Supply chains for many commodities and products are more out of whack today than they were a year ago. This is surprising to those of us who thought that over the course of a year of pandemic life, things would be more sorted out. But here we are today, and a number of items are now harder to get, or at least more expensive. Why?
There are different reasons for different shortages, but a common answer is that COVID-19 and its effects have pushed supply chains past the limits of their flexibility. While the first shortages we felt last spring (toilet paper, hand sanitizer, KN95 masks) were the result of pantry stocking and panic-consumption, many of the shortages of today are a result of lasting imbalances in supply and demand, changing consumer trends, and the fact that it can take years for certain industries to add new capacity.
There are numerous examples. Take, for instance, cardboard. The pandemic has resulted in a boom in ecommerce – according to Internet Retailer, ecommerce sales jumped 43% in 2020, nearly three times the average growth rate of the prior seven years. More ecommerce requires more cardboard boxes for shipping, and the corrugated industry has struggled to keep up. Mills have been running at full capacity, but it takes time to make new boxes. As a result, cardboard prices have surged, and some businesses have recently been forced to switch to plastic packaging. (More on plastics in a bit.)
Another example is semiconductors. At the start of the pandemic, consumer spending plummeted – auto sales were almost cut in half from last February to last April. At the same time, however, sales of electronics boomed as people built out home offices and bought new devices for their children’s remote schooling. Consequently, many semiconductor manufacturers switched from making chips for cars to making chips for electronics. When auto sales recovered, not only was there more demand for semiconductors in total, but less of the industry was making chips for auto manufacturing. Unfortunately, semiconductor factories are incredibly complex, and can take billions of dollars and years to build. A number of auto companies and electronics companies have felt the pinch, including Volkswagen, Fiat Chrysler, Nissan, and Samsung. General Motors, Ford, Honda and Toyota have been forced to cut production due to the shortage of semiconductors.
Another contributing reason for surging prices and shortages in a number of products and materials is the Federal Reserve’s reaction to the pandemic: cutting interest rates to nearly zero. Low interest rates has sparked a surge in real estate prices, home remodeling, and home building. According to the Wall Street Journal, lumber prices have more than doubled and have never been higher, and prices for granite, insulation, concrete blocks and bricks have all hit record highs. As with cardboard and semiconductors, home building materials suppliers just can’t catch up.
Global shipping hasn’t caught up yet either, contributing to issues across many other supply chains. In addition to the shortage of shipping containers in Asia that my colleague Marshall Schleifman wrote about in this space earlier this month, a surge of imports has resulted in a traffic jam at the California ports of Long Beach and Los Angeles, resulting in dozens of colossal cargo ships waiting at anchor until space opens, delaying their deliveries.
But changing consumption patterns aren’t the only culprit in this mess; mother nature hasn’t been kind either. Last month’s cold snap and storms in Texas knocked out power to numerous chemical plants and factories in the region, resulting in a doubling (or more) in the prices of the plastics polyethylene, polypropylene, and PVC.
Supply chain issues have already lasted much longer than some of us initially anticipated they would at the start of the pandemic and threaten to last still longer. But try to take solace in the big picture. Yes, the supply chain is going to be a mess for longer than expected, but COVID-19 vaccines were developed and made available last year faster than any vaccine in history. I’ll take that tradeoff every day of the week. I just hope the recent shortage of syringes doesn’t prevent me from getting my shots.
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