U.S. construction industry supply chains experience extra strain due to the Russian-Ukrainian war, leading to material shortages and rising costs, and major carriers and customs agencies are refusing Russian shipments. TPM22 conference reveals labor unrest regarding West Coast port labor negotiations. U.S. importers switch to more landside logistics options, and FMC and DOJ cooperate to counter anticompetitive behavior in the international ocean transportation system.
Construction Industry’s Supply Chain Issues Compounded by Ukraine War
Before Russia began its invasion of Ukraine on February 24, the U.S. construction industry was experiencing rising materials prices caused by inflation, increased shipping costs, and supply shortages for many construction materials.
The Russian invasion and international sanctions on Russia are now increasing fuel prices. The prices of materials such as aluminum and copper and products made from these metals are also rising as cargo ships from that region are stopped or delayed. January saw a year-over-year price increase in these materials of 33% and 25%, and the construction industry and manufacturers can expect prices to continue to climb.
Russia is a major producer of aluminum and copper metals and is the second-largest producer of aluminum (accounting for 6% of global production) behind China.
The rising prices and low availability of materials come at a time when the construction industry is already experiencing the largest annual spike of input prices (the total cost of producing a good or service) since records began in 1987.
Pandemic-related inflation combined with the economic effects of the Russian-Ukrainian war is making many question what the $1.2 trillion from the Infrastructure Investment and Jobs Act can accomplish. Input prices for government buildings increased by 13.2% in January compared with the previous year, while prices for highways and streets went up by 20%. Additionally, steel mill products increased by 113%, while plastic construction products increased by 35%. This will likely cause state transportation departments and other recipients of the act’s funding to choose smaller, lower-risk projects, which will impact infrastructure development over the next few years
Inflation and problems caused by the supply chain are also playing out in other areas of the construction industry throughout the U.S. The Architectural Billings Index (ABI), which projects nonresidential construction activity, has remained at 51 for three months regarding new architecture billings. A score over 50 indicates growth, while under 50 represents a decline in new projects.
Nonresidential construction firms in the Northeast and the West have seen continued declines in new billings, although the South is fighting the trend and seeing billing rates higher than before the Great Recession of 2007-2009.
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Maersk, MSC, and CMA CGM Suspend Shipments to and from Russia
Maersk, their 2M Alliance partner Mediterranean Shipping Co., and CMA CGM have all stopped taking bookings that travel to and from Russia until further notice, with the exception of shipments carrying foodstuffs, medical, and humanitarian supplies. The suspension includes air, ocean, and intercontinental rail cargo.
The decision to cease cargo shipments to and from Russia comes after Germany’s Hapag-Lloyd and Singapore-headquartered Ocean Network Express (ONE) ceased all Russian operations at the end of February when Russia first began its invasion of Ukraine.
The above carriers also suspended activity to Ukraine after the closure of the port of Odesa in the final week of February.
Various customs authorities have joined the major carriers in stopping Russian-bound cargo. Hutchison Ports ECT Rotterdam terminal has already announced that Netherlands customs will block all containers traveling to Russia. Additionally, U.K. Transport Minister Grant Shapps has sent letters to major ports throughout the U.K. asking them to ban all Russian vessels to ensure the Kremlin is not funding its war with sales made to the U.K. The European Union has also announced that it will close its airspace to all Russian aircraft.
The TPM22 Conference and Labor Unrest on the US West Coast
TPM22 talks from February 27 to March 2 highlighted many concerns regarding the potential for further port disruptions over the coming months due to new West Coast port labor negotiations. The current West Coast port labor contract expires on July 1, and there is a possibility that current negotiations and subsequent supply chain uncertainty could extend several months past that date.
The uncertainty from the International Longshore and Warehouse Union (ILWU) and its counterpart, the Pacific Maritime Association, combined with existing heavy port congestion and other issues, means that importers are now shifting cargo away from the West Coast.
In December, loaded Asian imports from Los Angeles through to Long Beach fell by 21.4% compared with December 2020, and imports along the entire West Coast fell by 19.7% for the same dates. For comparison, the East and Gulf Coasts saw imports rise by 11.2% and 28.2%, respectively.
The concern about disruptions regarding the current labor negotiations has led the National Retail Federation (NRF) to urge labor and management to make a deal quickly to avoid further congestion issues before the peak summer shipping season approaches. Negotiations could, however, stretch into the third quarter of this year.
There is a chance that both the government and ocean carriers that have experienced record profits will be able to fund wages and benefits of dockworkers should negotiations continue past the July 1 date to avoid a crisis in the nation’s ports.
US Importers Take More Control of Landside Logistics to Overcome Disruptions
U.S. Importers of Asian-made products are seeing a 25% increase in landside costs within service contracts, forcing many to opt for either expedited full truckload services, transloading facilities, or less-than-truckload (LTL) options instead.
Many container lines are reducing the amount of inland point intermodal (IPI) container exposure they provide, forcing forwarders and shippers to find alternative capacity and increasing demand for expensive inland distribution options. IPI volume moving out of the Southwest has dropped by 30% year-over-year in 2021’s fourth quarter and 28% in the Pacific Northwest.
Ocean carriers and surface transportation providers have been less willing to move freight that doesn’t work with their networks, and container lines don’t want their empty containers to sit at inland terminals for months, meaning many IPI containers no longer travel far inland. These two factors have contributed significantly to the 25% rise of landside costs in service contracts.
All of this is generating a more diverse supply chain where importers have to think about when they will move international freight into domestic supply chains and how they will utilize landside distribution options. Although transloading is increasing in popularity, it is not enough to make up for the missing IPI traffic needed to solve inland distribution issues that shippers are currently facing.
FMC Receives Antitrust Expertise from DOJ to Counter Anticompetitive Behavior
Maritime regulators from the U.S. Federal Maritime Commission will be given access to attorneys and economists from the Department of Justice’s (DOJ) antitrust division to aid in the enforcement of violations of the Shipping Act after the launch of an international working group whose goal is to investigate anticompetitive behavior in supply chains and enforce competitive laws.
The mission of the FMC, in particular, is to ensure that the international ocean transportation system that supports the U.S. economy is competitive and reliable, so the public is not at risk of unfair or deceptive practices. The partnership between FMC and DOJ comes after growing concerns about the consolidation of market power across various business sectors, with the federal agencies also increasing oversight over container shipping companies.
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