Moody’s Analytics: Supply-chain disruptions to get worse before they get better

  • Economy
  • Monday, 08 Nov 2021

KUALA LUMPUR: Moody’s Analytics expects the current supply-chain disruptions, chip shortage, energy crisis, labour shortages are going to get worse before they get better.

In its analysis issued on Monday, it said efforts to diversify and localise the supply chain are underway, but it will take time for those efforts to bear fruit

“For the investor, this means that margins for companies that rely primarily on labour and raw materials that are in short supply will be squeezed. Conversely, companies that require less of those concrete inputs will likely outperform,” it said.

In the report prepared by senior economist at Moody’s Analytics, Tim Uy pointed out supply-chain disruptions, chip shortage, energy crisis, labor shortages, reflecting the times we live in.

“Everything is in short supply, and people all around the world are affected. On the one hand, it’s a sign of tremendous growth in demand that is making everything scarce, from everyday supplies like paper to more sophisticated products like semiconductor chips.

“On the other hand, it’s also indicative of the challenges that come with such unbridled growth, particularly the limits imposed by physical and logistical constraints. Risks and opportunities lie in these unique times. Those who are well-positioned are primed to capitalize on the opportunities while mitigating the risks,” he said.

Uy said the supply-chain disruptions that have hampered goods flow worldwide, caused delivery delays, and exacerbated the aforementioned shortages are going to get worse before they get better.

The analysis pointed out governments around the world are doing what they can to alleviate these disruptions.

The White House opened the Ports of Long Beach and Los Angeles 24/7 for 90 days in October to try to ease port congestion, but the extra shift hasn’t been taken up by too many operators, and the truck driver shortage makes it difficult to make headway in clearing the ports.

Facing a similar truck driver shortage, the U. has instituted a programme to hire 5,000 drivers from Europe to make up for the local shortfall and ease congestion at its own ports.

Uy highlighted that with supply-chain disruption at its highest level since the 2011 Fukushima earthquake, Japan has appointed a new Minister of Economic Security to sort out its supply-chain issues and build resilience.

In China, the country is facing a host of supply-chain issues amid an energy crisis. The country is heavily reliant on coal and recently had to liberalize the coal market to avoid further power outages in industrial plants nationwide.

Meanwhile, Singapore has opened more storage space and recently hired 2,500 more port workers (an increase of 20%) to expedite the movement of key goods and services through its ports.

Other countries are adopting similar measures. These are certainly welcome developments, but with an energy crunch fueling high transportation costs worldwide and the winter fast approaching, it is almost certain that the supply-chain and shortage issues will continue in the short term.

“Given the short-term challenges in overcoming these supply-chain bottlenecks, governments around the world have initiated programs to build long-term supply-chain resilience. Within the frameworks for supply-chain resilience, energy resilience is always a key pillar.

“Specialisation due to comparative advantage is optimal when there are no frictions or market failures. However, in the current environment where dislocations abound, specialisation results in concentration risk that is detrimental to all.

“More than 90% of the world’s leading-edge chip-making capacity depends on Taiwan. Droughts, earthquakes, and any major unforeseen event that impairs that capacity would send phone companies, advanced computing users, gaming console makers, and others into a tailspin.

“China is responsible for more than 70% of the world’s magnesium supply. Given the energy-intensive nature of magnesium production and its energy shortage, China has shut down magnesium plants to the chagrin of many manufacturers worldwide,” he said.

While the longer-term efforts to diversify and localise the supply chain are underway, it will take time for those efforts to bear fruit.

The world’s largest chip-maker, the Taiwan Semiconductor Manufacturing Co. (TSMC) has started building a foundry in Arizona. However, this won’t be operational until 2024.

Companies around the world are building ships to help ease the flow of goods across countries; these ships won’t be available until 2023.

“What is clear is that while the world will look markedly different after the current storm passes, it will be some time before the changes materialise.

“What makes the current difficulties so pernicious is the fact that one shortage begets another. For example, when chips go missing, car production stalls, and cars become scarce.

“Shocks to this input-output nature of global supply chains are amplified by bottlenecks along the distribution network. Moving goods that are already produced has become increasingly difficult.

“With scarcity in all kinds of key inputs, including labor, it is no surprise that the latest inflation reading in the U.S. has the rate of price increase at its highest in decades. Similar spikes in inflation are being observed worldwide—in Europe, Asia and Latin America.

“The scarcity of available means to ship goods has seen freight rates as measured by the World Container Index rise by more than 300% in the past year.

“ Energy and commodity prices remain elevated, despite efforts by governments around the world to increase supply. Higher transportation costs and commodity prices result in higher input prices,” he said in the report.

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