Is the world running out of storage space?

Is the world running out of storage space?

In today's newsletter, we talk about the warehousing problem and how it's affecting the trade of commodities.


Business

The Story

Grounded flights, cancelled orders, and falling prices - They are all evidence of the fact that the pandemic has not been kind to the trade of commodities. But there’s one part of the supply chain that’s about to crumble right now and that’s “Storage and Warehousing”.

All your clothes, food, toys, and books were likely held in a storage facility at some point in time. But now that most countries have gone into lock down, consumer demand has plummeted, leading to a unique problem- sellers are unable to rid themselves of certain commodities, and they are running out of space to store these things themselves.

The worst-hit commodity within the lot — Oil. As Saudi Arabia continues to pump oil into the market to fight the ongoing price war with Russia, energy supply chains are flooding with oil. And considering the fact that world demand for the commodity has taken a nosedive already, the resulting glut is reaching catastrophic proportions. Analysts are now estimating that the world is mere weeks away from running out of oil storage space.

In the past, traders have capitalized on the low price environment by storing the commodity aboard oil supertankers at sea and then selling it for a nifty profit when prices reach more reasonable levels. But with Saudi Arabia ramping up production to unprecedented levels, freight prices have skyrocketed as well.

And analysts estimate that there are only about 57 oil tankers left— not nearly enough.

And it isn’t just oil that’s having these problems. Natural gas is facing the heat as well. As demand slumps and pipelines reach max capacity, many firms like China National Offshore Oil Corp. and PetroChina have declared force majeure — an obscure clause in most contracts which when triggered will allow one party to violate the terms of the contract without liability.

Meaning natural gas suppliers like Petro China can refuse to accept shipments from Natural Gas sellers even if there’s a contract that states they have to accept the shipment. (If force majeure holds in court that is)

Sad!!!

Apart from fuel, metal demand has also been tanking, leading to huge global stockpiles. As China’s construction and automotive industries remain immobile, copper demand has taken a hit. The only upside here is that the storage situation is not quite so dire, because unlike other commodities, metals can be stored out in the open (though it’s not ideal).

And then there are commodities like food, meat, and other groceries. This one is a bit weird because on the one side we are hearing that suppliers are destroying produce because they don’t have storage capacity anymore and on the other hand, we see images of empty supermarket shelves. So what gives?

Well, you see supermarkets mostly rely on the Just in Time model. Meaning they order (mostly) their stuff on a daily basis from distribution centres after assessing consumer demand. This works fine when everything moves like clockwork. Unfortunately, the supply chain is now broken. There aren’t enough trucks going around. There aren’t enough drivers going around. Transportation routes are a mess. And commodities can’t travel between Point A and Point B without coordination and teamwork. So naturally, warehouses are filling up quickly and there’s no way to get the produce to the end consumer.

Unfortunately, this anomaly isn’t just limited to groceries or metal. It’s happening at an unprecedented scale, across industries, and across geographies.

According to Analyst Henning Gloystein, “The outbreak of the pandemic has shown that the world has a woeful lack in storage capacities. If ports around the world start turning away shipments because their tanks and warehouses are full, then product values will tumble.”

And that’s precisely what’s happening right now. So the question remains: how low can they go?

You tell us!!!

Until then…


Share this Finshot on WhatsApp, Twitter, and LinkedIn.