Why the Great Supply Chain Disruption Will Continue This Year: IHS Markit

Date: Friday, January 21, 2022
Source: Sourcing Journal

The global supply chain system 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 analytics firm IHS Markit. The report, “The Great Supply Chain Disruption: Why it Continues in 2022,” said while Covid-19 has been a significant factor in driving the disruptions–with the current Omicron variant creating new uncertainties–it’s not the only factor. That’s because substantial capacity, logistical and labor challenges also exist beyond the pandemic.

“What is unfolding in supply chains globally is not only disruptive, it is also historic,” Daniel Yergin, vice chairman of IHS Markit and editor of the report, said. “Moreover, the intense new focus on inflation adds to the urgency to understand what is ahead for supply chains in 2022.”

Peter Tirschwell, vice president of maritime and trade at IHS Markit and a co-editor of the report, noted that each industry is grappling with its own set of challenges and circumstances that, combined, make up the “Great Supply Chain Disruption.” Tirschwell said only by taking an integrated perspective can the problem by fully understood and “why untangling it is going to take longer than anyone would like.”

In manufacturing, delivery times lengthened significantly in 2021 and January 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, according to 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,” Williamson wrote in the report. “Going into 2022, companies reporting that output was constrained by shortages was running 3.5 times the long-run average.”

He wrote that as a result of these pressures, IHS has been shifting its global economic growth forecast down and its inflation forecast up. The longer the pandemic keeps affecting supply chains, the weaker the growth outlook, he said, noting that IHS’s mid-2021 forecast of 4.5 percent global gross domestic product (GDP) growth for 2022 has dipped to 4.2 percent, 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,” Williamson wrote. “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.”

Regarding container shipping, Tirschwell stated that 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.

“As 2022 begins, the situation is not improving,” he said. “We would like to be able say that we see signs of the log jam breaking, but frankly, we don’t.

A recurring problem since the pandemic is that the system does not have time to recover before the next shock hits,” Tirschwell said.

Tirschwell noted that during the 2020 lockdown, when consumer spending in the United States swung wildly from services to home improvement, and from brick and mortar to e-commerce, the container supply chain was placed under unprecedented strain. E-commerce distribution center capacity was “nowhere near prepared,” and “remains unprepared today,” he said.

In addition, stimulus programs enhanced spending power, resulting in import container volumes in 2021 versus 2019 rising nearly 20 percent.

“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,” Tirschwell wrote. “The result has been to take significant capacity off the table. Estimates are that 10 percent to 15 percent of capacity has been removed due to congestion.”

Also effecting the industry is energy. Jim Burkhard, vice president of oil markets, energy and mobility at IHS Markit, noted that 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,” Burkhard wrote.

In addition, this year businesses will be forced to pay more for labor, 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, according to John Anton, director of price and purchasing service at IHS Markit.

“Labor supply issues are hitting as demand for goods remains elevated,” Anton wrote. “In the United States, consumer spending on goods was up 17 percent in the fourth quarter of 2021 compared with the fourth quarter of 2019. Spending on durables was up 23 percent. Even in normal conditions, employers would have to hire a lot more workers to meet demand, and with tight labor market conditions employers are finding they need to pay more to attract and retain workers.”

He said another key issue is inflation, with rising inflation rates in the Americas and Europe adding 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.”


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