Damaged supply chains and trade frictions

The ongoing Ukraine conflict and Covid-19 lockdowns in China continue to cause disruptions to global supply and trade.

| 6 min read

Macron vows to unite a divided France

President Macron’s success in the French Presidential election – as forecast by the polls and most commentators – reaffirms the growing role of the EU in foreign and trade policy for Europe. The large number of abstentions and non-voters demonstrated substantial dissatisfaction with the choice of candidates in the second round and the primacy of cost-of-living and supply issues. The President will need to see what more he can do to tackle the problems of inflation and the cost-of-living squeeze.

Chart 1: French presidential elections run-off 2022 results including abstentions and invalid ballots

Global trade disrupted

The combination of Covid lockdowns, trade tensions with China, a bout of western inflation, and the Ukraine war has proved disruptive to global trade. The Biden Presidency decided to continue the Trump policy of making more things in the USA and getting China out of sensitive areas in supply chains, especially in technology. Chinese lockdowns have created lulls and bursts of container traffic to America and Europe. Surging prices of energy, metals, and basic foods reflect shortages of supply and changes in patterns of supply, which do themselves create additional supply complications. Some items like semiconductors have remained in short supply for many months as the world struggles to invest in enough capacity to meet the fast-expanding demand for these products to power the digital revolution in everything from mobile phones to electric cars. The materials needed to make batteries are also in short supply.

The current lockdowns in China have assisted in reducing the queues of container ships in the USA and delays in shipping being experienced earlier this year. Some worry that once China unlocks again there will be more container ships waiting for berths in Californian ports where much of the container traffic from China goes. There are problems in both the USA and Europe in recruiting enough port workers, drivers, and cargo handlers, with wages being bid up to fill the vacancies. The shipping cost indices and container rates from Asia to the USA and Europe have fallen from their peaks but are still well above where they were before the Covid, and other disruptions hit.

Chart 2: Price of shipping a container from China to Europe and the US since 2021

EU and US to eliminate purchasing of Russian oil

The Russian invasion of Ukraine will continue to disrupt supply chains, especially in energy and food. The EU and the USA now have plans to eliminate Russian oil from their purchases and the EU is looking for ways to reduce its dependence on Russian gas. Oil is more of a globally traded commodity than gas, which needs pipelines for much of its delivery. The amount of internationally traded gas by LNG tanker is a small proportion of the total. In the oil market, Russia is finding new outlets for its oil, at discount prices and with some loss of volume. Output is thought by the IEA to have dropped by 700,000 barrels a day in early April. Germany is talking about halving her imports of Russian oil by the summer and phasing most out by the end of the year, implying further declines in Russian output and more searches for new buyers. The overall result of this is higher oil prices for longer worldwide.

Chart 3: Russian oil price discount

Gas and food concerns

Gas has proved more difficult to switch. The USA is self-sufficient, but Europe relies heavily on Russian imports. The aim to import more from further afield, including the USA, requires new LNG capacity to be installed at European ports – which will take time to achieve. There will also be the need for more LNG carriers.

Food is worrying. Ukraine will plant and grow less this year and there are issues with harvesting and shipping the crops. The world markets are signalling grain and cooking oil shortages as a result. Supermarkets are getting used to missing lines of product and will be looking around for alternatives to sunflower oil-based spreads and products using this oil. The combined difficulties of Covid policies, general inflation, and the Ukraine war have pushed grains and some cooking oils up by around 50% over the last year - with coffee and cotton up by two thirds. This rapid rise in the price of basics is causing serious problems for the budgets of many people, especially those on lower incomes and in lower-income countries.

Chart 4: Price of wheat and corn in 2022

China lockdown impacting green revolution

The move into and out of lockdown in China has disrupted supply. Longer-term shortages remain in semiconductors and materials needed for the products of the green revolution. Minerals and other commodities have mainly been in strong demand and have experienced price hikes as a result. Lithium carbonate prices have multiplied rapidly. More traditional materials like steel and wood are also well up on pre-Covid levels, though wood is off its peaks.

There has been a shortage of people to work in a range of activities as advanced economies have come out of lockdown. There has been considerable wage growth to persuade more people to be available and trained as drivers, chefs, hotel staff, warehouse staff, and food picking and preparation employees. As Central Banks cool economies with their monetary tightening, this should start to calm down, as demand reduces. Inflation should peak soon as the higher prices embed in the base figures of the price indices and as the cost-of-living pressure reduces demand for some items. It means less demand for discretionary items, which we can see now in falling consumer confidence indices and diminishing forward order books. It reinforces the need to check the growth prospects and turnover resilience of companies before investing. Those companies serving the better off are less affected by the cost-of-living squeeze.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Damaged supply chains and trade frictions

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