The pandemic has certainly created a difficult environment for businesses in 2021. The closures hampered operations. The scarcity of metals and rising metal prices have caused immense cost pressures, lost profits and, in some cases, bankruptcies.
One, while far from the only problem, was the disruption of global supply chains.
Research into the causes and potential solutions will be the business of analysts and experts for years to come. A thoughtful Citi Bank report titled “GLOBAL SUPPLY CHAINS, The Complicated Road Back to ‘Normal’” offers an achievable roadmap to return to normalcy that deserves close scrutiny.
Supply chain issues for metals, mining
For MetalMiner readers, a graph on page 37 illustrates the disproportionate impact of supply chain issues on the metals and mining industry, disruption reports are twice as important as the industry closest and a multiple of several times as much to widely covered issues, such as retail and automotive, which tend to dominate the media.
Rather than dwell on the question of how we got there, we would rather explore how these issues play out.
When do global supply chains return to normal?
As the report observes from the start, we have frequently observed that “demand is ahead of supply” and that it will take “time for supply to adjust”. But what we have experienced is unprecedented. Past experience is not a good indicator of the rate of recovery.
Based on the report’s observations, it is now evident that sustained progress in addressing these disruptions is closely linked to an improvement in the pandemic. Each lockdown restricts services and puts pressure on goods, while severely hampering the source of those goods: manufacturing operations in Southeast Asia. While immunization programs gain traction, they have not proven the absolute protection many had hoped for.
While it is attractive to oversimplify, it is clear that these supply chain disruptions are not the result of a single causal factor, but rather of several related concomitant shocks.
Given the variable nature of these shocks, Citi expects different characteristics of the disturbances to unfold at different rates, causing a gradual and irregular return to normality.
Reasons to be optimistic
Some positive signs are already developing.
Freight rates fell somewhat on Asia-West Coast and Asia-Europe routes. However, “a little” still leaves them at historically very high levels and in limited space.
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Well-intentioned attempts to reduce congestion at ports on the west coast of the United States have failed to capture the interplay of port labor and transportation restrictions. The measures to force the port to operate around the clock have been of little benefit. The United States is grappling with similar issues of road transport availability to Europe. These issues will not be resolved overnight or by calling in the National Guard.
On the bright side, the energy markets – after causing electricity problems in 2021 with prices rising sharply and supply limited due to coal shortages in China, natural gas shortages in Europe and a deficit oil market – appear to be easing, if not fully resolved. . 2022 is expected to see gradual improvement in all three areas, with oil supply expected to slightly overshoot next year.
Shortage of semiconductors… surplus?
The Citi report considers semiconductors to continue to underperform and hold back the recovery in the electronics and automotive industries.
Recent research suggests that the industry is actually producing more semiconductors than before the pandemic, with billions of dollars being invested in even more investment in manufacturing. We could experience a cyclical surplus by the end of 2022, if not certainly the year after.
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This begs a question: will current demand – for all products, not just semiconductors, be as persistent in 2022 as it was in 2021? As Citi says, how long can global demand for goods, especially durable goods, keep up with such a rapid pace? A possible recovery, currently hampered by the ramp-up of the Omicron variant, will accompany a return to more spending on services and, therefore, less on goods, the pace of which will have a significant impact on the recovery of global supply chains. .
Inflation and the role of central banks
The subject of media attention last week is inflation and the reaction of central banks to soaring price hikes. Central banks have finally started to react, notably with a reduction in quantitative easing from the Fed and rate hikes by the Bank of England. To the extent that inflation eats away at wages, it could have a dampening effect on demand and contribute to a slowdown in demand for goods that will help supply chains to recover.
Households are sitting on billions of dollars in accumulated savings. Some have been used to fuel the demand for goods. Some have been used to pay off debt.
However, there is still a lot left, and what is unknown is how the audience will react. Will he spend what could be a dwindling resource in an inflationary environment? Or will they pay off their debts as mortgage rates and credit rates rise?
What is clear is that the interplay of these various factors will not go smoothly.
Omicron, and possibly subsequent waves, have already shown that it could also lead to setbacks in the recovery and slow the shift from consumption of goods to consumption of services. The recovery in the manufacturing sector will be uneven across regions. This will continue to disrupt shipments. Meanwhile, labor shortages, especially in the road transport market, will take much of next year to gradually resolve. A gradual improvement towards the end of the first quarter of 2022 seems likely. However, it could be the end of 2022, maybe even 2023, before normalcy returns to global supply chains.
Further on, these disruptions have undoubtedly doubled when moving to nearshore or bringing together supply chains. The pandemic has called into question the inevitability of deepening global integration and has supported a more nationalistic approach to global trade.
By AG Metal Miner
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