Stocks n trades

What I’m seeing with supply chain disruptions: Jan ’22 edition

—

by

pluginever
in


​

1. What respondents are saying (ISM Manufacturing Index)

  • “While there has been some improvement in materials making it to our factories and logistics centers, we are still constrained by (a lack of) qualified labor. Orders so far are not being cancelled, but we are concerned that customers may be losing patience.”
  • “Transportation, labor and inflation issues continue to hamper our supply chain and ability to service our customers. Fortunately, it’s also hampering our competition as well. Ultimately, the biggest impact is at the consumer level, as (price increases) continue to get passed through.”
  • “Our suppliers are having difficulty meeting scheduled releases as their suppliers experience delays and shortages, so lead times and inventories are struggling, resulting in lost production.”
  • “Transportation restrictions and a lack of supplier manpower continue to create significant shortages that limit our production. This, in turn, limits what we can supply to customers, as well as on-time delivery.”
  • “The supply chain crunch may be loosening a bit; however, specific original equipment manufacturer (OEM) parts and equipment now have lead times that we have not experienced before.”

​

2. Supplier Deliveries (ISM Manufacturing Index)

  • It's at 64.6, down 0.3pp from last month.
  • That's not good because anything above 50 means it's difficult for suppliers to meet customer demands
  • But, a m/m decrease for the third consecutive month (it was 75.6 in Oct '21) means deliveries were incrementally faster & improving
  • The 0.3pp m/m decrease is relatively lower compared to what we saw for Nov '21 (3.4pp) & Dec '21 (7.3pp) partially due to the Omicron variant. But, suppliers are expected to be back on track in February & moving toward a better supply-and-demand balance in March
  • Not explicitly mentioned in this month's report, but an inference from the Dec '21 report indicates the index continues to reflect suppliers’ difficulties in meeting demand due to:
    • ongoing supplier hiring challenges
    • extended raw materials lead times at all tiers
    • high levels of input material shortages, but not explicitly mentioned as “increasing” per the Sep '21 edition
    • elevated prices
    • inconsistent transportation availability

​

3. Customer' Inventories (ISM Manufacturing Index)

  • It's at 33.0, up 1.3pp from last month.
  • That's not good because anything below 50 means inventories for customers are too low,
  • But, a m/m increase means that customer inventories went higher. At 33.0, inventories are slightly above Oct '21 – Sep '21 levels.
  • This is the 18th consecutive month where the index has been at historically low levels. Nov '21 was 25.1, which was the second lowest level ever (Jul '21 was 25.0).

​

4. Backlog of Orders (ISM Manufacturing Index)

  • It's at 56.4, down 6.4pp from last month.
  • That's not good because anything above 50 means a backlog, which reflects production for manufacturers not keeping up with orders from customers hence why they're in the backlog.
  • But, a m/m decrease means backlogs expanded at a slower rate relative to Dec '21 and was better able to keep up with continuing strong new order levels
  • This is the 1st month the index has been below 60 after 11th consecutive months and is now consistent with Oct '20 & historically normal levels (55.7)

​

5. # of container ships at anchor in Los Angles & Long Beach

  • About 25 – 30 ships were on anchor on a given day during late January
  • After adjusting for the new port policy that I discussed in my Nov '21 post, that's equivalent to 45 – 70 ships
  • After using my adjusted measure, there's an improvement from all-time high levels of +80 – 100 during Q3 '21 (no port policy adjustment needed) & 65 – 75 ships during late December (after port policy adjustment)
  • Although it's not at all-time level anymore, nonetheless: More ships at anchor = fewer ships unable to offload inventory = difficult for trade to flow. This recent & relevant article from the WSJ highlights that port congestion is still an issue: Port Congestion Spreads Across More U.S. Import Gateways – WSJ

​

6. Freightos Baltic Index (FBX): Global Container Freight Index

  • Was $9.7K during Jan '22, down from ~$10.0K levels during Oct '21 and a little higher than ~$9.5K levels during Dec '21
  • In FY '20, this was between $1.0K – $2.0K
  • Fewer ships available validated by # of container ships at anchor in California (mentioned above) means price of shipping of shipping has gone up relative to the past. Higher shipping costs makes it difficult for manufacturers to make goods and customers get the inventory they need to meet demand. It's a little odd to see shipping rates to go slightly up when I would have expected shipping rates to go down with less port congestion.

​

Key takeaways:

The situation incrementally improved for supplier deliveries, customer inventories, order backlogs. Some of that improvement could be because the holiday season is finally over so manufacturers had some time to catch-up, but they didn't realize their full potential due to Omicron being a moderate offset. Despite m/m improvements, it's still a negative situation across all of my channel checks. Heading into Feb '22, there should be favorable upside as Omicron wanes off & we're another month removed from the holiday season while there is some unfavorable downside if Omicron is more persistent & the impact of Chinese lunar new year shutdowns in Feb '21. Overall, my base case is to see some material improvement in the spring, perhaps Mar '22 – Apr '22, as we navigate through that & lap a full-year of a reopening economy.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *