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    Expert's Opinion

    Deep Dive Into Packaging Supply Chain

    Soaring freight rates, cargo container shortages, and port congestion have driven up shipping costs.

    Deep Dive Into Packaging Supply Chain
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    Alaina D'Altorio, Content Marketing Specialist, Smith Corona04.13.21

    2021 has left the pressure-sensitive label industry in utter chaos. Soaring freight rates, cargo container shortages, and port congestion have driven up shipping costs. Lead times have extended out so far, they are unknown.

     

    A rising need for pulp and paper has far exceeded supply and demand, escalating raw material costs. Packaging supplies, like sealing tape, stretch film, and ribbon, are seeing price hikes to the moon.

     

    This is all currently happening. So how did we get here? We took a deep dive into the supply chain crisis and got to the bottom of it. The following information has been gathered to showcase the contributing factors that have thrown the label industry into its current state of turmoil.

     

    Freight rate increases

    Over the past year, ocean cargo prices have skyrocketed up to four times the amount they previously were. These prices have affected 40' containers, a common size used for shipping products. Costs to ship to and from China have exploded within only a year.

     

    For example, the median cost of shipping a 40' container from China to the Eastern US coast more than doubled from $2,559 in February 2020 to $5,822 in February 2021.

     

    In another example, the median cost of shipping a 40' container from China to the Western US coast increased exponentially from $1,300 in February 2020 to $4,992 in February 2021.

     

    Shipping cost drivers

    The shipping industry thrives on periods of stability and predictable business. But nothing was more unpredictable than the 2020 pandemic and the intense turmoil it caused. From 2019 to 2020, global trade only declined around 1%. However, from April 2020 to May 2020 it fell 15% before quickly rebounding.

     

    The ocean cargo business is already very volatile, with maritime operators usually seeking long-term, stable contracts over spot business. This usually helps to manage volatility, but 2020 caused a mix of new customer demands. Customers with large, new demands for freight tend to fill it using spot business over long-term contracts. Spot business flourished with the rise of supply and demand caused by the pandemic. For example, demand for disinfectants has increased 6,800% and demand for items like exercise equipment has doubled over the past year.

     

    Two of the main sources of shipping cost increases are container shortages and labor constraints. Currently, there is a global shortage of shipping containers available.

     

    Due to labor shortages caused by COVID-19, containers have been stranded in ports and rail yards. The stranded containers have caused a shortage and new customers are unable to receive containers to fill with their products. Containers delivered to ports in South America and Africa are not being picked up because these are considered to be less profitable routes. It is more profitable for vessels to work China-USA routes and China-Europe routes.

     

    COVID-19 has reduced the number of dockworkers and truckers working due to many of them testing positive. At the start of February 2021, over 1,000 dockworkers in California tested positive for COVID-19, up from 694 workers in January 2021. These shortages in workers are further exacerbated by an unprecedented volume of imports in western US ports like Los Angeles and Long Beach. Wait times for anchorage at these ports often exceed a week, which only continues to increase costs.

     

    Shortages of truck drivers, rail workers, and longshoremen are further driving up freight rates. Because of these labor shortages, vessels are unable to be unloaded promptly. A lack of longshoremen has even caused many ocean carrier operators to cancel voyages. This snowball effect further slows the rate at which shipping containers are recycled back into service, making the already deep shortage of empty containers that much worse.

     

    Another danger to increasing costs is port closures. The Port of Montreal’s longshoremen union is currently in a continuous labor negotiation. On March 21, 2021, they voted against new offered terms, leaving the potential for a strike over the dispute. This uncertainty is driving deliveries elsewhere. A closure of this port will drive ocean cargo to other ports that are already overwhelmed, adding to more ocean transit delays.

     

    So what can we expect moving forward with ocean cargo?

     

    Currently, transit costs are only slightly lower than their peak rates in February. With the world’s economy beginning to see signs of reopening for the summer of 2021, many are hopeful that COVID-19 cases will be in remission. If this happens, there will be a corresponding increase in economic activity. The demand for ocean cargo will support elevated transit costs and opening economies will again lead to changes in consumer preferences, adding to volatility through additional spot business.

     

    Plus, on March 25, 2021, a 1,300-foot container ship called the Ever Given became stuck in the Suez Canal in Egypt, completely blocking transit and further halting shipping. Around 12% of all global trade travels through this canal, which provides a route connecting Europe to Asia. Hundreds of cargo ships and tankers were stuck waiting in the Red Sea near the opening of the Suez Canal for 5 days until the ship became unstuck on March 29, costing hundreds of millions of dollars.

     

    LTL and small parcel

    Beginning in December 2020, shipping rates began to increase. Fuel surcharges attempted to cover rising diesel costs, with additional new surcharges being added or contemplated to cover labor and operational costs.

     

    Extreme weather has also played a role in increases. The south and the southeastern US were affected by severe cold weather and winter storms in early 2021, causing disruptions to a wide array of businesses, factories and warehouses. Several states saw restrictions by LTL carriers, and many shipments were delayed or abandoned.

     

    Local courier services would usually rescue these shipments, but due to the high demand for local couriers, they are refusing non-contract customers. Carriers are also being more selective with their customers while restricting the shipments they are willing to pick up until they can stabilize their workflow. Ultimately, freight costs will cause increases to our raw materials irrespective of their underlying prices. No decline in demand is expected to be seen anytime soon.

     

    Driver shortage

    The current supply chain is still experiencing a huge shortage of truck drivers. These shortages began with changes to the Department of Transportation (DOT) rules regarding the maximum hours of service (HOS) a truck driver can accomplish during a week. These rules are enforced through mandatory Electronic Logging Devices (ELD).

     

    Drivers are only permitted to work a specific number of hours followed by time off duty before they can resume driving. These new HOS and ELD rules are designed to prevent accidents caused by over fatigued truck drivers. Because of these regulations, drivers are not able to put in as many hours or drive as many miles. As drivers are often paid by the mile, they are no longer able to earn as much money.

     

    As it stands, there are around 80,000 fewer truck drivers in 2021 than in 2020. Current drivers are aging out, and new drivers are not being hired or trained at a quick enough rate. As it stands, there are around 80,000 fewer truck drivers in 2021 than in 2020. Drivers are aging out, and new drivers are not being hired or trained at a quick enough rate. Around 57% of drivers are over the age of 45, with 23% over the age of 55.

     

    In 2019, of the 14 million job postings for drivers, only 1.9 million hires were made. There has been a 40% decrease in commercial driver’s license (CDL) training due to capacity restrictions from COVID-19 and outright closures of CDL training schools. There is also a lack of appeal with the occupation. Truck driving entails long hours, constant traveling, and unhealthy lifestyles with a minimal ability to eat well or exercise. According to the BLS, trucking is the 6th most dangerous occupation.

     

    Pulp prices on the rise

    Industry-wide price pressure from increasing pulp prices began in Q4 of 2020, which has continued into 2021, causing prices for pulp in China to nearly double. The Chinese market has increased pulp and paper consumption, with high demand in China being driven by the growth for tissue and packaging/board.

     

    There has also been a sharp increase in the use of tissue and ivory boards globally. Tissue demands are being driven by COVID-19 and ivory board demand has increased as consumption of single-serve meals has transitioned from plastic containers to board for sustainability.

     

    Many mills in North America and some in South America have delayed maintenance in 2020. Because demands for products escalated so extremely, mills delayed typical shutdowns for preventative maintenance. Regulations put into place because of COVID-19 limited access for specialized maintenance teams, mechanics and suppliers. These mills are now taking extended downtime to remedy deferred maintenance, further exacerbating the restraints of the pulp supply chain. 

     

    In 2020, several marginal pulp mills shut down due to poor profitability. A mill explosion at Androscoggin Mill removed more than 240,000 tons of pulp from the market, shifting the mill to purchase market pulp. Viscose fiber, which is used in clothing making, increased in price dramatically, 88% for Softwood and 53% for Hardwood. With China and many Far East countries coming out of lockdown, the demand for clothing has been driven up. Producer utilization rates are currently high, leaving little to no access capacity. There are lower than normal inventories reported throughout the market, with no major capacity expected to come online in 2021. 

     

    Historically in the pulp market, supply and demand have been very closely aligned, usually +/-2%. Tight supply and demand equilibrium and massive operating leverage throughout the industry have caused supply and demand shocks to generate huge pricing volatility. Industry experts anticipate volatile pulp prices to remain through the rest of the first half of 2021 and pricing to remain above that of 2020 through the rest of the year.

     

    On October 28, 2020, the US Departments of Commerce initiated an anti-dumping investigation into direct thermal paper from Germany, Japan, South Korea and Spain. Its goal is to determine if imports of thermal paper from these four countries are being dumped in the US market at less than fair value. As it stands, the alleged dumping margins are:

    •    Germany: 9.2% – 58.9%;
    •    Japan: 129.86% – 140.25%;
    •    Korea: 56.6% – 58.24%;
    •    Spain: 32.68% – 41.45%


    The pending anti-dumping investigation is tightening supply. Offshore manufacturers are limiting imports into the US to mitigate any potential dumping fines. Domestic US production for thermal paper is not sufficient to meet domestic demand. It is estimated that domestic production only covers 50% of domestic demand. Rising pulp prices are further driving up direct thermal base paper costs, forcing manufacturers to pass along these prices. Shortages are forming in the chemicals used to create direct thermal coatings, as well.

     

    Conclusion

    Overall, the disruptions currently taking place in the supply chain have thoroughly turned the pressure-sensitive label industry on its head.

     

    Prices are soaring across the board, affecting everything from freight rates to pulp, paper, and packaging supplies. In turn, this is causing businesses to adjust their pricing to meet demands, which ultimately affects end-users. Shortages in truck drivers, disruptions in paper mills across the country, and extreme weather conditions have only further exacerbated the situation.

     

    Predictions for a more promising future marketplace are hopeful, but as of now, there is no telling when that could be. At present, converters and distributors should keep their end-users informed on the evolving situation and adapt as best as they can to accommodate the difficult circumstances.

     

    To learn more about the supply chain and various other topics, click here for the original article on the Smith Corona website.

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