The highly synchronised global supply chain system developed over the past 30 years is under strain like never before and resolving the disruption will be less a “sprint” and more of a “marathon” that runs well into 2022, according to a new report by IHS Markit.
The report, entitled “The Great Supply Chain Disruption: Why it Continues in 2022” provides a comprehensive review and forward-looking perspectives from leading IHS Markit experts across a broad spectrum of the global economy
“What is unfolding in supply chains globally is not only disruptive, it is also historic,” says Daniel Yergin, vice-chairman of IHS Markit and editor of the report. “Moreover, the intense new focus on inflation adds to the urgency to understand what is ahead for supply chains in 2022.”
While Covid-19 has been a significant factor in driving the disruptions – with the current Omicron variant creating new uncertainties – it is not the only factor, the report says. Substantial capacity, logistical and labor challenges also exist beyond the pandemic.
“Each industry is grappling with its own set of challenges and circumstances that, combined, make up the great supply chain disruption,” says Peter Tirschwell, vice-president: maritime and trade at IHS Markit and co-editor of the report. “Only by taking an integrated perspective can one truly understand the problem, and why untangling it is going to take longer than anyone would like.”
Delivery times lengthened significantly in 2021, and January 2022 began with many companies reporting severely constrained output, input costs rising faster than at any point in the decade prior to the pandemic, and Omicron causing fresh uncertainty, writes Chris Williamson, chief business economist at IHS Markit.
“IHS Markit has been conducting surveys of purchasing managers for 30 years, and we have not seen supplier delivery times lengthen to anything similar to the degree witnessed in 2021,” says Williamson. “Going into 2022, companies reporting that output was constrained by shortages was running 3,5-times the long-run average.
“As a result of these pressures, we have been nudging our global economic growth forecast down and our inflation forecast up. The longer the pandemic keeps affecting supply chains, the weaker the growth outlook. Back in mid-2021 we were forecasting 4,5% global GDP growth for 2022. That’s now down to 4,2%, largely because inflation has become more pervasive than anticipated.
“Meanwhile, our business outlook survey for 2022 of 12 000 companies showed profit expectations to be the weakest in the pandemic so far. There are widespread fears about price hikes, supply shortages, customer resistance to high prices and an inability to pass costs on to customers after a year of sharply rising prices, damaging profit margins.”
Port congestion continues to significantly slow the circulatory movement of ships, containers and other transport assets including chassis – removing capacity, lengthening transit times and forcing shipping rates much higher, writes Peter Tirschwell, vice-president: maritime and trade at IHS Markit.
“As 2022 begins, the situation is not improving. We would like to be able say that we see signs of the log jam breaking. But frankly, we don’t,” says Tirschwell. “A recurring problem since the pandemic is that the system does not have time to recover before the next shock hits.
“During the 2020 lockdown, when consumer spending in the US swung wildly from services – travel, leisure and entertainment – to home improvement, and from brick and mortar to e-commerce, the container supply chain was placed under unprecedented strain.
E-commerce requires distribution centres, and distribution center capacity was nowhere near prepared. It remains unprepared today. Five to seven years of e-commerce growth has been compressed into a single year. Moreover, stimulus programs enhanced spending power. As a result, for example, US import container volumes in 2021 versus 2019 were up nearly 20% – a far higher rate of growth than during the pre-Covid decade.
“Exacerbating the crisis in container supply chains is capacity. Ocean carriers and freight forwarders report that there are enough ships and containers to handle even the elevated demand. The problem is that so much of that capacity is idled or circulating more slowly. The result has been to take significant capacity off the table. Estimates are that 10-15% of capacity has been removed due to congestion.”
Global semiconductor and electrical steel shortages will continue into 2022, forcing automakers to limit production and pivot away from longtime assumptions such as lean inventories and just-in-time manufacturing, Matteo Fini, vice-president: automotive supply chain and technology at IHS Markit writes.
“The supply chain issues in automotive are unprecedented. If the question is whether this gets fixed right away, the answer is no,” says Fini. “The recent experience of these input shortages is forcing automakers to go against everything they have done in the past 30 years when it comes to supply chain management.
“This means going against the famous ‘Toyota Way’, which was predicated upon lean supply and having as little inventory as possible. Carmakers are now considering taking on inventory for certain parts because, in relative terms, it costs peanuts to have that inventory compared with having a line stoppage, which can cost upwards of $50-million per week to an original equipment manufacturer.”
Compared with a year ago, crude oil, coal and natural gas prices are substantially higher, all owing to strong demand that has come with economic rebound. These rising prices are feeding into inflation and geopolitical risks that could cause further disruptions, which hangs over the market, writes Jim Burkhard, vice-president: oil markets, energy and mobility at IHS Markit.
“The reason for the spot gas increases in Europe and Asia is pretty straightforward—we’ve had a strong demand push,” says Burkhard. “Third quarter 2021 demand was up about 9% globally. That’s been scraping up against production capacity, which means supply is relatively inflexible in the short term. Coal maxed out, which pushed up gas demand, and the only way to ration that supply is to see these really unanchored gas prices we’ve seen recently.
“Oil hasn’t gone up nearly as much as liquefied natural gas, but it’s still up substantially – one reason is the strong demand recovery in 2021 as we saw in so many other sectors. We’re not bumping up against spare capacity in oil as we have against LNG and coal.
“However, there is less spare capacity of crude oil production today- about 3-million barrels per day – compared with a year ago. If there is not significant supply growth from the US and other sources outside of the OPEC+ agreement in 2022, then spare capacity could shrink further, which will make the oil market more crisis prone.”
Major impact on agricultural production seen from Covid-driven labor shortages in labor-intensive processes such as meat packing, as well as disruptions in containerised transportation, are driving up costs and, as in other sectors, leading to reconsideration of lean inventories and a greater emphasis on automation, Tom Scott, vice-president: agribusiness consulting at IHS Markit writes.
“The increasing tightness in labour supply means that the negotiating power is shifting even more from employers to employees,” says Scott. “As a result, if you have not been looking at automation as a solution to labor cost and availability before the pandemic, you’re going to have to look at it coming out of the pandemic.
“Another consequence is that a generation of business leaders have focused on building ‘just-in-time’ supply chains that by their nature have kept inventories minimal. That is not going to be reversed 100%, but we’re definitely encouraging our clients to think about inventory levels – and more broadly their supply chains – and what they need in terms of buffer stocks and other forms of resiliency to guard against future supply chain disruptions.”
Labour and Materials
Businesses in 2022 will be forced to pay more for labur, especially to service workers who were some of the lowest paid workers, most in danger of getting Covid and have been most hesitant to return come to work, writes John Anton, director: price and purchasing service at IHS Markit.
“The bottom line is if you are a business, you are going to pay more for labour in 2022. It’s that simple,” says Anton. “Labour supply issues are hitting as demand for goods remains elevated.
“In the US, consumer spending on goods was up 17% in the fourth quarter of 2021 compared with the fourth quarter of 2019. Spending on durables was up 23%. Even in normal conditions employers would have to hire a lot more workers to meet demand, and with tight labour market conditions employers are finding they need to pay more to attract and retain workers.
“Another thing to consider in 2022 is inflation. Higher inflation rates are no longer transitory, nor are they limited to the US. Rising inflation rates in the Americas and Europe will add to wage pressure. Workers are looking for an increased base to keep up with inflation, which can lead to a self-fulfilling spiral on the way up. If workers anticipate inflation, they ask for raises based on it, which makes inflation worse.”
Political decisions will play a much more significant role in supply chains in 2022 as governments seek to control strategic resources and secure competitive advantage, Nathalie Wlodarczyk, vice-president: risk intelligence solutions at IHS Markit writes.
“There are two key strands to the longer-term challenges we see to supply chain resilience – both ultimately anchored in more systemic shifts,” says Wlodarczyk. “On the one hand, there is geopolitical risk impacting supply chains – this is really just a small slice of the challenges and disruption we see today, which is primarily about blowback from the pandemic and logistical challenges.
“But we expect to see political decisions playing a much more significant role for supply chains going forward, particularly as governments make decisions about strategic resources and how to secure their competitive advantage.
“Strategic minerals and components critical to energy transition are likely to be the key focus, but also a broader desire to secure advantageous trade relationships more generally to support domestic resilience. On the other hand, there is increased focus on climate risk and ESG responsibility more broadly.
“There are two dimensions: direct disruption to supply chains from climate stress and social and governance instability; and regulatory, shareholder and consumer pressure to improve sustainability credentials and protect corporate reputations.”