How long will supply chain issues last?

The pandemic brought supply-chain security up governments’ agenda and there are still strains in the global supply of components and goods. Will it end soon?

| 6 min read

In October 2021 the Baltic Dry Index which, charts the cost of shipping, hit a new high of 5,647. The cost of sending a container of goods from China to the US had quadrupled over last the year. Despite these price rises there were queues of container ships sitting off the California coast, patiently waiting for a berth to unload their goods at Los Angeles or Long Beach. The air was full of worries about supply-chain interruptions.

Today the Baltic Dry Index has subsided to 1,296, less than a quarter of its peak. You can get more realistic quotes to move containers around. The waiting ships off California have been told to stay a long way from shore, so they now only count the ones close in as waiting for a berth. US demand for goods remains elevated, thanks to lockdowns and pandemic savings levels, generating increased demand for imported items.

Chart 1: Shipping and Air Freight costs

Other markets have been through booms and busts thanks to pandemic policy disruption. Timber was scarce and the price spiralled to $1,686 per 1000 board feet in May 2021, only to subside to a low of under $500 by August. The Fed pointed to this as evidence of how inflation should be transitory. Wood prices took off again and now are near $1,000.

One of the problems has been forest fires followed by floods in forests in North America. Paper and cardboard have been in short supply for some time, thanks to the surge in demand for packaging for the big increase in online shopping. It is taking time to put in the extra capacity, and to harvest the old packaging for recycling.

Other raw materials and components are still scarce. The world is in the throes of a nasty energy shortage, hitting Europe hard and troubling China too. A shortage of wind, closure of older generating plants and a reliance on Russian gas has left Europe facing large energy prices rises.

Energy prices continue to boost costs

The US has been hit by the world price of oil surging, though it has kept better control of domestic gas prices thanks to a ready home supply. The world lacks the large number of computer chips it needs. The market has been sustained by the surge in demand for smartphones, laptops and tablets as people forced to stay at home needed more devices for home schooling, working from home and downloaded entertainment. The auto industry needing more chips per car for its latest ranges, especially the electric vehicles, has been caught short in its orders by the general shortage of semiconductors.

Chart 2: Raw material prices

Aluminium needed for canned goods has been scarce and has serious cost issues from the surge in energy prices. Over the last year prices have risen by around a half as producers seek to bring supply and demand into better balance and cover rising costs. Steel has also been well bid as manufacturers and construction firms order more to match rising demand.

The impression of scarcity has been augmented in many countries by temporary hold ups in getting goods through the ports and into the shops or home deliveries. Some Chinese ports have been forced onto short working by covid restrictions. For a time, the Suez Canal was blocked by a badly driven large ship. Receiving ports have suffered from shortages of trained drivers to take the newly landed containers away in a timely manner as an ageing workforce takes retirement speeded by pandemic changes and the industry struggles to recruit and train enough replacements on both sides of the Atlantic. There has also been stockpiling or panic buying as people try to pre-empt a perceived shortage, which can make the position worse.

Chart 3: US durable goods consumption and personal savings rate

Some of these problems – such as the temporary item shortages, the timber shortage or the shipping container and ship shortage – resolve themselves as people find work arounds. Others are deeper seated and will take longer to fix.

The new microchip plants planned in Texas, Ohio, Japan and Europe take time to plan, build and get to work, so chips are likely to remain in short supply for the next year at least. The possible underlying shortage of container ships will see a doubling of new capacity produced in 2023, to swell the world fleet more rapidly.

Russia’s energy-market power a problem

The shortage of European gas is not easy to resolve, other than relying more on Russia which has its strategic difficulties. The European Union now sees gas as the transition fuel, to be used more to replace coal whilst the renewable capability and the electrification plans are rolled out. Oil prices have risen sharply over the last year as OPEC has kept markets a bit short of supply and as demand has leapt back up following pandemic closures and absence of a lot of travel.

Europe will have to live with an energy shortage for some time.

People are becoming more used to temporary shortages of their favourite products and brands. These can be caused by anything from a shortage of delivery drivers and shipping capacity through to an underlying shortage of raw materials or crucial components. Europe will have to live with an energy shortage for some time, as coal and nuclear plants for generating electricity are closed and as it takes time to put in working renewable replacements on a sufficient scale.

There is renewed enthusiasm for national solutions and more domestic production of most things as the leading governments retreat from the highs of globalisation. Strategic considerations deter more advanced-country reliance on China and Russia. Problems over the pandemic months. in keeping shop shelves full and governments well supplied by relying on imports, is leading to more economic nationalism to work round the supply-chain imperfections. We expect a gradual easing for many of these difficulties as the year progresses.

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How long will supply chain issues last?

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