Jul 5, 2021

What’s Causing the Global Supply Crunch?

Supplychain
Logistics
Supplychainriskmanagement
Procurement
He Jun, Director of China Macr...
6 min
Empty Shelf
Global shortages are affecting everything from copper to coffee - but why are the shortfalls so acute and so widespread?

As the global economy gradually recovers from the impact of COVID-19 pandemic, worldwide supply crunch is intensifying, spreading not only from one country to another, but also from one industry to another.

A year ago, when the pandemic continued to spread, economies around the world were severely hit and there was panic buying among consumers. Today, it is companies that are trying to go on a stockpiling, buying more raw materials than they need to keep up with rapidly recovering demand. The panic buying is fuelling more shortages of raw materials, including copper, iron ore, steel, corn, coffee, wheat, soybeans, wood, semiconductors, plastics, cardboard, etc. As a result, inventories of seemingly every raw material around the world are running low. “You name it, and we have a shortage on it,” Tom Linebarger, chairman and chief executive of engine and generator manufacturer Cummins Inc., said earlier, and he noted that his clients are “trying to get everything they can because they see high demand”.

Supply shortages have driven prices up significantly, with the impact of rising prices for some key raw materials being significant. The prices of various industrial raw materials such as crude oil, plastics, and chemicals are rising. Some of the impacts of higher raw material prices have already begun to be reflected in consumer goods. Reynolds Consumer Products Inc., the maker of the namesake aluminium foil and Hefty trash bags, is planning another round of price hike, and this will be the third for the increase this year alone. Food prices are also climbing. The price of palm oil, the world's most consumed edible oil, has risen more than 135% over the past year to record levels; soybeans have topped USD 16 a bushel for the first time since 2012; corn futures prices have touched an eight-year high, and wheat futures prices have risen to the 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 prices for raw materials. Some knitting enterprises in Dongguan, Guangdong, said that affected by the pandemic, about 40% of the orders have come back to China from countries such as India and Southeast Asian countries, while the factory utilisation rate has increased by about 30% to 40%, and now it has reached 100%. In Jiangyin, Jiangsu, a bedsheet enterprise adjusted its production capacity to accommodate a USD 20 million order from Southeast Asia. Increased demand from the textile industry has led to tight supplies of raw materials. In Wujiang, Jiangsu, where polyester filament yarn is the most in demand, the shortage of raw materials this year has been unexpected, especially in the current off-season, when there is not much stock. In Suzhou, also in Jiangsu, the export of polyester filament yarn increased by nearly 60% from January to April, while the price increased by 40% to 60%. Compared with the same period last year, the price of filament yarn increased by RMB 2000-3000/ton.

Remarkably, this hoarding frenzy is pushing global supply chains to the brink of collapse. Inventory shortages, transportation bottlenecks, and price increases are nearing critical levels, raising concerns that strong global growth could fuel inflation. The supply disruptions in the past are simply incomparable compared to the severe inventory crunch of 2021. Industry insiders predict that both large and small enterprises will be affected by this supply shortage.

Why are current supply shortages so acute? 

Researchers at ANBOUND believe that instead of having one single factor, there are multiple reasons for the emergence of complex systemic problems.

First of all, there is the recovery in demand as the pandemic is brought under control. This year, as vaccination rollout efforts have brought the pandemic significantly under control in the United States and some European countries, the economy has begun to show significant momentum for recovery. This trend prompted a near-simultaneous recovery in most markets around the world. The collective recovery of global markets has led to a near-simultaneous increase in demand, exacerbating the mismatch between supply and demand. In the case of commodity futures, the capital was collectively bullish on commodities under such expectations, significantly driving up the prices of commodities (mostly upstream commodities) and spreading to midstream and downstream commodities. It should be noted in particular that the surge in demand for certain specific commodities under the pandemic has also exacerbated the supply-demand mismatch in some industrial chains. For example, the increase in the need of remote, online working and studying has increased the demand for all kinds of electronic products, leading to a surge in global demand for semiconductor chips, which affects several chip-requiring industries.

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 wider supply crunch. As ANBOUND previously pointed out, the spread of the pandemic has dealt multiple blows to global supply chains. During the pandemic, China, as the "world's factory", was affected by the pandemic and its production side was disrupted. Then, the demand side of developed countries was suppressed by the impact of the pandemic. This is followed by the fact that the malfunctioning of the global supply chain system has exacerbated global supply distortions. To cite an example, the severe shortage of containers due to disruption of the supply chain has exacerbated the global supply distortions.

In addition, enterprises began to collectively increase their inventories, leading to the increase of 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 save costs and improve efficiency, many enterprises advocated zero-inventory production and tried to reduce the inventory in the production link, thereby reducing the capital occupation. However, the smooth operation of zero inventory production depends on the efficient global supply chain system. Once a problem occurs in the global supply chain system, it can lead to chaos in the whole supply chain system. The 2011 earthquake in Tōhoku, Japan has caused the shutdown of some key auto parts plants, which once led to the global auto supply chain being affected. 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 commodities, resulting in the artificial disruption of part of the industrial chain and supply chain. For example, the U.S.-driven crackdown on chip supply to Chinese enterprises and related sanctions have seriously disrupted the global semiconductor industry chain.

How long will the supply crunch last? 

Overall, the global supply crunch is due to a variety of reasons, including increased demand from the post-pandemic economic recovery, distortions in global supply chains caused by the pandemic, collective stockpiling by enterprises around the world, and geopolitical disruptions. However, this does not represent a significant expansion of aggregate global demand, but rather a distortion of the existing system as it is disrupted and broken. Judging from the current situation, this tight supply situation will last for a long time, leading to the price rise of raw materials and components. Therefore, both enterprises and governments need to be prepared for this scenario in the medium- and long-term.

Mr. He Jun is Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.

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Jun 29, 2021

Pentagon Faces Systemic Supply Chain Complications

businesschief
supplychain
Pentagon
Technology
Elise Leise
3 min
The American military can no longer rely on single-sourcing for its defence equipment, begging the question: how can it fix its broken supply chain?

The last time the States went head-to-head with a global superpower, the opponent was Russia, and the conflict was the Cold War. Since then, the nation has been engulfed in a series of low-intensity wars in Iraq and Afghanistan—both of which were intermittent enough to use contractors when planes, tanks, and ships ended up out of commission. Yet now, as tensions rise around the world—especially between the United States and China—the US Department of Defense must face the diminishing resilience of its supply chain. 

A lack of spare parts, supplier scarcity, and sole-sourcing practices have brought the Pentagon to this point. Issues run rampant beneath the surface—and this is just in peacetime. If the world explodes into conflict in the near future, it’s hard to imagine that the United States could long remain in a drawn-out, intense war with other superpowers. So what’s the issue? 

 

Why Single-Source? 

 

Before COVID-19, single-sourcing was the standard in many military operations. But when the military relies on a single supplier for any part, they make themselves vulnerable to disruptions in global supply chains. Why do they do it, then? For the most part, aeroplane and tank materials are highly complex, with no margin for error. Fundamentally, military procurement leaders rely on manufacturers that they trust. 

In addition, dominant manufacturers can lock down market prices. In the aeroplane industry, for example, the components are so expensive and complex that there’s a high barrier to marketplace entry—and even if upstart firms do manage to do so, they’re often crushed by low prices from the competition. In the short term, it makes sense for the military to buy parts from the least costly, most trustworthy manufacturers. But what happens when those vendors fail? 

 

What’s the Supply Chain’s Current State?

 

Frequent budget cuts and two decades of on-and-off fighting in the Middle East have left the Pentagon’s supply chain with no fuel left in the tank. According to the 2019 Industrial Capabilities Report, the US military overly relies on foreign suppliers, lacks aluminium and magnesium sand castings, and, as a critical example of sole-sourcing, only has two suppliers of solid-rocket motors. For a military that needs to be ready to act without hesitation, this represents a real need for rapid change. 

 

What Steps Can the Pentagon Take? 

 

Though the current situation looks grim, the United States has taken recent steps to ramp up its domestic and foreign capabilities. Joe Biden has signed numerous executive orders into law to strengthen American supply chains, invest in new technologies, and support American manufacturers. 

Yet according to Andrew Gonzalez, senior associate at One Defense, and Stephen Rodriguez, senior advisor at the Atlantic Council, if the Pentagon wants to recover, it must act now

They make three strong recommendations. First, the Pentagon should write contracts that have surge requirements—essentially stating that manufacturers have to rapidly ramp up their production capacity should there be a war. Second, it should develop diverse supplier networks, refusing to put all its eggs in one basket. Third, it should press suppliers to use emerging technologies to shorten lengthy R&D timeframes. 

At the end of the day, what’s needed is a strong policy incentive for surge capacity. The American military must know that if it ever engages in a drawn-out, intense war, it can rely on its suppliers to meet demand. After all, this is peacetime. Grounded tanks, aeroplanes, and ships don’t cost us lives. But what happens if our supply chain is still weak when we go to war?

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