When people want to describe 2020, they use words like “virus,” “lockdowns,” and “vaccines.” While it’s still too early in the year to characterize 2021, so far “shortages” appears to be the buzzword. And if analysts are right, it will stay this way.
Put this in the category of who wudda thunk. Back in the good old days, such as 2019, there were no shortages of anything. If you wanted something for yourself you simply went to your favorite store or ordered it online; for the most part there were no problems or delays. And if you needed something for your business, it could be delivered within a day or two - and sometimes in just a matter of hours. Businesses were humming along, the supply chain was working fine, and everyone was happy.
Then the pandemic broke out and shortages started to appear. At first, those were limited to things like toilet paper and hand sanitizer. But soon afterward, meat was in short supply in some areas because workers at processing plants were sick and couldn’t come to work, or because they stayed away from the job because they were afraid of getting infected.
Although no one expected shortages to linger into 2021, they have. In fact, they are far worse now than at any time in 2020, and are causing serious disruptions in many businesses and industries in the US and around the world. Many millions of people are suffering and losing money from the impact they are making. And even their health is being affected as well.
Shortages of medicines have become so widespread that the FDA has compiled a list of 120 drugs that are becoming increasingly difficult to get; anyone going to its database will be able to get an update about why a particular drug is in short supply, when new supplies may become available, and even whether a particular medication might have to be discontinued.
But shortages are even more pronounced in the building and construction industries. “Builders are delaying starting new construction projects because of sharp increases in the costs for lumber and other (materials),” said Mike Fratantoni, senior vice president and chief economist with the Mortgage Bankers Association. He added that supply shortages of appliances also are deterring new home construction.
Shortages of essential building supplies in Canada have become so problematic that home building is months behind schedule. They are also causing skyrocketing prices of some basic building materials. Higher lumber prices, for example, added approximately $36,000 to the cost of a new house in April. In addition, the cost of certain pipes, insulation, and related items are said to be “exploding.” One builder said that this situation is “getting worse every day” and that “the whole supply chain is out of whack.” Sue Wastell, president of Wastell Homes in Canada, said that “Literally every day we’re finding out something else is not arriving when it was scheduled to. … We’ve never seen anything like this.”
Cashing In The Chips
The worsening shortage of computer chips is probably the most worrisome aspect and it’s already curtailing manufacturing and affecting company profits and employees’ incomes. This is becoming a major problem because virtually every product either uses computer chips, or its manufacture is directly, or at least indirectly, dependent on them. These days, even items that seemingly have nothing to do with technology, like toothbrushes, do in fact need them.
According to CNN, shortages of chips “are going from bad to worse.” Bloomberg echoed this view, noting that “Shortages in the semiconductor industry... are getting even worse, complicating the global economy’s recovery from the coronavirus pandemic.”
Financial writer and author Michael Snyder reported that “According to Goldman Sachs, 169 US industries embed semiconductors into their products. The bank is forecasting a 20% average shortfall of computer chips among affected industries, with some of the components used to make chips expected to be in short supply until at least this fall and possibly into 2022.” At the same time, other analysts and industry experts believe this problem will last into 2023 or even longer, among them chip maker Intel’s CEO Pat Gelsinger and the Taiwan Semiconductor Manufacturing, a giant player in the industry.
Tesla navigated around this difficulty in the first quarter of this year, but other automakers were not as fortunate and their sales were down 10%. Ford in particular was hit hard, and its production in the second quarter is expected to be down by as much as 50%. Several of its plants have already announced significant layoffs and many more could follow unless the situation stabilizes quickly.
Ford recently warned that its auto production will be down by 1.1 million vehicles, which will slice profits by $2.5 billion. Bloomberg reported that some automakers may have to leave out high-end features from their cars. Meanwhile, prices of both new and used cars are going through the roof. Shortages of chips are becoming worse, slowing the global economic recovery.
Far And Wide
The shortage of semiconductors extends to industries far beyond automakers and consumer electronics. Copper, iron ore, steel, corn, coffee, wheat, soybeans, lumber, and plastic are among the other areas affected. So are diapers, cheese, seafood, olive oil, corn, oxygen, gasoline - even chicken. In fact, the third largest chicken processor has run out of chicken wings.
Consumers and manufacturers are not the only ones feeling the effects; so are farmers. According to Snyder, virtually every piece of farming equipment uses them and the worldwide shortage is expected to impact all aspects of agriculture at least into 2022.
Semiconductor lead times - the time it takes for a company to order a chip and take delivery of it - increased to 17 weeks in April. Bloomberg says this indicates shortages of these components are intensifying.
So how did we get into this mess? The principal cause is the pandemic and the disruptions, delays, closures, and related problems it caused.
This is not to say that the sky is falling; it is not! The system is still functioning and life is going on. But if the shortage of chips lingers it can cause much higher prices for many products, sharp reductions in manufacturing, much lower profits, and possibly even problems in supplies of basic necessities and social unrest.
While there’s never a good time for these kinds of problems, following so closely after the pandemic - when so many businesses and individuals are still reeling from their financial losses - is certainly not an exception.
Investors should keep a close watch on developments, as their portfolios could be impacted big time. And so could other areas of their lives. Hopefully these difficulties will be resolved soon. Otherwise, we may end up thinking back on 2020 as the good old days.