Supply chain issues became front and center in 2021 with shippers in all areas of the world beset with delays in getting their goods to market. This caught the attention of investors as well, with the words “Supply chain” being referenced on approximately 68% of company Q3 conference calls. Today we discuss with RBC Capital Markets Transportation Analyst, Walter Spracklin, how the current supply chain issue came about, who is being negatively impacted, who is emerging as a beneficiary and when these challenges might all be resolved.
Disclosures and Disclaimers
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Supply and Demand Imbalances
“Imbalances happen whenever there is too much of something, or not enough of another – and the system gets thrown out of whack. In this case the thing we had too much of was demand for goods; and (more importantly), the thing we did not have enough of was the transportation services to get those goods to market.”
Our current supply chain is designed to accommodate disruption to a certain degree but is not designed to accommodate the extent of disruption caused by COVID-19, which resulted in the complete shutdown of transportation networks. Emerging from the pandemic, demand rebounded quickly on the back of historical levels of fiscal stimulus. However, transportation capacity remained constrained due to labour shortages, reduced belly capacity as well as COVID-19 related port closures, amongst other factors. This supply-demand imbalance overwhelmed the supply chain, resulting in the issues we are witnessing today.
Winners and Losers
“First, when you think of a supply chain issue, you intuitively would say that these are transportation problems and it’s therefore transportation players that lose. Not even close. I would put it this way: railroads and trucking companies today are the providers of a very scarce asset, which is transportation service. And everyone is absolutely desperate for transportation services.”
Positively impacted. Shippers remain desperate for transportation capacity, reflecting robust demand. The capacity to deliver that service right now, however, is extremely tight. This is causing freight rates to surge and our RBC Shipper Survey points to rate increases next year that are among the most significant on record. So while transport companies have had capacity impacted by congestion, any lost volumes are being made up for with higher pricing.
Negatively impacted. The shipper is the most impacted by the supply chain disruptions in today’s environment. Shippers that can pass those rates onto their customers are the lucky ones; but inevitably, all shippers are getting hit hard with meaningful delivery delays.
When will current issues be resolved?
“A key carrier that we hosted at our recent Shipper Forum suggested it may be a year before we dig ourselves out from this mess – and that’s assuming there are no more supply shocks.”
Our view is that current supply chain issues will worsen before they get better. Analysis by our RBC Elements™ data science team has pointed to mid-2022 before we start to see some normalcy. Our view is that the seasonal slow-down that occurs post holidays provides us time to get through the backlog.
André-Philippe Hardy
Head of Canadian & APAC Research
André-Philippe Hardy is Head of Canadian & APAC Research at RBC Capital Markets, a premier investment bank that provides a focused set of products and services to corporations, institutional investors and governments around the world. RBC Capital Markets’ Canadian equity research team is consistently top-ranked by institutional investors, as per the Brendan Wood International, Greenwich and Institutional Investor surveys. Prior to becoming Head of Canadian Research in November 2013 (he was appointed Head of APAC Research in November 2019), André led RBC Capital Markets’ Canadian financial services Equity Research team for six years, with direct coverage of banks and insurance companies. Throughout his career as an equity analyst, Andre was ranked consistently as a top analyst in his sectors in industry surveys, while his stock-picking success was validated by his StarMine rankings and his work was often quoted in the financial press. His primers on banking and insurance were unique products, which were widely read by investors as well as management teams. Andre joined RBC Capital Markets in 2007 after almost a decade in the equity research departments of Merrill Lynch Canada and TD Securities.
Walter Spracklin
Managing Director, Equity Research Analyst, RBC Capital Markets
Walter has 20 years of experience in equity research and over the course of his career has been consistently cited as his sector’s top-ranked analyst by Brendan Wood, Greenwich and Institutional Investor. Brendan Wood has rated Walter #1 in Transportation for the last eleven years running and has consistently given him a top ranking for his specific coverage of Canadian National Railway, Canadian Pacific Railway, Air Canada, WestJet and Bombardier. Institutional Investor has also ranked Walter #1 in the Industrials sector each year since its inaugural “All-Canada Analysts” ranking in 2019. Walter has also been recognized for his stock picking, having been ranked by Starmine as a top stock picker on ten occasions over his career. In the early part of his career, Walter was also responsible for RBC’s coverage of the Business Trust sector and was top-ranked in that sector as well.
