Published by Wanda Rich
Posted on January 18, 2022
By Eric Leve, the CIO of Bailard
Supply Chain Bottlenecks: What to Expect in 2022
The supply chain crisis, among other major (yet adjacent) roadblocks, was a major strain this past holiday season. While headlines on delayed gifts and toys may be behind us, 2022 still has emptier shelves with higher prices, both in-store and online. Consumers were in a goods-buying frenzy in 2021. Much of what we’ve been facing in goods shortages has been due primarily to historically strong demand for goods that overtaxed our systems to supply them.
My team at Bailard is approaching these supply chain issues from three major causes, in order of increasing importance: a shortage of semiconductor chips, higher oil and gas prices, and supply bottlenecks due to broader labor and transportation issues.
Impact of Chip Shortage
The need for semiconductors has been front and center, and this market need is one that will last a long time. As we move toward an “internet of things” (IoT) where everything from your toothbrush to your car key has a chip in it, the demand for chips is escalating, with no signs of stopping. Chip producers and their main customers (computer, cloud, phone manufacturers) have been demanding ever more advanced chips which produce high margins for the chip makers.
The chips necessary for more mundane uses are simpler, with lower profit margins. Manufacturers have put less effort into building fabrication plants for these or designing new ones. The development of new plants will be the critical step to solving this bottleneck, but that may occur over quarters, not months. In addition, as the US chooses to purchase less from China, a major source of chips goes away. This strain is closely tied to the pandemic, but unfortunately is another one that has followed us into the New Year.
Increasing Energy Costs
The power to run factories is another major input into the final cost of many goods. In the latter part of 2021, oil and gas prices reached multi-year highs. In the near-term, energy prices are likely to remain high as OPEC has shown great restraint this past year in controlling supply.
Low natural gas reserves in Europe and the lingering effects of Hurricane Ida in the US are exacerbating this issue. Production in the Gulf of Mexico was shut down for a time. “Frackers” have been reluctant to return to their historic levels of output due to their history of marginal profitability and increased scrutiny around their environmental impact. Constraining on frackers’ ability to bring capacity back quickly are ESG-related pressures leading fewer institutions and individuals to buy bonds from energy companies. This has caused wider credit spreads, which increases the breakeven cost to consider restarting wells.
2022 could be a year of heightened geopolitical risks. Consider Russian aggressions on the Ukrainian border, China’s increasingly explicit intention to reintegrate Taiwan into the Mainland, and the acceleration of Iran’s nuclear capabilities. Geopolitical risk very frequently translates into higher energy prices, and is another trend to keep an eye on.
The production of goods continues, but costs will be higher than usual. However, some companies are unable to sell these goods at a profit, which resulted in bare shelves for the holiday season.
Strains on the labor & transportation
There are serious strains on the labor market that continue to impact both the supply chain for goods as well as the ability to fill service jobs. While services require fewer inputs, a critical one is people, which continues to have major shortages. Meanwhile, the “Great Resignation” has been taking place, leading to an ongoing imbalance in the job market.
For global transportation, many older dockworkers and truck drivers chose to retire in the past year. Demographically, this would have happened with or without COVID; the US has more people reaching retirement age than are entering the workforce. Adding to this, the pandemic accelerated retirement dramatically. Moreover, many currently unemployed workers come from the services industries, especially food. It takes time to retrain people into other specialized jobs, such as getting goods from ship to dock to shop.
A wealth effect from government transfers and strong equity markets alongside ongoing COVID fears and care responsibilities keep the labor supply low. We expect continued wage inflation to draw more of these constituencies back into the labor force.
But there are promising signs. The Biden administration ordered the Los Angeles port to work around the clock (24/7) to undo the bottleneck there. Major retailers have been chartering much smaller boats that bring in about one-fifteenth as many containers as the largest cargo ships, but can be offloaded more easily. As COVID (hopefully) evens out this year, we expect some of these squeezes in the supply chain to release. Likely, consumers will shift to a greater focus on services (dining out, travel, etc) in 2022 once we get through the current Omicron surge. This may put additional pressure on the labor market, but will likely encourage supply chain pressures to decrease at the margin as we return to a more predictable pace of supply and demand.
By Eric Leve, the CIO of Bailard
Supply Chain Bottlenecks: What to Expect in 2022
The supply chain crisis, among other major (yet adjacent) roadblocks, was a major strain this past holiday season. While headlines on delayed gifts and toys may be behind us, 2022 still has emptier shelves with higher prices, both in-store and online. Consumers were in a goods-buying frenzy in 2021. Much of what we’ve been facing in goods shortages has been due primarily to historically strong demand for goods that overtaxed our systems to supply them.
My team at Bailard is approaching these supply chain issues from three major causes, in order of increasing importance: a shortage of semiconductor chips, higher oil and gas prices, and supply bottlenecks due to broader labor and transportation issues.
Impact of Chip Shortage
The need for semiconductors has been front and center, and this market need is one that will last a long time. As we move toward an “internet of things” (IoT) where everything from your toothbrush to your car key has a chip in it, the demand for chips is escalating, with no signs of stopping. Chip producers and their main customers (computer, cloud, phone manufacturers) have been demanding ever more advanced chips which produce high margins for the chip makers.
The chips necessary for more mundane uses are simpler, with lower profit margins. Manufacturers have put less effort into building fabrication plants for these or designing new ones. The development of new plants will be the critical step to solving this bottleneck, but that may occur over quarters, not months. In addition, as the US chooses to purchase less from China, a major source of chips goes away. This strain is closely tied to the pandemic, but unfortunately is another one that has followed us into the New Year.
Increasing Energy Costs
The power to run factories is another major input into the final cost of many goods. In the latter part of 2021, oil and gas prices reached multi-year highs. In the near-term, energy prices are likely to remain high as OPEC has shown great restraint this past year in controlling supply.
Low natural gas reserves in Europe and the lingering effects of Hurricane Ida in the US are exacerbating this issue. Production in the Gulf of Mexico was shut down for a time. “Frackers” have been reluctant to return to their historic levels of output due to their history of marginal profitability and increased scrutiny around their environmental impact. Constraining on frackers’ ability to bring capacity back quickly are ESG-related pressures leading fewer institutions and individuals to buy bonds from energy companies. This has caused wider credit spreads, which increases the breakeven cost to consider restarting wells.
2022 could be a year of heightened geopolitical risks. Consider Russian aggressions on the Ukrainian border, China’s increasingly explicit intention to reintegrate Taiwan into the Mainland, and the acceleration of Iran’s nuclear capabilities. Geopolitical risk very frequently translates into higher energy prices, and is another trend to keep an eye on.
The production of goods continues, but costs will be higher than usual. However, some companies are unable to sell these goods at a profit, which resulted in bare shelves for the holiday season.
Strains on the labor & transportation
There are serious strains on the labor market that continue to impact both the supply chain for goods as well as the ability to fill service jobs. While services require fewer inputs, a critical one is people, which continues to have major shortages. Meanwhile, the “Great Resignation” has been taking place, leading to an ongoing imbalance in the job market.
For global transportation, many older dockworkers and truck drivers chose to retire in the past year. Demographically, this would have happened with or without COVID; the US has more people reaching retirement age than are entering the workforce. Adding to this, the pandemic accelerated retirement dramatically. Moreover, many currently unemployed workers come from the services industries, especially food. It takes time to retrain people into other specialized jobs, such as getting goods from ship to dock to shop.
A wealth effect from government transfers and strong equity markets alongside ongoing COVID fears and care responsibilities keep the labor supply low. We expect continued wage inflation to draw more of these constituencies back into the labor force.
But there are promising signs. The Biden administration ordered the Los Angeles port to work around the clock (24/7) to undo the bottleneck there. Major retailers have been chartering much smaller boats that bring in about one-fifteenth as many containers as the largest cargo ships, but can be offloaded more easily. As COVID (hopefully) evens out this year, we expect some of these squeezes in the supply chain to release. Likely, consumers will shift to a greater focus on services (dining out, travel, etc) in 2022 once we get through the current Omicron surge. This may put additional pressure on the labor market, but will likely encourage supply chain pressures to decrease at the margin as we return to a more predictable pace of supply and demand.
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