Supply chain disruption: is the worst over?

Purchasing managers say delivery times for manufacturers worldwide are deteriorating, with the global delivery time index down to 34.8 last month

An aerial general view shows a container terminal in New Jersey

di Stefano Rebaudo

As companies, investors and policy makers fret over port logjams, freight costs and chip shortages, some indicators are starting to signal that global supply chain stress may be on the wane. Supply chain glitches dominated the latest company earnings season, with mentions of the issues by chief executives jumping 412% from last year, according to a BofA tally.

The coming months will show if the snarl-ups portend a toxic scenario of stagflation for the world economy or are just a bumpin the road to recovery. They will also determine how inflation expectations, monetary policy and corporate earnings pan out.
Here are some indicators that may show the problems easing:

Cargo shipping costs tracked by the Baltic Exchange Dry index are down a third in the past month after hitting their highest since 2008 in October. Further out, data from shipbroker Alibra Shipping showssix-month contracts for Atlantic and Pacific Ocean routes cost $54,000 and $ 52,500 a day respectively for capesizes, thelargest dry cargo vessels. For contracts in 12 months, Pacific routes slip to $ 36,000 and then $ 26,000 two years out. "This could mean the market doesn't anticipate that the portcongestion situation will be as big a problem next year," Alibra's head of research Rebecca Galanopoulos said. Port congestion has eased at most Chinese ports but thegiant Los Angeles/Long Beach container port still has a backlogof 222,0000 TEUs (twenty-foot equivalent unit), RBC analyst Michael Tran said. RBC's Time of Turnaround metric for the key U.S. port is at7.5 days compared with 3.5 days before the coronavirus pandemicand Tran doesn't expect normality to be restored until May 2022.

Purchasing managers say delivery times for manufacturers worldwide are deteriorating, with the global delivery time index down to 34.8 last month. Any number below 50 shows deliveries are taking longer and October's reading was the worst on record. Jefferies analysts expect shortages to intensify at the endof 2021 before demand shifts towards services. They said thatshould ensure supply chain bottlenecks begin to clear by thefirst quarter of 2022 as seasonal demand drops sharply andinventories are rebuilt. The purchasing mangers orders-to-inventories ratio in theeuro zone has been declining and some manufacturers are alreadybracing for shortages to turn into gluts. "Today's level of durable goods demand is unsustainablyhigh," said Paul Donovan, chief economist at UBS Global WealthManagement, who expects consumers to switch away from buying goods to buying more services. 3/CHIPS The outlook for semiconductors is murkier. Chip shortages will cut global light vehicle production by 5million this year, IHS Markit estimates, while some carmakerswarn that constraints could last through much of 2022.

Toyota executive Kazunari Kumakura, however, saidthe worst was over. Asset manager Capital Group says carmakers who cancelled orders when the pandemic hit were then caught out as spiralling chip demand from the gaming and cloud computing sectors gobbled up available semiconductors. "Since it takes about four months to manufacture auto chips,the situation is likely to correct itself by the end of thisyear," the asset manager wrote in August. While Malaysian chip suppliers predict it will take two tothree years for the market to normalise more broadly, the industry is also boosting production with Q3sales rising to $145 billion, the Semiconductor IndustryAssociation says.

China's growth slowdown may play against further commodityprice rises, with the Fitch agency noting that weaker propertymarkets are "resulting in a plunge in the price of iron ore". Beijing has also moved to tame energy prices after powershortages shuttered swathes of factories and mines. Those steps knocked coal futures off record highs and also hitmetal prices. Similarly, China's record paper pulp market rally early thisyear sent prices sky-rocketing globally, causing shortages ofpackaging materials. But since May, Shanghai-traded wood pulpfutures are down 30%. U.S. futures for lumber, a key housebuilding component, arealso 60% below springtime highs.

Vaccination rates against COVID-19 are creeping higher inkey manufacturing nations, especially chip suppliers such as Malaysia and Taiwan, making production disruptions less likely. UBS estimates vaccination rates in Vietnam, Taiwan andMalaysia should reach 80% by January 2022. Jack Janasiewicz, portfolio strategist at Natixis, isoptimistic about supply chains, as long as COVID-19 is tamed. "If we can't keep COVID under control, we're going to end uphaving the same issues again and again. They're going to keepcoming in waves," he said.