The Supply Chain Conundrum

By André-Philippe Hardy and Walter Spracklin
Published December 1, 2021 | 14 min listen

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 HardyCanadaIndustries in MotionLogisticsSupply Chain

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