How Supply Constraints Stole Christmas
Søren Otto Simonsen
Senior Investment Editor
Summary: If you have tried to buy, well, basically anything, you've probably noticed that the shelves in the stores aren't as full as they used to be. With the Christmas shopping season approaching fast, there is a very real chance that Santa will have a hard time getting everyone what they want. In this article, we will look at how supply constraints will be this year's Grinch, how they will steal Christmas and how you can counteract them.
It’s not news that the global supply chains are challenged, but how did it get here and what will it mean for your Christmas presents? In this article, we will look into how supply constraints came about and how they will impact Christmas shopping. “We’ve all become accustomed to the fact that when you order something online, you get it delivered within a few days. That system is broken down and we have to be much more patient now,” says Ole Hansen, Head of Commodity Strategies at Saxo Group.
Exceptional demand challenges the physical limits of the world
One of the main drivers behind the supply constraints is a sudden imbalance between supply and demand, which is an effect of the COVID-19 breakout in the early 2020s. On one hand, a collapse of the global economy was expected, and on the other, governments across the globe started supporting both businesses and people by handing out money. The global economic collapse in large part didn’t happen and the world went into a lockdown, which meant that people suddenly had money on their hands but couldn’t travel or go to restaurants, so instead they started buying goods and commodities.
“I normally tend to tell the Danish media that it all began when we got our holiday check paid out from the government, because then we all went on a spending spree. Restaurants and cinemas were closed, so we went online and went shopping for consumer goods. So, from having cancelled lots of orders, expecting a sharp decline in economic activity due to the pandemic, companies suddenly had to put in massive new amounts of orders and the system couldn't cope,” says Hansen.
In a world where global activity was already historically high, an increase in demand like this puts a lot of strain on the physical parts of being able to supply people with what they want. “When you have such a big shift on the demand side, then when we talk about supply, it's about the physical world - ports, container ships, available containers - and its generally about infrastructure, which takes time to build out and thus can’t make as big a leap as the demand side, because we are talking about building big physical things,” says Peter Garnry, Head of Equity Strategies at Saxo Group.
The system, which Hansen is referring to is the logistics sector, where the physical limits of the world are challenged by rapid technological development. “I think what this whole supply chain issue has shown is that everything we're talking about is basically constraints we observe in the physical world, and if there's something we have seen during this pandemic, it’s a phenomenal rally in technology stocks and companies that operate in the online world. When I travel around and talk to clients, I show this chart where you can see that since the great financial crisis, technology companies’ revenue and profits have just taken off like a rocket relative to the physical world, the normal world, the one we are in, and these supply constraints are once again teaching us that a lot of the investment opportunities will be in the online world,” says Garnry.
In essence, this means that because governments feared an economic collapse, they handed out money to people and companies who then used the money to buy more goods than usual, like e.g. technological devices and gadgets, which pushed the limits of the physical ships, ports, trucks and roads. In such a situation, the last thing you would want is to clog up the system, so the pressure on the physical limits will be even tougher. Enter Ever Given.
Winding the clock back to March this year, one of the largest container ships in the world, Ever Given, was passing through the Suez Canal, one of the world’s most important supply routes. Here it was hit by strong winds that forced the ship to turn, which resulted in the ship getting stuck across the canal. Some 400 container ships were queued up for six days, creating not only shipping delays but also further bottlenecks when the ships arrived at ports at the same time, increasing the pressure on the physical world.
So now you had governments handing out money, a global population eager to buy goods, ports that are already overworked and a global trading route which is closed down, halting the usual flow of goods from East to West.
A shortage of people
It’s probably fair to think that such bottlenecks shouldn’t take long to fix as long as everything is operating as it should. But here it’s necessary to understand two things. The first thing is that on the sea, transportation of cargo is constantly becoming bigger, but on land, this isn’t the case. “Containers ships are getting bigger and bigger, but you still need one truck to move the container to and from the harbour. So, it’s an increasing challenge that these ships roll in and need to be offloaded and loaded in a relatively short time. This has become a major obstacle, like we have seen in Felixstowe in the UK, in Los Angeles and even in Rotterdam,” Hansen says.
At the same time, there’s a historic shortage of truck drivers around the globe. In the US alone, it’s estimated that 80,000 additional truck drivers are needed to handle the number of containers that could be delivered at the country’s ports. The reasons for this are many, but it’s an important factor in the supply constraints, and one that isn’t easily fixed.
Generally, truck drivers have been in short supply since the mid-2000s. In addition, many economies around the world work at close to full capacity, which usually allows people with lower-paying jobs – like truckers – to move up to higher-paying and more attractive jobs, due to increased demand for workers. Also, governmental support during COVID may have provided some drivers with money they’ve been able to use to get better jobs. “You need a lot of truck drivers, which has been another issue, as there’s a shortage of truck drivers. This is mainly because some of them have found other jobs during the lockdown, where wages are rising in other industries as well, so it's difficult to find all the truck drivers needed to move all these containers. That means that you suddenly end up with a harbour full of empty containers stacking up, which takes space away from the filled ones that need to come in,” says Hansen.
So, along with increased demand putting the physical world under pressure, and the blockage of an important trading route, there are also not enough people and trucks to handle the containers when ships do roll in, all adding to the delays and difficulties of moving things around the world.
When trying to explain how we ended up with supply constraints, it’s impossible not to mention the COVID-19 virus, because it has had a significant impact. As previously mentioned, one reaction to the pandemic has been governmental stimulus, which has created a number of ripple effects. More concretely, COVID-19 has affected operations at ports around the globe – especially in China, one of the world’s key production hubs. “The Chinese zero-case policy on COVID-19 is making it difficult to keep supply chains efficient, because when there’s a new series of cases in China, they tend to close down pretty large parts of the particular region where the cases are happening,” says Garnry.
The shortage to rule them all
Struggling to ship goods around the world is a major challenge. But struggling to supply the most crucial component in today’s technology goods is arguably a much bigger issue.
Semiconductors – also called integrated circuits or microchips – are used in a wide range of goods and products, including electronics. The semiconductor shortage – like the others we’ve described – has been caused by a variety of snowball effects, including bad weather in Texas, trade disputes between China and the US, and especially the COVID-19 pandemic. But this shortage is more significant, constraining sales of some of our most in-demand goods. In that sense, the semiconductor shortage is the real Grinch, which will steal the most popular Christmas presents even before they’re produced. “The semiconductor shortage is impacting everything from Nintendo to car production and PlayStations. iPhone production has also been cut by as many as 10 million units due to these constraints. So, even if you wish for it, and you want it and it's cool, you can't get it,” says Garnry.
And if you’re wishing for a new car, semiconductors can also spoil the day. Car manufacturers, who buy lower margin semiconductors, were late in ordering chips after the economy didn’t collapse due to the pandemic. The semiconductor industry had already found willing buyers thanks to high demand for graphics cards for gaming and crypto, as well as chips used in data centres and computers. Car manufacturers were therefore put at the back of the line and have ever since scrambled to get priority, causing car production to be reduced due to lack of semiconductors, meaning that there are a lot of cars that are almost ready to be shipped, but can’t be because they are missing this one component,” says Garnry.
Looking at the different reasons why supply chains have ended up in the pickle they’re in, one of them also points to a potential solution, which would be a massive shift in the production strategy that companies have pursued for a number of years. “If you're a large consumer goods company today and your main markets are the US and Europe, you must be contemplating whether you should have production closer to your end markets,” says Garnry. He adds:
“Not too long ago, we had a very engaging conversation with Jens Bjørn Andersen, CEO of DSV, and we talked about this situation. In the financial industry, we always suggest that investors should make sure to diversify their portfolio. But for whatever reason, this concept seems to have escaped the manufacturing industry when you look at their portfolio of production. Said in another way – production companies have sent huge amounts of their global production to China and that really hurts when you have disruptions like these. This could lead us to see more fragmented production and that manufacturing companies begin to diversify their supply chains. My bet is that in the future, we will see some production come back to main consumer markets in the western world.”
How to un-steal Christmas from the supply Grinch
While Garnry’s point about production closer to main markets is relevant, it’s a long-term solution that won’t help this year’s Christmas shopping. For now, we’ll just have to get used to it being more difficult to get what we want.
“We need to get the balance back in terms of supply and demand. Until then, we're going to have to live with some disruptions for a number of years and that will create these temporary obstructions in various places in the world,” says Hansen. Garnry adds that the bottlenecks will solve themselves: “We will get there, but it will take some time,” he says.
So, what do we do this Christmas? While the Grinch may steal your car, iPhone and PlayStation, Hansen thinks we should look at our wish list and wish for something the Grinch can’t steal – and where we can do good. “Regarding Christmas, think a bit alternatively. The global economy came back very strongly, but there was a whole area which was left in the dark and that was the service sector. So, spare a thought for them if you can't get the goods you are looking for. Wish for a gift card to the cinema or to a restaurant or to some local experience. They're not going to run out of supplies and could use it,” he says.
If you want to read more about how to invest in the logistics sector during these challenges, take a look at this article.
If you want to get inspiration for more investments in the logistics sector, take a look at Garnry’s theme basket here.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.