Logic Behind Logistics & Supply Chains

Mar 16, 2022

Logistics companies, such as FedEx and UPS, are beneficiaries of ongoing supply chain issues with their massive networks of aircraft, ground delivery vehicles, sorting and distribution hubs, and service centers to move goods around the world. The bottlenecks, initiated by the global health crisis, have prompted closer analysis into potential investment opportunities related to supply chains.

Our research team identifies such opportunities by implementing a bottom-up analysis approach that evaluates single stocks. As a result, companies are assessed in an individual manner to determine if the long-term potential is appropriate within the portfolio.

For logistics networks, our assessments highlighted that the industry has high barriers of entry due to the extensive physical networks required, which helps protect the existing oligopoly market structure and creates competitive advantages. Overall, these strong brand names are benefiting from the current state of the supply chain, which is driving higher top-line growth and strong pricing power - all of which showcases an enticing investment.

The State of Supply Chains

Throughout the pandemic, supply chains were restricted as factory production faltered under lockdowns and quarantines. Those issues were then exacerbated by a significant demand increase, in areas like e-commerce, coming out of the COVID-induced recession. Fast-forward to today, ongoing efforts to restock inventories and meet demand continues to constrain shipping capacity.

At the start of the pandemic, shipping companies promptly adjusted down capacity to accommodate for the reduction of goods while production was delayed. As a result, there’s now an ongoing game of catch-up happening as factories, some of which are still closed, work to increase production to meet the needs of strong consumer demand and rebuild depleted inventories. This catch-up game is further inundating logistics networks with heightened demand.

The price increase of shipping containers is one example highlighting the frenzy. Shipping technology firm Freightos reported that the shipping price of a 40-foot container rose more than $9,600 in a span of 18 months. That same container was $1,400 upon the start of the pandemic, and it rose to over $11,000 as of September 2021

Data from the St. Louis Fed shows that this price behavior is unlike anything seen before, attributing high inventory restocking demand for the high price environment. The sheer demand increase has already prompted White House intervention, regarding the opening of the Port of Long Beach to 24 hours to reduce congestion and backlog.

If demand pressures weren’t enough, now, with the looming ban on Russian energy, oil prices reached $130 per barrel in early March, contributing to an increase of shipping costs.

The Russia-Ukraine Wrinkle

While the current geopolitical tensions are not directly related to logistics networks, Russia’s invasion of Ukraine does have supply chain implications.

The war is disrupting the highly interconnected global economy, and energy supply chains specifically, adding another challenge to already strained supply chains. Both countries are critical suppliers of raw materials such as platinum, aluminum, steel, sunflower oil, wheat, and crude oil, and the financial and political sanctions, paired with a refusal to do business in Russia by shipping companies, is adding even more stress to global supplies. Food shortages and high energy prices are two immediate areas of concern as the long-term global impact of the war remains unknown.

As always, our research teams will continue to monitor all situations and assess opportunities as they arise, helping us make disciplined and informed investment decisions.

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