Supply Chain Disruption - Why The Bottlenecks?

By Don McArthur, CFA®
September 30, 2021

WE ARE NOT USED TO WAITING FOR ANYTHING IN OUR ECONOMY…WHAT HAPPENED TO ON-TIME DELIVERY OF THE THINGS WE TAKE FOR GRANTED?
Bottlenecks in shipping, trucking and storage amid strong demand are leading to supply chain issues across many industries. I think we all have stories about waiting on something we wanted to buy or going to a store without much inventory.

Supply Chain
CAN YOU SUMMARIZE WHAT CAUSED THE SUPPLY CHAIN ISSUES?
Recall in early 2020 that Covid hit China first and they had a hard clamp down on nearly any activity, shutting factories. This caused an initial decrease in supply of goods shipped to the world. When Covid hit the United States, the government approved fiscal stimulus, plugging the hole in the economy and putting cash in consumers’ pockets. With a limited ability to spend on services, Americans shifted their wallets to goods. Consumers spent extra stimulus money on electronics to work/school from home, home improvements, and everything to keep them entertained, from exercise equipment to outdoor activities. Initial public health restrictions on communities across the U.S. limited mobility, causing logistic bottlenecks to occur with a shortage of drivers and other workers. This continued to get worse as the pandemic spread. As the economy re-opened, inventories were low, but consumer demand remained robust due to additional stimulus. Worker shortages began to develop and haven’t eased due to several factors. To exacerbate the situation, China then had a return of Covid cases with the Delta variant and shut down ports and some factories. This amplified previous bottlenecks and logistical mismatches of shipping containers and production.

In short, demand remains strong and is ahead of supply at a time when inventories are low.

CAN YOU POINT TO SOME EXAMPLES OF SUPPLY CHAIN ISSUES?
There are several areas, but one is the number of container ships trying to unload goods at U.S. ports. For instance, the port of Long Beach/Los Angeles currently has over 60 loaded ships waiting to get a spot to get unloaded at the port. In normal times there may be one waiting. With rising Covid cases due to the spread of the Delta variant, it’s hard to get employees to work the docks, trains, and trucks to move the goods through the country. Currently, they are unloading around 35 ships a week, down from 45 in June. The cost of moving a container from China to LA skyrocketed from $2,000-3,000 to over $12,000. Another example of supply chain issues, largely due to rising Covid cases, is the shut down of many factories in Vietnam that make softline goods, such as shoes, clothes, etc.

My understanding is that it’s common for goods to have up to two-month delays getting to the United States. Finally, hurricane Ida did some major damage to refineries in the Gulf Coast, leading to a reduction in capacity for many chemicals that are inputs to many products from paint to plastics to foam.

WHAT ELSE IS CAUSING THE PROBLEMS?
It’s been widely reported that shortages of semiconductors are causing auto production to be curtailed. Vehicle production is currently near a 13 million-unit annual run rate when it should be 17-18 million. With more sensors and connectivity in vehicles, they need an increasing amount of semiconductor chips to produce a car. These chips are also needed in the production of goods in a variety of industries, which further aggravates the supply shortage issue. It’s not simply a matter of upping production as semiconductors take long lead times to produce. Another overriding issue is a shortage of drivers and warehouse workers. Clearly, trucking companies are struggling to find drivers, further extending the issues with ports and other areas. Additionally, Americans are used to getting everything delivered to their doors in a matter of days and parcel companies are seeing rising costs from attracting workers. We also have a large system of warehouses and distribution facilities that need to be staffed in a market with millions of open jobs that remain unfilled.

HOW DOES THIS IMPACT COMPANIES?
Companies across a variety of industries are discussing supply chain issues. Typically, these issues cause higher costs, negatively impacting profit margins. Companies can pass through costs through higher prices to their customers. However, it often takes some time for price increases to flow through their income statements, hurting near-term profitability. In addition to higher costs, many companies are experiencing supply chain issues and will see a negative impact to revenue as they are unable to secure goods to sell to their customers. Note that we are approaching the holiday season and two-month delays may make shopping difficult.

AS A MANAGER OF SOME EQUITY STRATEGIES, HOW DOES ALL THIS MATTER TO THE MARKETS?
Stocks have done well this year as earnings expectations for companies increased throughout 2021. As we hear companies report third-quarter earnings and provide forward guidance, we expect more caution regarding margin pressure from supply chain issues and higher wages. Going forward we believe this episode of higher inflation from companies raising prices to cover higher costs lasts for longer than many may expect due to the need to rebuild inventories and higher wage levels. We’re not sure when the supply chain issues will be alleviated, but they are likely to persist into the first and second quarters of 2022. My advice? Get your holiday shopping done early!

Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of October 5, 2021.
This summary is intended to provide general information only, may be of value to the reader and audience, and any opinions expressed herein are subject to change.
This material is not a recommendation of any particular security or investment strategy, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk.
Commerce does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situation.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed, and is subject to change rapidly as additional information regarding the conditions which impact the represented subject matter may change.
Commerce Trust Company is a division of Commerce Bank.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

RELATED ARTICLES

ABOUT THE AUTHOR

Don McArthur
Don McArthur, CFA® Senior Vice President, Senior Investment Strategist and Director of Equity Research Commerce Trust Company 
Don serves as a Senior Vice President & Director of Equity Research with Commerce Trust Company in Kansas City and manages the Fundamental S&P 500 Equity Strategy. Don joined Commerce in 2006.

Don earned his accounting degree and business administration degree with economics from the University of Kansas in 1995. He also earned his Master in Business Administration degree from the University of Missouri-Kansas City in 2000 and holds the Chartered Financial Analyst® designation.