Home » The outlook for the NZ supply chain – less reliable, more expensive

The outlook for the NZ supply chain – less reliable, more expensive

The outlook for the NZ supply chain - less reliable, more expensive. Cargo ship in water.

The outlook for the NZ supply chain – less reliable, more expensive

The world remains at the mercy of an unprecedented global logistics crisis. Production and freight delays along with unprecedented inflation has plagued businesses at every stage of the supply chain. The security of raw material and product supply is a key priority for governments and businesses, across all industries, alike.

To blame all the disruption on COVID 19 is an over simplification. There’s no doubt that it has had a significant effect on the global and domestic production, manufacturing and distribution, but it has had some help. COVID has caused labour shortages as a result of workers self-isolating, skyrocketing ocean freight costs, domestic transport delays due to intense pressure on local providers, and trucks and forklifts being out of service as they wait for replacement parts.

The rising cost of fuel cannot be entirely blamed on the pandemic and is another key contributor to the increase in freight costs. We have also experienced significant labour disputes at key ports and manufacturers around the world. It’s fair to say that we are experiencing a perfect storm and the supply chain is taking a hammering.

“The pressures have been relentless, with logistics teams suffering sustained and systemic global supply chain disruption, record port congestion, cargo delays, chronic capacity shortages, breaches or near breaches of shipping contract commitments – and ocean freight rates surging to extreme levels.” 

Phillip Damas, Managing Director, Drewry

The global pulp and paper industries, along with the print industry, are particularly vulnerable. The logistics challenges are obviously driving up costs and constraining production as the mills run out of raw materials to produce product and the warehousing space to store it. The industrial action at key mills in Europe has also played its part, and whilst these have now officially ended and mills are being restarted, it will still be many weeks before they can replenish their supply chains under current conditions.

As a result pulp prices increased across all regions and for all grades during April, nearing or breaching record highs (in normal terms). Suppliers have indicated further price increases will follow.

Sitting at the end of international freight routes we (New Zealand) have definitely felt the flow-on effects. There is an international shortage of containers and most available shipping capacity is in use. Shipping reliability is currently well below pre-pandemic levels as a result of congestion at major international ports. The cost of international shipping has increased by up to ten times when compared with 2019 levels.

Global Schedule Availability

New Zealand is a very small player in the global supply chain. Our freight and logistics sector has been significantly impacted by disrupted international shipping and reduced air travel, compounded by local COVID-19 impacts and domestic port operational issues.

“We are at the mercy of some very large, global shipping lines, we don’t have very much ability to influence a lot of the global issues because of the size of our country and position”

– Harriet Shelton, Manager, Supply Chain, Ministry of Transport

In the past year, there has been strong domestic demand for goods as well as ongoing demand for capacity from exporters. Unfortunately, capacity has been unable to keep pace, despite government subsidies, due to shipping delays, congestion and labour shortages to haul products around the country.

Supply is arguably the biggest challenge facing our industry currently and the effect of the bottleneck. Back in 2019 when the pandemic first hit the government made the decision to stop paper imports from Europe – which put massive pressure on the paper supply chain here in NZ.

This obviously had an immediate effect on paper supply and printing organisations across New Zealand The ongoing effects of this decision, the closure of the Kawerau Paper Mill and other continued disruptions has seen business closures like that of Ovato’s printing arm in Auckland, leaving nearly 150 people without a job.

“When a key player in Ovato’s supply chain – the Kawerau paper mill – closed, this left the company reliant on imported paper. Importing paper is not only expensive due to the huge increase in shipping costs, but there’s around a seven-month wait time to get paper from Europe.”

Ovato managing director Paul Gardiner

COVID is clearly not to blame for all the disruption but it has definitely shone a light on the vulnerability in both the global and domestic supply chains. This has been recognised by the government who have recently published a discussion paper as a starting point for the development of New Zealand’s freight and supply chain strategy for the next 30 years – NZ freight and supply chain issues paper

This strategy won’t resolve any challenges in the near future but it will have an ongoing impact on your business so it’s worth reviewing. Decarbonising our supply chain will be a key priority so building your own plans will help you minimise the future impact. I explore government policy and its longer term impacts on the supply chain in one of the other posts on my site.

So, what does the future hold? There is much debate over the outlook for the global supply chain and the ongoing disruptions. There are definitely signs of recessionary (deflationary) pressures but these have not yet materialised and could be equally challenging. The general consensus, with the pandemic unresolved, is that global logistics are likely to be disrupted for a further 12-24 months and the disruption will have flow-on effects that will take some time to remedy.

We have not yet felt the full effects of the Omicron outbreak or the Russian invasion of Ukraine, and the corresponding impact to energy costs, in New Zealand.

In the recently published Deloitte 2022 Ports and Freight Yearbook they suggest consumer behaviour will be a key driver of how quickly the supply chain normalises. But we have seen elevated shipping rates flow into long term contracts between shipping lines and their customers, suggesting the hangover could be felt for some time to come.

The above timeframes are all based on some varying push and pull factors.

  1. Easing consumer demand – there is some easing of demand expected as people remain optimistic about “returning to normal” and ease of stockpiling or over ordering in fear of not being able to get supply in the future.
  2. Risk of new Covid variants – Any new threatening variants have the possibility to lead to further supply chain disruptions as people are forced to isolate and recover.
  3. Geopolitical pressures – The potential cut off of Russian gas in Europe.

Regardless, there is a good chance that the post-pandemic supply chain will look very different to the current ‘Just-in-time’ approach. Businesses will be looking to build more resilience, risk mitigation and agility into their logistics operations. This may involve diversifying suppliers, holding additional inventory and an increased focus on digital technology. I share some of the strategies businesses are employing in one of the other posts on my site, as well as some of the work we at BJ Ball have been undertaking to minimise the impacts to our business and yours.

If you have any questions or feedback I’d welcome the opportunity.