Drewry, has warned that the recent green signals in container shipping are unlikely to last as demand is expected to remain weak. While the uptick in spot rates and charter-hire prices are signs of a recovery, Drewry believes it to be a transitory illusion. The order book for 2021 and 2022 is vast and will coincide with a slump in volume. As the newbuilds flood in, pressure on both markets will become an irresistible force that owners and operators cannot bat away. Drewry is now predicting low rates through 2024.

Drewry notes that global throughput will increase only by 1% this year, far below capacity growth. The company expects net fleet capacity growth, including the effect of ship demolitions, to increase 4.7%. Shipping lines could have made the supply-demand balance much more manageable for themselves by scrapping more of their older ships more quickly, but scrapping is way below what Drewry was expecting. Only 28,000 TEUs were scrapped during the rate boom, and Drewry estimates that 31,000 TEUs were scrapped in the first quarter of 2023, which is "on par with the whole of 2021 and 2022 but still way off from our current target." The container liner industry earned an aggregate EBIT of $296 billion in 2022, a staggering sum and up 37% versus 2021. Drewry expects the industry to earn EBIT of $16.5 billion in 2023, a decline of 94% year on year.

Dunavant Solution: In light of the current ocean shipping environment, we have found it beneficial to evaluate both spot market and contract options for our customers and decide on the best path forward based on their specific business needs, balancing cost, and service. 

The Step Away from China
The US and its allies are grappling with how to limit ties with China in specific sectors they view as strategic, while maintaining broader trade and investment flows with the world’s second-largest economy. The Group of Seven (G7) advanced democracies are concerned that China, a dominant supplier of many goods and materials, could cut off key exports during a conflict or another pandemic. They also worry that Western investment and expertise could help develop Beijing’s military. The IMF has warned against splitting the global economy into competing geopolitical blocs led by the US and China. Such a split would lower global trade and growth.

US officials have been considering how to restrict investment into China by targeting only sectors that could help enhance Beijing’s military capabilities. The US and its allies have agreed on new initiatives to bolster supply chains on the sidelines of the semiannual meetings of the International Monetary Fund and World Bank. The US, led by the Biden administration, has been pushing most urgently to reorient the global economy away from China. “The benefits of open trade, which include more efficient allocation of global resources, is maintained with friend sharing. So I think the argument that friend-shoring is going to cause huge fragmentation and loss of the benefits of trade is really not valid,” Ms. Yellen said. French officials have said that they share US concerns about relying on China. However, even crafting US policy toward China can prove challenging and time-consuming. The rules are set to prohibit US private equity and venture capital investment in quantum computing and advanced semiconductors.

Dunavant Solution: We are closely monitoring trends on a macro level and have strategic partners in countries that are friendly to the U.S. Dunavant’s Cross Border Mexico team is seeing this transition first hand and we are looking to locate personnel in other countries. 

The Coming Copper Shortage
A supply gap in copper is becoming an increasingly urgent issue as electrification drives demand for the metal. According to consulting firm McKinsey & Co., the annual demand for copper is expected to rise to 36.6 million metric tons by 2031, with supply forecast to be around 30.1 million tons, creating a 6.5 million ton shortfall at the start of the next decade. Copper is used in a variety of industries, including construction, wiring, electric vehicles, and solar panels. Mined output globally in 2022 was 21.8 million tons, with little output growth expected in Peru and Chile, which currently dominate copper production.

Metal markets are starting to view copper as the new lithium, with supply potentially insufficient to meet demand, particularly in the energy transition context. A lack of newly mined resources is a key challenge, with Fitch Solutions estimating that 2023 copper mined production in Chile will likely be about 5.7 million tons, the same volume as in 2020. Copper prices may need to rise to $15,000 a metric ton to attract investment in new mines, according to Marex’s head of market analytics.

Posted by Katie Elizabeth Carpenter at 16:59