The pandemic, then the war in Ukraine and the energy crisis have completely disrupted logistics - Will we ever go back to the way things were?

Source: eKapija Wednesday, 10.05.2023. 22:53

(Photo: Pixabay/postcardtrip)
Just when the pandemic softened its impact allowing us to return to the (new) normal, the war in Ukraine happened, followed by an unprecedented energy crisis. The already fragile supply chains were broken, the prices of transportation and warehouse leases rose dramatically, and the flow of goods slowed down. All of this has contributed to the last three years being very challenging for the logistics and transport sector.

When and will everything return to normal? Associate professor at the Faculty of Organizational Sciences, from the Department of Production and Service Management, Dr. Slobodan Antić, does not have an encouraging answer. He points out that the prices of logistics services increased significantly in the periods of 2021 and 2022, but that during 2023, stabilization and a slight reduction in prices is expected. However, despite the tendency to stabilize the prices of logistics services, we should not hope that they will return to the level of 2019, warns our interlocutor.

- The prices of transport and lease of warehouses have increased by 30% to 50% due to the overall increase in prices, but primarily the increase in fuel prices and the cost of employee wages. If we talk about the two biggest costs in transportation, fuel and employee wages, it can be said that fuel prices will continue to oscillate, but maintaining the rising price trend. The average cost of labor has increased from 30% to 50% for the last two years, for certain categories of employees in logistics, and it will certainly not decrease due to the increase in the cost of living and increasingly fierce competition in the provision of logistics services - Dr. Antić points out.

The system could not handle two crises in such a short time period. Just as he began to recover from the pandemic, the war in Ukraine followed, affecting almost the entire world. Global implications, according to our interlocutor, appear primarily in the form of an energy crisis and a lack of primary food (grains) on the markets of countries that depend on food imports.

- The conflict between Russia and Ukraine has affected the global logistics market at all levels, especially when it comes to oil trade. The effects of the pandemic had a huge impact on breaking through warehouse capacity and container availability and only recently started to decline, at the end of 2021, when the war between Russia and Ukraine again started to affect the industry and the cost of logistics services. In addition to the fact that the nature of the conflict in Ukraine has led to a slowdown in the flow of goods, as in the case of a pandemic, that is, it has significantly increased the costs and shortages of primarily agricultural products and created catastrophic food shortages around the world, it also led to a crisis of significantly larger proportions - the energy crisis. The European Union imports a significant part of energy from Russia, i.e. 35% of natural gas imports, about 20% of crude oil imports and 40% of coal imports come from Russia. In the long term, the largest European world economies are forced to look for other sources of energy, because gas prices in Europe had risen by 30% in 2022 - Dr. Antić reminds.

Domestic logistics companies should work on improving their processes

The pandemic, and then the war in Ukraine, have taught us that the stability of global supply chains is very vulnerable. And it should not be surprising, because as our interlocutor says, the supply chain is based on a rather delicate balance between consumption, production and inventory, and even the smallest disruption can cause its instability in terms of prices and availability of logistics services.

The energy crisis affected the increase in prices in the transport sector (Photo: Altmann)The energy crisis affected the increase in prices in the transport sector

- If we were to make a comparison, in the case when the ship is sinking, the passengers leave the ship first, and finally the captain or the owner of the ship, because they are trying to do the impossible and save the ship from sinking. It can be said that it is the same in business at the moment of major crises and poor business results. When a crisis arises, as in the case of the COVID 19 pandemic, foreign logistics firms cut costs more rigorously by closing branches in certain markets. If the observed market is completely dependent on foreign logistics companies, then it will be significantly more difficult for the same to meet the needs at the time of crisis, i.e. it is necessary that domestic production and trading companies, in case of need, direct their logistics activities towards domestic logistics companies - Dr. Antić advises.

According to the words of our interlocutor, it is possible to be competitive on the domestic market, because there is always the possibility to ensure adequate business sustainability by constantly monitoring the market, by maintaining the basic base of employees and by analyzing in detail the specific needs of companies on the domestic market.

- Domestic logistics companies cannot influence the global risks brought by crisis situations, but it is necessary to primarily offer the quality and price of services on the domestic market, which cannot be offered by foreign logistics companies, i.e. to continuously work on the optimization and improvement of their processes (digitalization of processes in transport and storage), training of employees in order to reduce regular business costs - says Dr. Antić.

What went up the most - sea transport as many as seven times

The most popular form of transport, both for Europe and the USA, is truck transport and accounts for about 70% of the total movement of goods. However, in the last three years, maritime transport or container transport by ships has become more expensive, our interlocutor points out. As he says, the cost of maritime transport has increased seven times by 2022 compared to 2019. But, looking towards the stabilization of transport prices at the end of 2022, road transport has reduced the prices of its services the least.

Intermodal transport is one of the most common types of transport (Photo: Oleksiy Mark/ transport is one of the most common types of transport

Intermodal transport, which is one of the most common types of transport and requires two or more types of transport for the shipment to reach its final destination, has also become more expensive.

- Intermodal transport usually involves a combination of rail, ship and road transport, which often require trucks to transport shipments from the railway or port. Intermodal transport is ideal for shipments that have to travel long distances, transoceanic shipping of goods by container ships. In most cases, the products remain inside the same transport container during the entire process or are transferred from one shipping container to another - Dr. Antić explains.

However, there is good news coming from the US. From the spring of 2022 to today, ocean freight rates have reached near pre-pandemic levels. Data from international shipping platform Freightos show that the cost of transporting a container with 29 tons of goods from Asia to the American West Coast has dropped by 80% compared to April last year and by two thirds when it comes to the East Coast. A significant factor contributing to the drop in prices is the drop in consumption, they say in this platform.

However, our interlocutor points to another problem that affects prices, namely the lack of labor in transport and warehouses. As he says, in the European Union alone, there is currently a shortage of 400,000 drivers in road truck traffic.

- It is safe to say that digitization has solved the problems of ordering, marking and tracking goods, but it is difficult to solve the problem of delivering goods from point A to point B, which, for example, an employed tow truck driver must deliver to the central warehouse, and an employed warehouse worker must prepare for the customer, and then again the driver in direct distribution will transfer to point C and deliver to the final customer, if the company is not able to employ the required number of employees of the observed profile - Dr. Antić indicates.

Every crisis has its price

All of these supply chain breaks are felt by the end consumer. We have been witnessing inflation all over the world lately. However, the question arises whether the instability of global supply chains is a justified reason for price increases or sometimes just an excuse. Our interlocutor points out that it can be said that every crisis has its price, which results in a decrease in economic activity, an increase in the prices of labor, goods and services, as well as a decrease in the quality of life of employees.

- When in normal business conditions, without the influence of crises, we talk about the justification of the increase in the prices of goods and services, then the existence of annual inflation rates, the projection of desired GDP growth rates, the availability of capital for investments and the growth of economic activities necessarily lead to an increase in the prices of goods and services , so economic growth is conditioned by a justified increase in the prices of goods and services - Dr. Antić notes.

However, as our interlocutor further explains, as the world has become global in all its domains, which means that, for example, there is production in geographically distant locations at one end of the world, and the consumption of manufactured goods at the other end of the world, then it is logical that in case of even the slightest crisis it leads to the collapse of supply chains, shortages of goods and rising prices of goods and services in markets that depend on observed production.

- As now the shortages of supplies of goods and services are also of a global nature, then it is logical that the increase in the prices of goods and services will be of a global nature, although this may not be justified for certain countries or certain markets - Dr. Antić points out.

M. Dedić

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