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    • The Future of… Supply Chains

When will bottlenecks end?

We analyse what companies are saying about supply-chain disruption.

How long can supply-chain disruptions continue? We’ve studied what global businesses are telling their investors and surveys to identify what issues are concerning businesses and the measures being taken to mitigate the problems of component scarcities, logistical blockages and labour shortages. Based on that, we set out three potential scenarios for when trade disruptions may start to ease.

For well over a year, backlogs, long lead times, product shortages and disrupted production have squeezed profits and pushed up prices. But to discover the issues most concerning companies, how firms are coping, and their future expectations, we have employed Natural Language Processing techniques to analyse data from earnings calls to shareholders, and looked at recent business surveys.

Supply shortages featured prominently in earning calls for industrials, tech and consumer-goods firms, with shipping disruptions of greatest concern to European and US companies.

US surveys identified raw-materials availability plus shipping and production delays as key causes of disruption, while Brexit-related factors featured in UK company earnings calls.

From company calls we have identified six risk-mitigation strategies being adopted. These are: maintaining strong relationships with suppliers; using freight alternatives such as air and rail; building stocks; bringing production closer to home; vertical integration, including transport; and moving production and distribution to avoid pandemic restrictions, factory shutdowns or congestion at ports.

In addition, digitisation, including internet-of-things solutions, should help strengthen supply chains in the longer term by providing real-time data and greater visibility of production and logistics processes.

But normalising supply chains will depend on how long COVID-19 restrictions remain and the risk to production from resurgences or new variants, plus global goods demand. The rebound in Asia’s industrial production could help ease supply disruptions but it will take time to clear backlogs.

Our three scenarios for when supply-chain disruptions might start to ease are:

  • After the Chinese Lunar New Year. There is usually a rush of orders and higher freight rates before mainland Chinese factories close for the holiday – which is early in 2022, from 1 to 15 February, so the rush could come sooner. However, two weeks’ respite may be insufficient to clear container backlogs at ports and fully disentangling supply chains could take months more.
  • In the second half of 2022. Disruptions could linger for many reasons, including container-shipping volumes remaining high, continued movement restrictions, or the virus forcing factories or ports to close again. Mainland China’s energy crisis could also limit production ahead of the Lunar New Year.
  • Not until the end of 2022. Existing or renewed pandemic restrictions would extend supply-chain and logistics issues. Demand for pandemic-related products could rebound – though less so than in 2020. US union negotiations with West Coast port operators could also cause further disruption and keep freight rates elevated.

The bulk of new vessels that will increase container capacity will not be delivered until 2023. So while it is reasonable to expect logistics pressures to ease after the Lunar New Year, disruptions may begin to abate only in late 2022, particularly if movement restrictions, shipping bottlenecks and shortages of key inputs persist.

And the longer supply chains remain disrupted, the longer high container-freight rates are likely to continue – pushing up costs for businesses and eating into margins.

 

First published 17th November 2021.

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Global Research

HSBC Global Research is an independent research house that provides research, advisories, and market analysis tools.

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