Wed. Jun 29th, 2022
From <a href="https://www.zerohedge.com/"Zero Hedge

Logistics Costs As A Percentage Of GDP Hit Highest Level In 13 Years

By Mark Solomon of FreightWaves

The 33rd annual State of Logistics Report, the year-over-year report card of the U.S. business logistics system, confirmed empirically what everyone already knew: 2021 was nirvana or a nightmare depending on what one does for a living.

Total logistics costs, which measure how much was spent on transportation, warehousing and ancillary services such as support and administrative, soared 22.4% last year to nearly $1.85 trillion, according to the report. That was equal to 8% of the U.S. GDP, a level not seen since 2008, said the report, which was released by the trade group Council of Supply Management Professionals (CSCMP) Tuesday morning.

Demand spiked across every mode and service. Businesses desperate for reliable motor carrier capacity powered a 39.3% jump in spending on private fleets or dedicated contract carriage to $415.2 billion. Inventory carrying costs jumped 25% to $502 billion as surging warehouse demand and supply chain congestion filled facilities to overflowing. The capital costs of carrying mountains of inventory jumped 33.4%. 

Spending on waterborne services surged 23.6% as ocean carriers leveraged massive rate increases on international sea routes to make more money in 2021 than in the prior 20 years combined, the report said.

Spending on parcel-delivery services jumped 15.6% and produced a five-year compounded annual growth rate of 11.4%, the highest of all the report’s cost components.

All of this led to a fattening of carrier profits at a time when shippers felt the double whammy of shrinking margins and declining service levels, according to the report. Shippers of all types “longed for the days” when service levels that are now considered acceptable were viewed as major failures, the report said.

Through the report’s long history, a relatively high costs-to-GDP ratio reflected network inefficiencies that forced users to spend more to get goods to market. Network inefficiencies were certainly evident in 2021, along with an unprecedented surge in goods demand that is one of the legacies of the COVID-19 pandemic.

Given the events of the first half of 2022, it is clear that next year’s report will look different than this year’s. Consumer demand has cooled off in the wake of higher inflation and the waning effects of pandemic-related government stimulus. Rising interest rates will curtail spending even more. 

Consumers worried about cost increases and the possibility of a recession will not be spending nearly as freely this year as they did in the past two. More service-related consumption, especially in travel and entertainment, will cut into goods-spending activity.

Some of that change is showing up in the daily logistics ebb-and-flow. Ron Marotta, vice president of supply chain solutions for the Americas division of freight forwarding and contract logistics firm Yusen Logistics, said on a conference call with reporters last Friday that ocean freight shippers are increasingly looking to negotiate their carrier contracts as more liner capacity opens up. 

In a sign that ocean supply and demand might be returning to some form of balance, Yusen has worked off virtually all of its cargo backlogs, some of which have built up over two years, Marotta said. The overall environment, he said, has become “more favorable to shippers.”

While the dual misery of transport delays and higher rates may abate somewhat for shippers, the report’s authors cautioned that the pendulum will not abruptly swing back to capacity abundance and lower rates. E-commerce and last-mile delivery demand will remain elevated and some supply bottlenecks will not loosen easily, they wrote.

Higher borrowing costs will continue to push up the expense of holding the many billions of dollars of inventory sitting in warehouses and distribution centers. The already-complex task of managing a dizzying array of stock-keeping units will only be compounded by the higher interest expense, said Andy Moses, senior vice president of sales and solutions at 3PL Penske Logistics.

The continued upward march in interest rates will “expose any inefficient process management in the warehouse trade,” Moses said last Friday.

Tyler Durden
Tue, 06/21/2022 – 20:20
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