What is Going on with Commodities? – A Lot, Actually.
U.S. Businesses that rely on any number of inputs from domestic and foreign suppliers have all noticed two consistent trends in the first quarter of 2021: (1) underlying commodities and manufacturing inputs are taking significantly longer to acquire and; (2) when the commodities are available, they are considerably more expensive. The why behind these trends is a complex (and unprecedented) mix of factors which are worth taking a look at.
During Siberian winters, in the most extreme regions, truck engines are left to run 24-hours a day to prevent them seizing in -50° temperatures – restarting engines which have frozen is a nightmare endeavor. In extreme subzero temperatures, batteries die instantly, diesel turns to gel, and components seize. The same can be said of a frozen global economy and its supply chains, both of which froze over amid the 2020 pandemic, with all the commensurate component failures one would expect.
What we are witnessing now is a supply chain struggling to restart, along with raw materials producers and factories attempting to ramp-up production after a very long winter. There are compounding problems however. Laid-off workers who rearranged their lives around the new normal of 2020 are not flooding back to the workplace as expected, leading to a massive labor shortage all along the supply chain. Tariffs imposed by the previous US administration on Chinese imports as well as EU commodities, such as steel and aluminum, are also being blamed for lagging capacity.
There is perhaps no better example for the unique confluence of factors leading to the supply and production crunch in the US than the lumber industry, where prices have tripled in the past 12 months. Due to lumber shortages and increasing costs, the average US single-family home now costs $36,000 more to build owing to the price of materials. The lumber industry is suffering from labor shortages, a struggle to revamp production to not only pre-pandemic levels, but pre-2007/2008 financial crises levels when new home building declined precipitously. Since 2007/2008, US mills have been reluctant to add capacity for fear of being stuck with unsellable stock - reversing these positions is not an overnight endeavor. In addition, the tiny Mountain Pine Beetle has wreaked havoc on Canadian pine forests, which had accounted for a significant proportion of US imports. Adding to these woes, a reduction in The Annual Allowable Cut (AAC) in British Columbia has forced the US to import more of its lumber supply from markets further afield, such as Germany and Sweden.
Expect similar scenarios across many sectors. The US auto industry is expected to build 1.3 million fewer cars in 2021 as a result of a simple microchip shortage, as just one example. The US is attempting to rapidly add to domestic microchip production to alleviate such problems – but as with any sector, such realignments can require significant time to net results.
Shipping continues to experience its own ripple effects from the Ever Given fiasco in the Suez Canal earlier this year, in which one of Ever Given's cargo ships was lodged in the canal. Despite freeing the canal, supply chain analysts are warning of container shortages, ship-bunching in ports worsening congestion and therefore increased delivery delays – all of which are expected to take months to resolve.
To be clear, the reemergence of significant demand is a great sign for the global economy following the pandemic, however, businesses should expect unique growing pains throughout the year – and plan to capitalize on some likely unique opportunities.
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