Home Finance Global Supply-Chain Problems Are Likely to Persist This Year and Beyond

Global Supply-Chain Problems Are Likely to Persist This Year and Beyond

by internationalbanker

By Hilary Schmidt, International Banker


As the world continues taking tentative steps towards recovery from the COVID-19 pandemic, one global issue remains very much on the horizon even to this day. The disruption to supply chains inflicted by the virus outbreak—with a resulting drop-off in industrial activity—has failed to ease with real conviction, which means that 2022 and even beyond will remain decidedly tough for a number of global goods markets.

Thanks to the curtailment of business activity due to the health crisis, manufacturers continue to struggle to produce as much as they did during the pre-pandemic era—or even as much as is needed to meet the volumes required today. This has typically been down to several key factors, including shortages of raw materials and components, workers and power, as well as the shift in demand from activities such as eating out and attending events to buying more durable goods to be used within the home. Indeed, supply-chain disruption was chief among the factors underpinning the International Monetary Fund’s (IMF’s) downgrade of its 2022 global economic growth forecast to 4.4 percent in January from 4.9 percent in October.

It also means that accelerating inflation, which many believed to be a transitory phenomenon just a few months ago, is unlikely to disappear anytime soon, given the supply-chain disruptions companies face, thus slashing production and hiking prices in response. “We went into this year across our entire portfolio—without this conflict in mind—knowing that we were facing commodity price increases [and] shortages,” Joseph Wolk, chief financial officer at pharmaceutical company Johnson & Johnson, told an investment conference in early March. “So, we had a very healthy level of inflation or cost increases built into our plan. That’s probably gotten a little steeper over the last couple of days.”

And things are likely to deteriorate further before improving. A survey conducted by management consulting firm AlixPartners in December found that supply-chain issues were the biggest concern of the 3,000 chief executive officers polled, followed by the labour market and digitalization. “They realized that their business models, which have served them well for many years, are largely now not fit for the purpose” and that they’re rushing to build local, regional and global supply chains, according to AlixPartners CEO Simon Freakley. “We went from what was a rolling sea of worry about economic cycles to a choppy sea of all these disruptive forces.”

Such supply-chain problems are only likely to get worse before getting better—that’s at least according to Moody’s Analytics. “As the global economic recovery continues to gather steam, what is increasingly apparent is how it will be stymied by supply-chain disruptions that are now showing up at every corner,” Moody’s associate director, Tim Uy, stated in a Moody’s report in October. “Border controls and mobility restrictions, unavailability of a global vaccine pass, and pent-up demand from being stuck at home have combined for a perfect storm where global production will be hampered because deliveries are not made in time, costs and prices will rise, and GDP growth worldwide will not be as robust as a result.” Uy also observed that supply would likely play catch up for some time due to the persistence of bottlenecks at every supply-chain link, including containers, shipping ports, trucks, railroads, airports and warehouses.

To compound matters further, Russia’s invasion of Ukraine looks set to cause major upheaval to global supply chains as a rapidly growing number of companies cease operations in the region. Bottling company Coca-Cola HBC, for instance, confirmed it had implemented contingency plans that included ceasing production in Ukraine, closing its plant and asking colleagues in the country to remain at home and follow local guidance. “To run everything on the supply chain—unfortunately, so much of it relies on oil,” Kona Haque, ED&F Man head of research, told Yahoo Finance Live on March 11. “It’s the reason why every time you see oil prices go up by 50 percent, a US recession typically follows. It’s that impactful. It’s that entrenched in the economy. And obviously the US clearly is very, very energy dependent…. It will have a reverberating impact across the supply chain.”

ING, meanwhile, expects the conflict to impact global supply chains severely as well as “flatten” global trade. “The improvement in global supply chains has ended before it ever really began. The war in Ukraine will bring longer-lasting disruption, and the trade outlook will bear the consequences of sanctions. Expect a new round of delays and protracted supply shortages,” said economists at the Dutch bank. “The biggest hit to supply chains would come from any severe disruption to Russian energy exports, as several European countries are dependent on Russia for energy. But even in the absence of this, there are more challenges to come.” ING also noted that the exports of the likes of agricultural products such as wheat, corn and sunflower oil, as well as key precious and base metals such as steel, palladium, platinum and nickel, of which both Ukraine and Russia supply large amounts for the global market, will be particularly badly hit.

And according to Gartner, six key supply-chain challenges will arise as a result of the Russian escalation against Ukraine:

  • Key-material shortages,
  • Material-cost increases,
  • Production-capacity impacts,
  • Demand volatility,
  • Logistics-route and capacity constraints,
  • Cybersecurity breaches.

“We expect severe shortages of hydrocarbon, critical minerals, metals and energy,” Gartner added. “Prices for those items will likely spike, thanks to both the shortages and behaviors such as irrational buying and protectionism. This will, in turn, impact manufacturing operations up- and downstream as much as raw material mining.” The research and consulting firm also recently warned that important logistics routes will be restricted, such as the Black Sea route and railroads and highways from east to west and vice versa, resulting in delays and disruptions with spill-over effects on Chinese ports and other key transportation nodes likely.

All this means that any return to normalcy for global supply chains is unlikely to materialise in 2022. “It’s unlikely to happen in 2022,” Phil Levy, chief economist at Flexport, a freight-forwarding company based in San Francisco, recently told The New York Times. “My crystal ball gets murky further out.” Indeed, a “new normal” may be taking hold, in which such disruptions simply become part of the fabric of global supply chains. “Lockdowns are hopefully a thing of the past outside China, but there are still all kinds of restrictions in place to the movement of people, including workers with in-demand skills,” Flavio Macau, an associate professor specialising in supply chains at Edith Cowan University in Western Australia, told the UK news publication The Guardianin December. “My view is that supply chains still have high blood pressure, consistently showing arrhythmia. It will take to mid-2024 to get back to ‘normal’.”

Are there ways to alleviate the chaos in the meantime? The US government has certainly made significant efforts over the last year to assess vulnerabilities in—and strengthen the resilience of—the country’s critical supply chains, which should prove useful to other nations seeking to similarly contain their own supply-chain issues. On February 24, exactly one year after the Biden Administration issued an executive order to investigate the US’s most pressing supply-chain requirements, seven different cabinet agencies published reports identifying key supply-chain weaknesses and devising multi-year strategies to address those weaknesses.

The White House also published a capstone report in which a number of measures that have been taken to reduce the vulnerability of US supply chains across a range of key sectors were highlighted, including the strategy established in June to strengthen supply-chain resilience and mitigate future disruptions by focusing on five broad policy areas:

  1. Rebuilding domestic production and innovation capabilities;
  2. Supporting the development of markets that invest in workers, sustainability and quality;
  3. Leveraging the Federal government’s role as a purchaser of and investor in critical goods;
  4. Strengthening international-trade rules and trade-enforcement mechanisms;
  5. Working with allies and partners to decrease vulnerabilities in global supply chains.

In the private sector, meanwhile, the British Standards Institution (BSI) released its annual “Supply Chain Risk Insights Report” in November 2021, which identified the crime, climate and convergence of threats that emerged in 2021 as the dominant risks to the global supply chain. Although released prior to the Russia-Ukraine conflict, the report acknowledged that global supply chains would “continue to be massively disrupted way into 2022” and that “it may well get worse before it gets better”.

Nonetheless, the report sought to answer a handful of critical questions surrounding current supply-chain issues that are likely to persist for some time. Recommendations for solving these issues, according to the report, include the need for companies to understand their suppliers fully; being proactive and visionary and embracing change before it is imposed on them to drive competitive advantage; prioritising supplier performance to ensure that suppliers are managing their business relationships correctly; identifying pain points and establishing effective communication between all parties; and fully understanding the interrelated nature of things, not just within organizations but across value chains. “Changing consumer behaviour and automation are other key trends to follow closely as businesses seek to apply the lessons learned from the COVID-19 pandemic to become more resilient,” the report added.


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