What is causing the global supply crisis? | Direction & Strategy
As the global economy gradually recovers from the impact of the COVID-19 pandemic, the global supply crisis is intensifying, spreading not only from country to country, but also from country to country. industry to another.
A year ago, as the pandemic continued to spread, economies around the world were hit hard and there were panic buying among consumers. Today, it is companies that are trying to build up inventories, buying more raw materials than they need to cope with a rapid recovery in demand. Panic buying fuels more commodity shortages including copper, iron ore, steel, corn, coffee, wheat, soybeans, timber, semiconductors, plastics, cardboard , etc. As a result, stocks of apparently all commodities in the world are low. “You name it, and we have a shortage,” said Tom Linebarger, president and CEO of engine and generator maker Cummins Inc. earlier, and noted that his customers “are trying to get everything they need. ‘they can because they see high demand.
Supply shortages drove prices up significantly, with the impact of higher prices for some key raw materials being significant. The prices of various industrial raw materials such as crude oil, plastics and chemicals are on the rise. Some of the impacts of rising commodity prices have already started to trickle down to consumer goods. Reynolds Consumer Products Inc., the maker of the eponymous foil and Hefty trash bags, is forecasting another price hike, and it will be the third for the increase this year alone. Food prices are also rising. The price of palm oil, the most widely consumed edible oil in the world, has risen by more than 135% in the past year to reach record levels; soybeans topped $ 16 per bushel for the first time since 2012; corn futures are at an eight-year high and wheat futures are at their highest level since 2013.
Changes in factory orders due to the impact of the pandemic have also tightened supply in some markets and pushed up commodity prices. Some knitting companies in Dongguan, Guangdong, said that affected by the pandemic, around 40% of orders returned to China from countries such as India and Southeast Asian countries, while the rate factory utilization increased from around 30% to 40%. , and now it has reached 100%. In Jiangyin, Jiangsu, a bed sheet company adjusted its production capacity to meet a $ 20 million order from Southeast Asia. The increase in demand from the textile industry has led to a shortage of raw materials. In Wujiang, Jiangsu, where polyester filament yarns are most in demand, the shortage of raw materials this year has been unexpected, especially during the current off-season when there is not much stock. In Suzhou, also in Jiangsu, exports of polyester filament yarn increased nearly 60% from January to April, while the price rose 40% to 60%. Compared with the same period last year, the price of filament yarn has increased from 2000 to 3000 RMB / ton.
Remarkably, this hoarding frenzy is pushing global supply chains to the brink of collapse. Inventory shortages, transport bottlenecks and price increases are approaching critical levels, raising fears that strong global growth is fueling inflation. The supply disruptions in the past are simply incomparable compared to the severe inventory crisis of 2021. Industry insiders predict that businesses large and small will be affected by this supply shortage.
Why are the current supply shortages so acute?
ANBOUND researchers believe that instead of having just one factor, there are several reasons for the emergence of complex systemic problems.
First, there is the resumption of demand as the pandemic is under control. This year, as vaccine rollout efforts brought the pandemic under significant control in the United States and some European countries, the economy began to show significant momentum for recovery. This trend has led to an almost simultaneous recovery in most markets around the world. The collective recovery of global markets has led to an almost simultaneous increase in demand, exacerbating the mismatch between supply and demand. In the case of commodity futures, capital was collectively bullish on commodities under such expectations, causing commodity prices (mainly upstream commodities) to rise dramatically and spreading to intermediate commodities and downstream. downstream. It should be noted in particular that the sharp increase in demand for certain specific commodities in the context of the pandemic has also exacerbated the supply-demand mismatch in some industrial chains. For example, the increase in the need to work and study remotely online has increased the demand for all kinds of electronic products, leading to an increase in the global demand for semiconductor chips, which affects several industries requiring chips.
Another reason is that the pandemic has disrupted the global supply chain system, causing distortions in supply and demand in certain industries, which are transmitted along the supply chain, causing a tightening of the supply chain. larger supply. As ANBOUND has previously pointed out, the spread of the pandemic has taken multiple hits on global supply chains. During the pandemic, China, as the “factory of the world”, was affected by the pandemic and its production was disrupted. Then, demand from developed countries was suppressed by the impact of the pandemic. Next is the fact that the dysfunctional global supply chain system has exacerbated global supply distortions. To cite one example, the severe container shortage due to supply chain disruption has exacerbated global supply distortions.
In addition, companies collectively began to increase their inventories, leading to an increase in inventories in the industrial chain and supply chain, amplifying the demand for all kinds of raw materials, intermediate products and supporting products. In the past, in order to reduce costs and improve efficiency, many companies advocated inventory-free production and tried to reduce inventory in the production link, thereby reducing the occupation of capital. However, the proper functioning of non-stock production depends on the efficiency of the global supply chain system. Once a problem arises in the global supply chain system, it can lead to chaos across the entire supply chain system. The 2011 earthquake in Tōhoku, Japan caused the closure of some key auto parts factories, which once affected the global auto supply chain. Likewise, the global spread of the COVID-19 pandemic since last year has damaged, distorted and even disrupted global supply chains.
Finally, geopolitical factors have also contributed to the tight supply of global raw materials, causing the artificial disruption of part of the industrial chain and the supply chain. For example, the US crackdown on supplying chips to Chinese companies and related sanctions has severely disrupted the global semiconductor industry chain.
How long will the supply crisis last?
Overall, the global supply crisis is due to a variety of reasons, including increased demand resulting from post-pandemic economic recovery, distortions in global supply chains caused by the pandemic, collective storage by companies around the world and geopolitical disturbances. However, this does not represent a significant expansion in aggregate aggregate demand, but rather a distortion of the existing system as it is disrupted and broken. Judging from the current situation, this situation of supply tension will last for a long time, leading to higher prices of raw materials and components. Therefore, businesses and governments must be prepared for this scenario in the medium to long term.
Mr. He Jun is a partner, director of the Chinese macroeconomic research team and a senior researcher. His research area covers China’s macroeconomics, energy industry and public policies.