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Supply Chain Design, Focus are Key to Managing 2020 Volatility in the Middle East and Beyond

MENAWhile volatility has always been a way of life for supply chain management, how companies manage their supply chain going ahead will remain key with the impact of stock markets, trade negotiations and now COVID-19 affecting supply chain design and focus.

Wayne Holbrook and Moataz Hussein, Expeditors, discussed this and more during a global supply chain outlook with more than 40 companies in attendance on August 26. PESA Middle East Chapter Chair Ed Whitnell, NOV, provided a market outlook for the Middle East.

The economic impact from COVID-19 has been staggering, with global GDP growth expected to drop 4.9%, the worst decline since the Great Depression. Global merchandise trade is expected to fall 11.9%, and public debt and unemployment are on the rise in most countries.

AIRLINE FREIGHT
Due to the decrease in passenger travel and freight, billions in aid packages could be needed to rescue the airline industry. Airport revenue is expected to plummet 60%. Daily international cargo capacity is down 35% year over year.

Passenger travel remains uncertain through 2021, Holbrook said. The industry is taking steps to maintain smaller fleets and limit routes. Cargo revenue must offset passenger travel loss, as a result.

PPE product movement will remain strong in Q3 and Q4, and new high-tech product launches out of China will cause fuel surcharge prices to begin trending up.

OCEAN FREIGHT
Consolidation has reduced the ocean cargo industry to nine major carriers and three alliances. This has a profound impact on carrier/sailing options and alliance strategies, which results in higher prices.

Ocean pricing is at a five-year high due to blank sailing (a sailing cancelled by carrier); even as poor on-time performance continues at about 60%. It is important for customers to reserve containers as soon as possible, due to overbooking and demand/supply imbalance, Holbrook said.

LAND FREIGHT
The trucking industry is facing a driver shortage, and the practice of using team drivers is challenging due to COVID-19 social distancing requirements. Trucking volume is starting to increase but pricing is still increasing due to driver shortages, Holbrook said. Trucking firms have a critical need for timely payments and predictability.

FUTURE CONSIDERATIONS
Airline industry revenue will drop by more than $400 billion in 2020, with 32 million aviation jobs at risk. Supply chain managers can expect additional uncertainty into 2021, and cargo belly space may not ever come back to pre-COVID levels.

It’s going to take years for airlines to recover.

As a result, companies should focus on supply chain resiliency, with long-term stability and inventory strategy top of mind.

“What are your inventory strategies? That’s very important.”Wayne Holbrook, Expeditors

Logistics budgeting will have to be addressed because of potential increases in transportation costs, both direct and indirect. Insurance costs are also rising. The near future will be survival mode for carriers, whether that’s air, sea or logistics companies.

For logistics service providers, financial stability will be a key requirement, with contracts shifting towards sustainable terms and conditions, and support carriers requiring timely payment to partners.

“You need to look at how financially stable your logistics companies are,” he said.

In addition, dynamic pricing will show the importance of space capacity. New processes will be needed to drive efficiency and cost, and digital disruptions will cause less funding to be available for some. Industry-specific solutions are needed, Holbrook said.

Leading companies are:

  • Reassessing and reviewing their global supply chain and sourcing/manufacturing strategies.
  • Actively engaging in pre-COVID-19 issues, and creating strategy and action plans
  • Actively communicating and creating joint strategies with third-party logistics partners, including
    • Managing capacity for key lane pairs
    • Getting regular market updates via webinars, etc.
    • Engaging with executive management teams
  • Leveraging technology and digital solutions to optimize logistics and supply chain
    • Trade, supplier, carrier, cost and performance management
    • Supply chain modeling, simulation and organization
    • Study machine learning capabilities to move towards predictive and prescriptive analytics
  • Cost management with a view of “total cost” and optimizing best mode of transport

Moataz Hussein, Expeditors, analyzed cross-border movement within the Gulf Cooperation Council (GCC). He said main trucking gateways like the UAE to Oman have not been affected by the pandemic so far. When the UAE/Saudi Arabia borders were closed, many land freighters had to switch to air freight and ocean. Currently, borders are moving with no major issues, but companies could expect a delay of 2-3 days.

In Saudi Arabia, increased customs duties and VAT rates started July 1 to address economic concerns from COVID. In Lebanon, the Beirut port is partially operational following the August 4 explosion at the terminal. Shipping lines have resumed their regular calls and the customs clearance operations have partially resumed for containers only.

MIDDLE EAST OUTLOOK
At a macro level, COVID has slowed Middle East and North African (MENA) economies and travel, as well as oil and gas demand, said Ed Whitnell, NOV. National oil companies throughout the region have announced 30-50% capital expenditures cuts.

In addition, COVID has delayed a return to travel and muted demand for gas and diesel. Across the globe, suppliers have laid off or furloughed 20-50% of staff. Orders fell 60% on average and revenues dropped 50%. A second wave of the virus could cause an additional 4-6% contraction with revenues shrinking 9-12%.

A baseline of 89-90 million barrels per day in 2020 could rise to 97-98 mbpd for 2021. However, if a second wave of the virus hampers demand further, the 2021 demand would remain under the 2019 demand. But, Whitnell said, a recovery going into 2021 is possible.

Even so, OFS companies are facing a smaller piece of the pie.

Gas projects are least likely to be delayed and the first approved when FIDs start moving again, he said. Kuwait wants to move away from oil to gas for electricity, and Saudi Arabia’s stated 2030 goal is 70% gas and 30% renewables. As a result, gas assets are both lucrative and in the interest of national security.

“The gas FIDs (final investment decisions) will be the early ones approved and will be a symbol of confidence returning to the region,” Whitnell said.

If your company would like to join the Middle East Chapter, contact Director Government Affairs Maria Suarez.

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