Weekly Brief: When It Rains On Manufacturers, Boy Does It Pour

Weekly Brief: When It Rains On Manufacturers, Boy Does It Pour

over 2 years ago3 mins

Manufacturers can’t seem to catch a break: as if it wasn’t enough to deal with supply chain disruptions and rising raw material and energy costs, now they’re contending with skyrocketing shipping rates too.

🕰 Recap

  • A boom in demand for goods has led to a boom in demand for international transport, causing shipping costs to leap this year
  • Manufacturers are struggling to keep up, leading to a global supply chain crunch that’s driving up costs for businesses
  • In July, higher costs combined with rising freight rates helped push the US inflation rate to a 13-year high
  • And fresh data out this week showed eurozone inflation hit its highest in a decade last month

✍️ Connecting The Dots

Supply disruption has been one of the biggest stories of the year. Demand for just about everything is surging as economies bounce back from the pandemic, but the scramble to ramp up production has led to shortages across multiple industries, with microchips the highest-profile example. But a disruption that was only expected to be temporary now looks like it’ll last well into next year, as the surging Delta variant disrupts factory production in Asia.

That’s adding to the list of pains facing manufacturers who are already reeling from rising raw material and energy costs. And now they have one more issue to contend with: shipping. See, booming demand for goods means booming demand for international transport, with manufacturers being forced into bidding wars to get space on shipping vessels. That’s caused freight rates to skyrocket: the cost of sending a container from Asia to Europe is about 10 times higher than it was in May 2020, while the cost from Shanghai to Los Angeles has grown more than sixfold, according to the Drewry World Container Index.

All these woes are starting to creep up in real-time economic indicators. Data out this week, for example, showed Chinese manufacturing activity shrinking in August for the first time since April 2020. A survey of European factories, meanwhile, saw unfilled orders rise to an unprecedented level in August. If these issues persist, they could pose more risks to the global economy…

🥡 Takeaways

1. Rising inflation is problematic for central banks.

The resulting squeeze of supply chain disruptions, rising input costs, and rising freight rates is driving up costs for businesses, and encouraging many of them to raise prices on their customers to make up the shortfall. That’s helped push up inflation rates to multi-year highs in the US and Europe, with their central banks insisting that a spike in prices is due to temporary pandemic-related shortages. But if supply chain disruptions persist well into next year, inflation could stay elevated for much longer than central banks hope. And that might force them to slow down their bond-buying programs or raise interest rates sooner than expected.

2. The disruptions are forcing changes in supply chain patterns.

The huge globalization trend of the 1990s and 2000s saw plenty of companies shift production of lower-value components to cheaper labor markets in China and other parts of Asia. But these same companies now face the headache of trying to get those parts to factories where they can be assembled into finished products. That’s forcing them to rethink their supply chains. Take Switzerland: a recent survey by investment bank Credit Suisse shows half of Swiss businesses have already adapted their supply chains by buying more from European suppliers or within the country itself.

🎯 Also On Our Radar

Cathie Wood’s ARK Invest – the firm behind several thematic exchange-traded funds (ETFs) popular with retail investors – is getting ready to launch a new ETF focused on transparency. The fund will closely follow a stock market index that excludes stocks in industries like alcohol, banking, gambling, and fossil fuels. If approved, the ETF would be the second that ARK Invest has launched this year after debuting a fund focused on (sort of) space-related investments in March.

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