AmerCareRoyal - Market Update Q2 2022

AmerCareRoyal - Market Update Q2 2022

Market Update

Quarter 2 | 2022

Product-to-Market Pathway

Q2 2022 Market Update

SUMMARY: The new war in Ukraine and resulting boycotts of Russian oil are anticipated to contribute new inflationary pressures on the cost of raw materials, energy consumed to manufacture products, and shipping expense for manufacturers, importers and consumers.

Risk Scale

Low

Moderate

High

Factory-to-Port Outbound Logistics

Ocean Transport Inbound to North America

DC-to-Customer Outbound Logistics

Raw Materials

Manufacturing

Record demand for manufactured goods depleted Chinese coal supplies in 2021 and may lead to continued power shortages in China throughout 2022, impacting production.. Excess 3.5-gram exam nitrile and high-cost older nitrile in the market is leading to widespread inventory liquidation, expected to trend the other direction once inventories are depleted. Industry watchers are reporting slight decreases in Vinyl glove factory output.

Consumer goods demand remains exceptionally high and ocean freight experts predict continued record costs to ship due to constrained vessel capacity as well as delivery delays well into 2023. 60% more vessels are anticipated on routes from Asia to North American East Coast by mid- 2022 as shippers divert product from jammed ports along the West Coast.

Container shortages continue to hamper supply chain efficiency, most acutely in Asia, where container turnaround times are longer due to on-going and severe port congestion. Covid outbreaks are primarily disrupting ground shipping and warehouse operations in China as lock downs in Shanghai at the end of March and earlier outbreaks there, in Hong Kong and other locations demonstrate. Factories and ports have stayed open, but trucking is restricted by government order.

Congestion at inland depots and rail-truck hubs is diminishing supply chain efficiency, greatly slowing the pace of product delivery, resulting in wide-spread extensions of lead-time estimates across all industries. Russian invasion disruption of oil markets caused diesel fuel spikes that may result in ground freight surcharges. Glimmers of progress are seen in alleviating North American port congestion, but ground freight service is still hampered by driver and equipment shortages and long lines of ships dot both coastlines awaiting docking.

Aluminum prices have climbed significantly during Q1 2022, up 32% from January to March on US indexes, 18% in China. Russia’s invasion of Ukraine and resulting instability in oil and gas markets is driving up manufacturing costs for resin-based and petroleum-reliant products.

Nitrile rubber cost began rising in March. PVC / Vinyl cost trended down but is leveling off as Q1

ends. Demand that shifted to Vinyl from

scarce Nitrile in ‘20 and ’22 has not shifted back.

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Restaurant Industry Update & Outlook

Q2 2022 Market Update

SUMMARY: Industry recovery continues, tempered by concerns over inflation in the cost of food, supplies and labor, as well as stubborn staffing and supply chain shortages, and on-going pressures to adapt to shifting patron preferences and new operational norms.

PENT- UP “OPTIMISM” FELT IN RESTAURANT INDUSTRY

Pointing to a lasting shift in restaurant format, Consumers searching for

Phil Kakarikis, CEO and president of the International Foodservice Manufacturers Association: “Pent -up optimism, we can see some supply chain challenges seem to resolve themselves … everyone is seeing demand that has been pent -up start to emerge … how foodservice companies treat their people is key because this is all about how restaurants can fulfill their customer expectations and experience at the point-of-purchase. But nothing is going to be normal at any point in time, soon. The new normal is abnormal.” Nations Restaurant News

businesses with outdoor seating

continues to be above pre-pandemic levels increasing 292% in year two of the pandemic when compared to pre- pandemic searches. Y elp

HOWEVER, IN REALITY, AN INFLATION-DRIVEN RECOVERY

GHOST KITCHEN PHENOMENON ACCELERATING

Restaurant visitor volume remains below pre-pandemic levels and much of the growth as an industry is showing up through higher check totals (meal receipt amounts). Technomic feels this is not sustainable and will settle at some point or consumers will look elsewhere either by trading down (to less costly places to eat) or trading out visits with off-premise meal formats. Technomic

Chain concepts are investing further to gain the operational and investment returns delivered by Ghost Kitchen operational formats; Wendy’s over 700 locations; TGI Fridays over 300; facilities; Inspire Brands 700 locations; REEF launched an alliance kitchen housing all their brands to order from one app; Chick Fil-A testing concepts for their brand and other concepts. Technomic

SUPPLIES AND FOOD AVAILABILITY, STAFFING THE KEY ISSUES

SLOW RETURN OF BUSINESS TRAVELLERS IMPACTING PACE OF INDUSTRY RECOVERY

80% of restaurant have changed menu offerings due to food and product supply delays and shortages. And despite adding back 1.7 million jobs in 2021, seven of 10 restaurant operators report not having enough staff to meet current customer demand. Industry capacity for growth is being restricted by staffing shortages. National Restaurant Association , Technomic

Business travel not expected to recover until 2024. Full-Service Restaurants are dependent upon Business Travel and their recovery will not fully occur until Business Travel recovers further. Global Business Travel Assoc.

Ocean Freight and Logistics

Q2 2022 Market Update

SUMMARY: Container shipping costs are higher than ever and will stay high for the foreseeable future as importers continue to battle for space in the face of record demand for consumer goods from Asia. Covid resurgence in China disrupted productivity across the supply chain in March. Next potential disruption on- deck … West Coast Longshore Union contract expiration and negotiation.

COVID RECURRENCES CONTINUE TO UPSET SUPPLY CHAIN ▪ A record wave of Covid 19 variant outbreaks being referred to as “Stealth Omicron” hit Shenzhen, Shanghai and Hong Kong in March, leading to lockdowns, work-from-home orders, restrictions on truck driver movement, and extensive disruption of manufacturing, ground transport, port operations, and ocean sailings. AsteelFlash, Associated Press ▪ Freight forwarders in Hong Kong estimate domestic truck fleet capacity in China has been cut by at least 70% due to Covid outbreaks, further delaying and disrupting product flow from factories to outbound ports. Splash247.com

Demand for goods will continue to outpace supply until 2023, keeping pressure on ocean container shipping. Drewry Maritime

Freightos Baltic Index of Ocean vessel container load prices rose 2% to $16,403 in mid-March for routes from China/ East Asia to US West Coast, 196% higher than the same time in 2021. Freightos

OCEAN FREIGHT COSTS CLIMB HIGHER, SET NEW BAR ▪ Container berth cost from Asia to the U.S. West Coast in late February 2022 was 179% higher than the same time the prior year. In March, the YoY rate was 196% higher. Freightos ▪ Ocean carriers manage capacity more to their advantage now, taking vessel capacity out of their fleet systems on short notice, helping to keep prices they charge for berths high by reducing the price-dampening impact of new / additional ships coming on-stream. DHL

WEST COAST PORT LABOR CONTRACT EXPIRATION LOOMS ▪ Current labor contracts at US West Coast ports expire July 1. Supply chain disruption has routinely occurred during past negotiation seasons and industry experts warn that the current Covid / Supply Chain crises era leaves little existing buffer capacity for other ports in Canada, Mexico or the East Coast to absorb diversions from the US West Coast. Lars Jensen, Vespucci Maritime

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Domestic Shipping and Logistics

Q2 2022 Market Update

SUMMARY: Consumer goods demand remains high, filling truck capacities on routes already tight due to driver and equipment scarcities. Diesel fuel spiked when Russia invaded Ukraine. As a result, unprecedented ground freight cost is the norm across North America.

DEMAND FOR GOODS REMAINS HIGH, CONTINUED PORT CONGESTION  Ground shipping capacity, particularly Less-than-Truckload will be stressed throughout 2022 due to shortages of trucks and nodes or docks at inland transfer hubs. Capacity limits put further stress on delivery lead-times as shippers must wait longer to ship. CH Robinson  US retailers raised their imported products forecast through April, portending extended port congestion on the West and East coasts through the summer months of 2022. US Census Bureau  Ports on both North American coasts have yet to clear backlogs of vessels and on-terminal containers that have accumulated in recent months. Queues of dozens of vessels some 90 or more, dot shorelines around all major North American ports. LA-Long Beach port complex was down to 48 ships awaiting in mid-March from 109 in January, but still far above the normal 2 or 3 in pre-pandemic times. Global Port Tracker, Journal of Commerce Online, Wall Street Journal

US Census Bureau

WAR IN UKRAINE SPIKES FUEL COST, ADDS TO PAIN FOR SHIPPERS

 Fuel prices already 40% higher than prior year increased over 30% during the first two weeks of the Russian invasion of Ukraine. MarketWatch  Trucking experts expect fleet companies to begin implementing fuel surcharges to shippers, contributing further to the increased cost-of- delivered or landed-goods Supply Chain Dive  Until supply chain problems are sorted out with more drivers, trucks and inland storage space, do not expect rapid decline in the backlogs being experienced. Open driver positions in North America now estimated at over 80,000. Hackett Associates  Rates for truckload, LTL and specialized transportation increased 25%. Parcel rates rose 14.7%, while prices for warehousing services increased 20.5%, with much of that coming after July 2021 as demand spiked hard due to the ripple effect of supply chain bottlenecks at various U.S. seaports. FreightWaves

14% ($.70 / gallon) jump in diesel fuel prices the week after Russia invaded Ukraine .

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Takeaways

Q2 2022 Market Update

SUMMARY: Supplies will continue to cost more, arrive slower, and flow less predictably from factory to consumer through 2022 and well into 2023.

▪ Covid outbreaks continue to slow and disrupt production and shipping from Asia, and equipment and personnel shortages are keeping ports, warehouses and inland transfer hubs in North America clogged and trucks behind schedule in delivering goods. ▪ Inflation reached four-decade high of 7.9% in the United States at the end of Q1, and a thirty-year high of 4.8% in Canada. US Federal Reserve economists forecast inflation to remain high but stabilize in 2022 as planned interest rate increases take effect. ▪ Restaurants are rebounding as mask and dining capacity restrictions are eased, though pace of progress is tempered by labor and supply shortages and inflation in the cost of operations. ▪ Products reliant on petrochemicals for manufacturing will cost more, as will shipping, due to spiking energy cost resulting from the Russia – Ukraine war. ▪ Product lead-times are stretching further as the ground freight system across North America struggles with log-jammed train & truck transfer facilities and worsening shortages of drivers and equipment. ▪ Ghost kitchen popularity is opening new doors to growth for distributors that offer product, packaging and service mix tailored to these production-oriented operations.

AmerCareRoyal is Your Dedicated Partner to Tackle Every Challenge!

AmerCareRoyal works to identify and alleviate Supply Chain and product availability risk:

• Our global manufacturing network and product sourcing teams continue to identify and implement supplier and substrate options that keep prices as stable as possible, and product flowing smoothly and seamlessly. • Ocean shipping options that ensure timely delivery are a core deliverable of ACR and our team of experienced professionals who work to secure optimal freight rates and routes to bring your products to your facilities. • Significant investment of money and time made since 2020 to improve ACR’s domestic warehousing network is paying dividends with improving first-time order fill rates and stabilized shipping expense.

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