The pandemic certainly created a challenging environment for business in 2021. Lockdowns hampered operations. Metal scarcity and rising metal prices caused immense cost pressures, loss of profits and, in some cases, bankruptcies.
One, although by no means the only issue, was disruption to global supply chains.
Research into the causes and potential solutions will be the stuff of analysts and pundits for years to come. A thoughtful report by Citi Bank entitled “GLOBAL SUPPLY CHAINS, The Complicated Road Back to ‘Normal’” holds out a feasible road map back to normality that deserves some scrutiny.
Supply chain issues for metals, mining
For MetalMiner readers, a graph on page 37 illustrates the disproportionate impact supply chain issues have had on the metals and mining industry, reports of disruption are a factor of twice more than the next nearest industry and a multiple of several times more widely covered issues, like retail and auto, that tend to dominate the media.
Rather than dwell on the question of how we got here, we would rather explore how these issues unwind.
When do global supply chains get back to normal?
As the report observes early on, we frequently observed that “demand is running ahead of supply” and that it will “take time for supply to adjust.” But what we have experienced is unprecedented. Past experience isn’t proving a good guide as to the pace of recovery.
Drawing on the observations of the report, it is now obvious sustained progress in resolving these disruptions is critically tied to an improvement in the pandemic. Every lockdown throttles services and throws pressure back on to goods, while at the same time severely hampering the source of those goods: manufacturing operations in Southeast Asia. While vaccination programs are gaining traction, they have not proved the absolute protection many hoped.
While it is attractive to oversimplify, it is clear these supply chain disruptions do not flow from just one causal factor but, rather, from several related coincident shocks.
Given the varying nature of these shocks, Citi expects that different features of the disruptions will unwind at differing paces, resulting in a gradual and lumpy return to normality.
Reasons for optimism
Some positive signs are already developing.
Freight rates have softened somewhat on the Asia to West Coast and Asia to Europe routes. However, “somewhat” still leaves them at historically very high levels and space tight.
Well-meaning attempts to ease congestion at U.S. West Coast ports failed to grasp the interplay of port and haulage manpower restrictions. Moves to force 24-hour port operation were of minimal benefit. The U.S. is struggling with similar road haulage availability issues to Europe. Those issues will not be resolved overnight or by calling out the national guard.
On the positive side, energy markets — after causing power problems in 2021 with steeply rising prices and tight supply due to coal shortages in China, natural gas shortages in Europe and an oil market in deficit — appear to be abating, if not fully resolved yet. 2022 should see a gradual improvement in all three areas, with oil supply expected to move into a mild surplus next year.
Semiconductor shortage … to surplus?
The Citi report calls out semiconductors as continuing to underperform and resulting in a brake to recovery in the electronics and automotive sectors.
Recent research suggests the industry is actually producing more semiconductors than before the pandemic, with billions of dollars flowing into even more manufacturing investment. We could be into a cyclical surplus by the end of 2022, if not then certainly the year after.
That poses a question: will the current demand — for all products, not just semiconductors, prove as persistent in 2022 as it has been in 2021? As Citi puts it, how long can global goods demand, especially for durables, keep up such a blistering pace? An eventual recovery, currently hindered by the rise of the Omicron variant, will accompany a move back to more expenditure on services and, correspondingly, less on goods, the pace of which will have a significant impact on the recovery in global supply chains.
Inflation and central banks’ role
The topic of media attention this past week is inflation and central banks’ reaction to surging price rises. Central banks have finally begin to react, including a tapering of quantitative easing by the Fed and rate rises by the Bank of England. To the extent that inflation eats into wages, it could have a dampening effect on demand and contribute to a slowdown in demand for goods that will help supply chains recover.
Households are sitting on trillions of dollars of pent-up savings. Some has been used to fuel the demand for goods. Some has been used to pay down debt.
However, much remains, and what is unknown is how the public will react. Will it spend what could be a dwindling resource in an inflationary environment? Or will they pay down debt, as mortgage and loan rates rise?
What is clear is the interplay of these various factors will not play out smoothly.
Omicron, and possibly subsequent waves, has already shown it could also offer setbacks in the recovery and slow the move from goods to services consumption. Recovery in manufacturing will be uneven by region. That will continue to cause shipping disruption. Meanwhile, labor shortages, particularly in the road haulage market, will take much of next year to gradually resolve. A gradual improvement toward the end of Q1 2022 seems probable. However, it could be the end of 2022, possibly even 2023, before normality returns to global supply chains returns.
Further out, these disruptions have undoubtedly doubled down on moves to nearshore or bring supply chains closer to home. The pandemic has called into question the inevitability of deepening global integration and supported a more nationalistic approach to global trade.
By AG Metal Miner
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