The supply chain crisis explained: What B.C. floods, inflation and global shortages mean for Canadians ahead of the holiday season

Open this photo in gallery:

Overview

The COVID-19 pandemic has warped global supply chains, leading to product shortages, shipping delays, disruptions to manufacturing and soaring consumer prices that are fuelling concerns about persistently high inflation.

Bottlenecks throughout the global manufacturing and transportation system are the result of changes in supply and demand.

Over the past 20 months, COVID-19 health protocols have caused factory shutdowns around the world and labour shortages in key transportation nodes, such as ports in China and the West Coast of the United States.

A series of natural and man-made disasters – a fire at a large semiconductor plant in Japan; a massive container ship getting stuck in the Suez Canal in March – have compounded the problem.

The flip side of the issue is a surge in demand, buoyed by pandemic stimulus from governments and central banks. With North American consumers spending less on vacations, restaurants and live entertainment during the pandemic, demand for durable goods – furniture, electronics and sporting gear – has soared.

Most of these goods are manufactured in Asia and shipped to Canada and the U.S. via container ships. The huge demand for container shipping has pushed up transportation prices and strained the capacity of ports to process incoming goods.

Further inland, trucking companies and warehouses are scrambling to manage the unprecedented influx of container shipments, while wrestling with their own labour shortages.

Manufacturing supply chains that were built around just-in-time delivery of parts have been knocked sideways by shortages and delays.

Retailers are having to rejig their logistics to deal with the boom in e-commerce. The inability of companies to forecast volatile consumer demand during the pandemic has led many to stockpile and over-order, straining warehouses.

In Canada, these issues were exacerbated in November by extreme flooding in British Columbia that washed out and damaged railways and highways, effectively cutting off the Port of Vancouver from the rest of the country.

How bad is the current situation?

Open this photo in gallery:

Supply chains were already strained before the floods in British Columbia. The events of November have made things immeasurably worse.

In British Columbia, mudslides and flooding severed all major highways between the Lower Mainland and the Interior, as well as freight routes used by Canadian National and Canadian Pacific railways to connect Vancouver, the nation’s largest seaport, with the rest of Canada. No one yet knows how long it might take to rebuild and reopen all of that – which means supplies of food, fuel, consumer goods and manufacturing inputs, which were already unstable because of the global supply chain problems, could be shaky for a long time.

Declaring a state of emergency, B.C. Premier John Horgan introduced fuel rationing in parts of the province, limiting each person to 30 litres of gasoline per purchase at any gas station, but also allowing British Columbians to cross to the United States for supplies without needing a COVID-19 test on their return.

In the United States, the Port of Los Angeles – where dozens of ships are anchored off the coast, waiting their turns to dock and unload – has become a focal point of supply issues. U.S. President Joe Biden recently intervened to bring 24/7 operations to the port, aiming to alleviate the blockages. The Port of LA had processed 30 per cent more containers this year than over the same period in 2020, and is easily on pace for the busiest year in its history.

As of Nov. 16, there were 84 container ships waiting offshore to get into the Port of L.A. or its neighbouring sister port in Long Beach, an improvement from some recent days when the number topped 100. Containers that spent two-and-a-half days on average waiting at port terminals in 2019 are now waiting more than five, a historic high. Before the pandemic, it was unusual for more than one ship to be in the waiting lane at the Los Angeles port complex, which handles more than half of all American imports. Meanwhile, those containers were spending, on average, nine days waiting on trucks after leaving the port. The industry considers one to three days an optimal time.

There are some signs of improvement in global shipping. Ocean freight prices have come down over the past two months, although they remain far higher than before the pandemic, while the number of containers waiting at the Port of LA for more than nine days has dropped by a third since mid-October.

Which industries in Canada have been most affected?

Open this photo in gallery:

Importers, manufacturers and wholesalers are all scrambling to secure container space on ships, even at elevated prices, to get their goods to Canada.

Companies are also dealing with increasing labour and manufacturing costs, leading to tough decisions about whether to pass on increased costs to customers – and potentially lose market share – or absorb losses themselves.

Canada’s automobile industry is getting hit especially hard as automakers struggle to get their hands on semiconductors, the computer chips at the heart of all modern electronics, including cars.

The lack of semiconductors is leading to lengthy downtime at assembly plants and posing a challenge to the economic recovery. In August, light vehicle production in Canada tumbled 38 per cent from a year earlier, according to data from research firm Wards Intelligence.

Ultimately, there is less inventory at car dealerships, forcing consumers to fork out more money for vehicles, new or used, and feeding into higher inflation that’s become a focal point of debate among economists, investors and central bankers.

The fallout is also evident in Canada’s labour market. Nearly 10,000 jobs in auto manufacturing have yet to return. General Motors Co., Ford Motor Co. and Stellantis NV (which owns Chrysler, Jeep and other brands) imposed lengthy shutdowns at Canadian assembly plants this year. GM’s CAMI plant in Ingersoll, Ont., has been largely shuttered since February.

Canadian grocery stores are also scrambling to transport goods from Alberta to parts of British Columbia after the flooding cut off major trade corridors in and out of Vancouver.

Grocery store shelves are being picked clean and the rural parts of Abbotsford – home to a sizable number of chicken and dairy farms – are underwater, causing fears about food supply in the province.

In addition, the supply issues are having a tangible impact on small companies. In a survey by the Canadian Federation of Independent Business, among 841 companies, 31 per cent of respondents said a shortage of products and materials was limiting their ability to increase sales or production. A record share (36 per cent) of companies said unfilled orders from their suppliers were higher than usual.

Companies on the Prairies are getting hit, too. Crestline Coach Ltd., a maker of ambulances based in Saskatoon, halted production because it couldn’t get semiconductor chips, according to industry group Canadian Manufacturers and Exporters. Winnipeg’s Eastside Group, which has an industrial coatings and composites business that makes precision components for clients such as Indian Motorcycle and Polaris recreational vehicles, has seen prices shoot up for materials such as glass and resin.

“This is 100 per cent the worst thing we’ve ever seen,” says Lan Nguyen, Herschel’s senior vice-president of operations and information technology. “This is a global crisis in terms of logistics.”

Which products are being hit the hardest?

Open this photo in gallery:

Canada’s annual inflation rate hit 4.7 per cent in October, according to Statistics Canada – up from 4.4 per cent in September. It was the seventh consecutive month inflation has exceeded the Bank of Canada’s target range of 1 per cent to 3 per cent, and it marked the highest annual rate since February, 2003.

Inflation is an imperfect proxy for the cost of living. But the general direction is clear: consumer prices for a wide range of products and services have moved sharply higher in recent months, due in large part to supply chain problems. (Other drivers of inflation include a spike in energy prices, changing consumption patterns as COVID-19 lockdowns ease and lavish pandemic support from governments and central banks, which are keeping interest rates at rock bottom).

Specifically, that means rising costs for gasoline, new vehicles, housing and various food items – all compounded by supply chain issues.

Energy prices were 26 per cent higher in October than a year earlier, the Statscan numbers show. While gasoline was a major contributor, natural gas prices also rose 19 per cent. Prices for natural gas have spiked since the devastating floods and mudslides in British Columbia forced Enbridge Inc. to restrict flows through a key pipeline.

A global shortage of semiconductor chips is weighing on vehicle production – and, subsequently, supply. With little inventory at car dealerships, prices for passenger vehicles rose 6.1 per cent in October.

Grocery shoppers are also feeling the pinch. The price of meat products rose 10 per cent, with particularly steep increases for fresh or frozen beef (14 per cent) and bacon (20 per cent). A brutal drought this past summer devastated crops and animal herds, meaning food prices will likely climb higher in the coming months. “Labour shortages that have slowed down production, ongoing supply chain challenges and rising prices for livestock feed continued to factor into higher prices for meat,” Statscan said.

Finding the perfect real Christmas tree will also be harder and more expensive this year. Canada is the world’s top exporter of natural Christmas trees and is grappling with a shortage that is likely to be exacerbated by historic flooding in British Columbia, where some tree farms are underwater.

How will the supply chain issues affect the upcoming holiday season?

Open this photo in gallery:

Supply-chain congestion in Canada shows no signs of abating heading into the holiday season. Many of Canada’s largest retailers – Walmart and Canadian Tire, for example – saw the pre-Christmas supply crunch coming and built up inventory ahead of time. But not all companies have been able to be as pro-active.

In essence, the deadline has passed to ship goods in time for Christmas. “If a corporation hasn’t ordered their goods yet, they’re out of time,” said Eric Oak, research analyst at Panjiva, a trade data company that’s part of S&P Global Market Intelligence.

Anything that touches land after Nov. 1 “will never see the floor for Christmas,” said Kevin Mullaney, chief executive officer of Grayson Co., a retail consultancy. It’s an open question whether the goods currently floating offshore will make it to shelves in time for gift opening, said Jon Monroe, a logistics consultant. “Some might, some won’t. It’s 50-50,” he said.

What are companies doing to ease the supply chain crisis in time for Christmas?

Open this photo in gallery:

Twenty months into the COVID-19 crisis, the supply chain shock has emerged as a top-of-mind worry for Canadian corporate leaders, forcing a deep rethink of how to source the materials and goods they need and how much profit they’re willing to sacrifice in the face of rising expenses.

Some analysts say it will take months or even years for the capacity constraints and backlogs to ease, a situation that could permanently influence what Canadians can buy and at what price.

Large retailers have been preparing for the holiday season for months, and earlier than usual, on account of the supply challenges. That has led to a number of creative solutions.

Walmart, for example, is taking on ”containergeddon” by chartering its own vessels. The company has hired on The Flying Buttress, which previously glided across the oceans carrying vital commodities such as grain to all corners of the world.

Other big retail chains, such as Target, Home Depot, Costco, Dollar Tree and Canadian Tire, have also said they are chartering ships to deal with the pandemic-driven slowdown of sea networks that handle 90 per cent of the world’s trade.

Some Canadian retailers, on the other hand, have taken to the skies to mitigate holiday supply chain woes.

Aritzia Inc., Lululemon Athletica Inc. and Roots Corp. are among the Canadian companies that are increasingly moving product from overseas factories by plane, a direct response to supply chain troubles that are lengthening delivery times and leaving items stuck at ports. Many American clothing companies – including Nike Inc. and Levi Strauss & Co. – are doing the same.

Flying goods to Vancouver from Shanghai is about triple the cost of transporting them by ship, according to quotes from Freightos. And prices are rising quickly: the cost of flying items from Hong Kong to North America is US$10.45 a kilogram, up 206 per cent from two years ago. However, it may be a company’s best shot at getting items in time for Christmas.

And while Canadians may have started holiday shopping earlier than usual this year, retailers such as La Vie en Rose, La Maison Simon and IKEA Canada are pulling back on the preholiday sales to keep up with soaring supply chain costs. Shoppers can still expect to see the usual Black Friday and Cyber Monday sales, but the sales and discounts will not be the same.

How has the Canadian government responded to the supply chain issues?

Open this photo in gallery:

With U.S. President Joe Biden’s popularity flagging in the face of high inflation, the White House has taken a number of steps to try to deal with supply chain congestion. The federal government struck a deal with ports in California to keep them operating 24/7, and has secured promises from major U.S. transporters, such as UPS, FedEx and Walmart, to extend their hours to deal with delivery delays. U.S. regulators have also been investigating potential price gouging by shipping companies.

Canada has taken a much less pro-active approach to dealing with the problem. When asked in mid-October what it was doing to address supply chain issues, a Transport Canada spokesperson said the ministry “is actively monitoring the impacts that the global supply chain challenges are having on Canadian port, terminal, railway and trucking operations.”

“We are in close contact with the transportation industry network to assess the fluidity of Canadian cargo movements, congestion points and potential solutions such as the implementation of active traffic management measures in British Columbia to support efficient port/intermodal operations.”

The issue of government intervention in supply chains came up at the “Three Amigos” summit in Washington on Nov. 18, where Prime Minister Justin Trudeau, U.S. President Joe Biden and Mexican President Andrés Manuel López Obrado discussed supply chain snarls that are hampering an economic recovery. The Prime Minister said the three countries are “focused on economic recovery and strengthened supply chains.”

“The leaders are going to actually start a North American supply chain working group that is going to look at – with a goal to really define essential industries to minimize future disruptions, including work in areas like critical minerals,” said a U.S. official.

Mr. Trudeau and Mr. Biden also met one-on-one to discuss the importance of integrated supply chains, promoted by Biden’s focus on the “Buy American” strategy for the auto sector and infrastructure projects, and Canadian concerns.

How long will the supply chain shortages last?

Open this photo in gallery:

It’s unclear how long the global supply chain shortages will last, but many experts say the crisis is likely to continue into next year.

Many people felt that “supply disruptions would start to ease around now,” said Stephen Brown, senior Canada economist at Capital Economics. “In reality, it’s become increasingly clear that those disruptions are likely to persist into 2022.”

The long-lasting nature of the supply chain disruptions has forced the Bank of Canada to change its narrative about inflation and move to a more aggressive timeline for tightening monetary policy and raising interest rates. For much of the past year, Bank of Canada Governor Tiff Macklem argued that the surge in inflation would be “transitory” – the result of statistical blips, as prices today were compared to lower prices earlier in the pandemic, and shifts in consumer demand as service sectors of the economy reopened.

High inflation has proved much harder to dislodge. “The main forces pushing up prices – higher energy prices and supply bottlenecks – now appear stronger and more persistent than we previously thought,” Mr. Macklem said at the central bank’s most recent interest rate announcement in late October.

The Bank of Canada now expects inflation to stay close to 5 per cent for the rest of the year, and average 3.4 per cent next year. It has said it could start raising interest rates to push back against inflation as early as April. Ultimately, however, interest rates affect demand in the economy. Higher rates won’t improve container ship processing times or rebuild washed out highways in British Columbia.

More reading

• B.C. flooding shuts down highways and rail lines, damaging fragile supply chains
• Canadian retailers take to the skies to mitigate holiday supply chain woes
• Backlog of shipping containers off California’s coast creating urgency to get goods moving for holiday season
• Canada’s annual inflation rate hits 4.7 per cent in October, fastest pace in nearly 19 years
• Supply chain fears in Canada, U.S. ramp up ahead of shopping season
• Why Canadian auto production is getting hit especially hard
• “This is 100 per cent the worst thing we’ve ever seen”: How Canadian companies are adjusting to supply chain chaos

With reports from Mark Rendell, Brent Jang, Eric Atkins, Nathan VanderKlippe, Matt Lundy, Susan Krashinsky Robertson, Nicolas Van Praet, Robert Fife, Adrian Morrow and The Canadian Press.

Compiled by Abigale Subdhan.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.