In George Pilcher’s 2024 state of the paint industry article, he explains that supply chain issues still have not fully recovered from the challenges wrought by COVID-19.[1] Initially, it appeared that 2023 was going to be a year when the pandemic-related supply chain problems stabilized. Unfortunately, in the second half of 2023, new challenges evolved and spread, upending much of the progress brought about by adding manufacturing capacity closer to home, adjusting inventory levels to accommodate availability, and decreasing lead times.
This time, shutdowns related to COVID-19 were not the culprit. Rather, a more insidious set of circumstances were and are at work to stymie the almost-reestablished post-COVID supply chain: Houthi forces and La Niña.
COVID-related issues caught everyone off-guard without measures in place to shore up long-held just-in-time delivery practices. During COVID, just-in-time began to be replaced with just-in-case deliveries. Reshoring became very popular. Many companies’ manufacturing processes returned from Asia to be closer to customers in the United States, Mexico, Central, and South America. Unfortunately, as the supply chain stabilized in 2023, some importers went back to just-in-time deliveries, completely negating one important lesson learned during COVID.
In 2023, many ships that had been built during the pandemic were placed into service. Freight rates dropped due to vessel overcapacity, causing shipping prices to tumble. Shippers and customers started to relax, transportation costs came down, and prices fell to more reasonable levels — albeit not necessarily to pre-COVID rates.
Then in late 2023, tensions exploded in the Middle East. The instability in the region is the most obvious problem affecting supply chains in all markets. Any shipper that depended upon the Suez Canal or the Red Sea had massive logistical headaches. During normal operations, 15% of world trade passes through the Red Sea.[2] However, starting in the first 11 days of January 2024, Egypt reported a 40% drop in revenue from transit fees as reported by the Suez Canal Authority’s Admiral Osama Mournier Mohamed Rabie.[2]
As the Israeli-Palestinian conflict escalated, Houthi forces began to attack cargo ships in the Suez Canal and the Red Sea. Commercial ships are huge, but they are poorly equipped to absorb missile and drone attacks. Any ships navigating the Red Sea had to depend on the U.S.-led Maritime Coalition for protection. The Bab-el-Mandel Strait into the Red Sea from the Asia side was essentially shut down; ships that were lined up for miles were often hijacked while waiting to get through.[2]
The inability to navigate the Suez Canal was a major catastrophe. Recall that in 2021, the Ever Given, a container vessel operated by Evergreen Marine, got stuck in the canal, and that halted traffic for a week. The blockage stopped 369 ships from passing through the canal and delayed an estimated $9.6 billion worth of trade each day.[4] The effects of that comparatively small delay impacted supply chains for up to nine months.
In the 2000s and 2010s, Somali pirates were a threat. Today, drones, drone strikes, and waterborne IEDs are a bigger problem. Clearly, the ongoing Middle East issues are going to have a much larger impact on supply chains than a one-week stoppage because of a stuck ship.
Now, through lessons learned from the complications related to COVID-19, initial response times were shortened. Major shippers such as Maersk and Hapag-Lloyd immediately rerouted ships around South Africa to protect the containers — lengthening transportation time by at least 25% and increasing costs exponentially.[3] But at least shipments were not brought to a halt or otherwise destroyed.
On top of that, all the new ships languishing in ports after the pandemic were suddenly needed to shore up the longer routes and shipping times. Freight rates rose dramatically, but the consolation was that COVID rates were still five times higher than the new rate increases.
As if the Middle East didn’t pose enough significant challenges for container-vessel transit and supply chain disruption, there was another major issue brought about by La Niña in North America. The lack of rainfall during the wet season in 2023 caused severe drought conditions, dropping the depth of Gatun Lake to dangerous levels. The Panama Canal reduced traffic due to this historic drought, which saw water levels fall to the lowest since 1965. In addition to impacting the drinking water available for that region, the lake did not have enough water to spill over into the Panama Canal. It became “too dry” — rather, too shallow — to permit the usual number of shipping vessels to traverse the canal without an advanced reservation.
For ships that needed to move from the Atlantic to the Pacific side, reservations were (and still are) as difficult to obtain as an uber-exclusive five-star restaurant in New York City. Ships without reservations must resort to an auction for a passage slot. The opening bid was $55,000 over the regular tariff — one confirmed bid was $4 million!
Bloomberg reported that in November 2023 alone, shipping companies have paid $223 million above transit costs just to get a slot.[5] And they still must wait for days before passage is finally allowed. However, the wake of these large ships causes water to spill out of the canal if they are too close together, which further lowers the water level. In November 2023, as conditions worsened, the Panama Canal Authority reduced daily transits to 24 from the normal of 34-36 and further reduced them to 18 in January. This continued into the third quarter of 2024.[5]
Fortunately, the Panama Canal Authority anticipates much higher rainfall during the 2024 May to December rainy season because of the weather shift to El Niño. The refilling of Gatun Lake allowed for an additional booking slot beginning August 5, 2024. Drafting regulations have been eased, allowing for additional ships to pass at the same time. A proper rainy season could lead to normal operations by fall 2024.[6]
What Does this All Mean for the Coatings Industry?
On the plus side, because of the lessons learned during COVID, there is now some level of stabilization and predictability. PVC resin prices held steady in June, remaining below 2023 levels.[7] On the other hand, the hurricane season is expected to be especially active in the Gulf region where many PVC manufacturers are located. Hurricane Beryl already made an early appearance in Texas.
Another plus is that industries tangential to the coatings industry have also made significant supply chain modifications that will benefit our products. For example, GE Appliances (a subsidiary of China-based Haier Smart Home) in Louisville, Ky., remade its supply chain more flexible after coping with product shortages during the pandemic.[8] Admittedly, the company began the process in 2017. The pandemic forced the acceleration of those plans as GE Appliances struggled with over- and under-stocking of major appliances.
The largest change GE Appliances made was to bring manufacturing from Asia to the United States, which added 4,000 manufacturing jobs. For the company, this change cut shipping costs, reduced transit delays, allowed better control of production, strategically located inventory levels, and generated consumer goodwill with the new jobs. For the tangential industries such as coatings and metals, these manufacturing sites turned into new, large domestic customers.
In addition, GE Appliances balanced inventory by tracking customer orders delivered on time and in full–thereby prioritizing existing orders. The cascading effect was that because many appliances are painted, scheduling those needs were also better managed. Pretreatment and paint suppliers were better prepared to provide products as needed, instead of way ahead, too far behind, or as an emergency.
Although the situation in the Panama Canal will most likely resolve itself later this year, there are still going to be significant challenges within the supply chain. Ocean shipping costs will remain very high as long as the Middle East remains unstable and hostilities keep the Suez Canal a shipping nightmare. Increased lead times will continue for core commodities well past any cessation of hostilities.
Pressures due to ongoing freight and raw material pricing will continue to drive cost pressures this year.[9] Section 301 tariffs that went into effect on August 1 will impact just about all commodities — although this can be mitigated by bringing manufacturing back onshore.
Another pressure on the coatings industry is the price of crude oil. Many raw materials used in oil and acrylic paints are derived from petroleum. A $10 rise in crude oil equals a 3% rise in paint manufacturing cost.[9] A gallon of top-shelf house paint sold for approximately $30 in 2017. That same gallon of paint at the same store is now at least $60. (I can vouch for this, as I keep receipts!)
Resiliency, flexibility, and excellent planning will be the attributes that help meet the challenges of ultimately stabilizing the supply chain for coatings and tangential industries this year and into 2025.
For more information, contact the author at cgosselin@chemquest.com.
Read in CoatingsTech.
References
1. Pilcher, G. The State of the U.S. Paint and Coatings Market 2023-2025: Slow and “Steady as She Goes.” CoatingsTech. 2024, September/October.
2. Hunnicutt, T. et al. US Strikes Houthi Anti-Ship Missiles, Shipping Disruptions Grow. Reuters Business. January 19, 2024
3. Neuman, S. As Houthi Attacks on Ships Escalate, Experts Look to COVID Supply Chain Lessons. NPR, Jan 20, 2024.
4. 2021 Suez Canal Obstruction. https://en.wikipedia.org/wiki/2021_Suez_Canal_obstruction (accessed July 31, 2024).
5. Panama Canal Warns of “Indefinite Delays” as it Offers Special Auction Slot. The Maritime Executive, Nov 23, 2023.
6. Panama Canal Traffic to Increase as Drought Conditions Ease. Oil & Gas Journal. https://www.ogj.com/, June 28, 2024.
7. Border States website. Border States Supply Chain Update—July 2024. Border States. https://solutions.borderstates.com/news/border-states-supply-chain-update-july-2024/ (accessed July 31, 2024).
8. Young, L. Supply-Chain Overhaul Boosts GE Appliances’ Sales. Wall Street Journal, Heard on the Street, July 8, 2024; p B10.
9. On the Job with Behr (blog). 2024 Paint Industry Outlook: Exploring Headwinds & Tailwinds in a Dynamic Marketplace. Behr Pro website. Published February 2024. https://www.behr.com/pro/onthejob/blog/2024-paint-industry-outlook/ (accessed July 31, 2024).https://www.deskbird.com/blog/return-to-office-statistics (accessed July 1, 2024).
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