What Do Supply Chain Disruptions Mean for Transportation Factors?

The strain on the supply chain in 2021 and into 2022 is putting tremendous pressure on every link. David Jencks looks at the overall impact of the logistics chaos and how there might actually be opportunity for motor carriers and their financiers despite the challenges.

BY DAVID JENCKS, ESQ., JENCKS LAW

On Nov. 10, more than 100 container ships were stuck at the Los Angeles area ports. Some of these stranded ships re-routed to Florida via the Panama Canal as a somehow quicker alternative to unloading, but many still remain, according to Fortune, which reported “77% of the world’s ports are experiencing abnormally long turnaround times.”

Global supply chains are still recovering from the impact of the lockdowns governments imposed in 2020 to contain the COVID-19 pandemic. Lockdowns in China shuttered factories, which stalled much of the supply side in global shipping. Then lockdowns in the United States prompted a surge in demand as people ordered everything from consumer staples to electronics and gadgets to facilitate working from home.

Many other scattered disruptions, such as China briefly closing shipping ports in August and June to prevent a COVID-19 outbreak and the United States suffering a claimed dearth of truck drivers and a definite shortage of chassis trucks, have further damaged the shipping industry’s ability to rectify obstacles in their shipping schedules. Lastly, and less reported, staffing shortages at the ports themselves remain a pervasive problem.

A large amount of the supply chain problem is just the global pandemic doing what it is bound to do. In the United States, for example, there was a surge of Asian‐made consumer goods to meet an unexpected spike in U.S. demand during the summer but still‐muted demand abroad for certain U.S. products in other countries. A basic mismatch between peaking worldwide demand as economies reopen, consumers make up for lost time and companies restock depleted inventories with insufficient shipping capacity have driven many supply chains to the breaking point.

While importers are clearly reeling from delays and 300% increases in containerized freight shipping costs, U.S. exporters (mainly consisting of agricultural product distributors) lacking the empty containers they need to send their goods abroad are also besieged.

There is, however, another culprit that is only partially caused by the pandemic. Major U.S. port delays have, according to Flexport, been “exacerbated” by a longer standing global supply‐demand imbalance, leading to a decline in effective capacity. The effective capacity has only gotten worse since then, with some estimates of container ships carrying only two-thirds of their capacity. In addition to California (Los Angeles/Long Beach and Oakland), backups are a problem at other major U.S. ports, such as New York/New Jersey, Georgia (Savannah) and South Carolina (Charleston).

With all this in mind, it makes sense that motor carriers are severely and negatively affected, as they sit toward the end of most supply chains. However, in the midst of unprecedented port chaos and supply chain turmoil, Transport Dive reported the Federal Motor Carrier Administration approved approximately 10,000 applications for operating authority per month in 2021, granting 82,000 operating authorities before October alone, a record number of authorities in any single year.

What’s driving the record number of authorities? Money, specifically money available to companies through sky-high spot freight rates and an abundance of loads. This “freight-flation” has new carriers attempting to take advantage of market forces by placing a high value on their services and their equipment. “Freight-flation” is outpacing a motor carrier’s operating inflationary pressures by a factor of five, excluding the increase in freight rates, which is largely offset by fuel surcharges. Spot market loads and rates both rose around 30% year over year in October 2021, with the core inflation rate in that same period running at just under 6%.   

Surely the supply chain disruptions will quickly and dramatically correct themselves and the lofty load and rate numbers will burst, but this is not so, says Lee Klaskow, a senior analyst at Bloomberg Intelligence.

“Supply chain constraints will take time to unwind as port congestion reaches new highs,” Klaskow told Bloomberg. “We expect trucking supply will be constrained beyond historical norms from restocking, economic recovery and limited driver availability.” 

Klaskow isn’t alone, with Tim Uy of Moody’s Analytics telling CNBC that “supply will likely play catch-up for some time,” while Vox reported Federal Reserve chair Jerome Powell echoed the likelihood that 2022 will continue to feature supply chain challenges.

Lastly, FTR’s Avery Vise told Heavy Duty Trucking he expects supply chain disruptions and the stress on load demand and pricing to continue “well into 2022 before we level down to what we think of as a normal pattern.”

Good times for motor carriers and their financiers will always ebb and flow, but a strong consensus of transportation experts is calling for extended favorable economic conditions for motor carriers, even if it is at the detriment to other sectors. Motor carriers will experience economic recovery from the pandemic, and the litany of short- and long-term supply chain issues will translate into continued opportunities for plentiful loads and robust freight rates. While many industries and their financiers may suffer in the near term from supply chain disruptions, motor carriers, and their factors by proxy, will continue to reap the benefits of the chaos in the supply chains through busy clients and elevated invoice amounts.

David Jencks, Esq., is an attorney at Jencks Law that has been practicing for more than 20 years in the areas of transportation and transportation finance. He represents factors, brokers and motor carriers in transactional and litigation matters. He is a member of Delta Nu Alpha, the professional fraternity involved in the continuing education of transportation professionals, and the Transportation Lawyers Association. David presents regularly for the International Factoring Association on transportation topics and issues. He can be reached at davidjencks@jenckslaw.com.