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Disruption in supply chain hampers economic revival

T he world economy isn’t your ordinary phone, and what seemed as a gradual and gentle recovery process, now appears to be spitting out problems of inescapable proportions. 

Published: 31st October 2021 11:22 AM  |   Last Updated: 01st November 2021 09:29 AM   |  A+A-

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For representational purpose. (Photo| Sindhu Chandrasekaran)

Express News Service

Most of us have done it at least once. That is, hitting the reset button on the smartphone to shut it down and wipe out the virus. For better results, we’ve even tried deep clean or reboot, which restores factory settings, meaning the device is as good as new. Simple, really. 

So, when Covid-19 struck last year, policymakers world over did pretty much the same thing. They hit the reset button, hoping, or rather praying, that lockdowns and subsequent lift offs will take things back to normalcy. In earnest, they even called it the Great Reset.

But the world economy isn’t your ordinary phone, and what seemed as a gradual and gentle recovery process, now appears to be spitting out problems of inescapable proportions. Foremost among the looming troubles is the global supply chain disruption, which could lead to an inventory recession, or slowdown global economic recovery. It appears, we cannot chicken out, and must face either one of the two. Worse, some even flagged doomsday scenarios, predicting price pressures morphing into stagflation, which then could throw the global economy off course. China’s dramatic slowdown last quarter places such forecasts right at the dead centre. 

Supply disrupted

Among other things, the pandemic has put world trade at risk. Moody’s Analytics warned about ‘dark clouds ahead’ because several factors make overcoming the supply constraints challenging. The key culprits this time include labour, overstretched shipping lines, and rising raw material and logistics costs.

First, companies are facing shortages like labour, energy (remember coal shortages), and critical industrial components like computer chips for cars. Second, even if companies produce goods, shipping lines are so jammed that crossing an ocean from one end to another takes twice the pre-pandemic time or more. And lastly, even if goods make it in and out of shipping ports, some countries like the UK are facing a dire shortage of truck drivers delaying deliveries. 

India is in the midst of an energy crisis — like many others in the world — primarily owing to shortage of coal. The situation has been exacerbated by the supply chain disruption resulting in high import costs. This has impacted both power as well as non-power consumers of coal.

Venu Nuguri, Managing Director & CEO, India and South Asia, Hitachi Energy, recently said in an analyst meet that while electricity demand is expected to grow 8-8.5% in FY22, risk of a power crisis emanating from coal shortages may dampen supply and hit production at core industries, softening the pace of economic revival.

“High inventory build-up in our factories, mainly for our high demand products, due to the supply line crunch, deferment of revenue and high input costs impacted our cash flow,” he said. Non-power sector consumers, including captive power plants (CPP), aluminum, steel, cement, sponge iron, chemical, paper etc, have long been facing an acute shortage of coal as supply through rail mode was halted from most of the Coal India subsidiaries, decried The Coal Consumers Association of India in a letter to coal Secretary.

“Steadily rising global coal prices as well as expensive ocean freight rates have also rendered import of coal almost impossible for these consumers in order to make up for the lack of supply from indigenous sources,” it said in the letter. FMCG companies from Unilever to Nestle to Procter & Gamble grappling with supply difficulties have no choice but to jack up prices. But that’s only part of the problem. Perhaps, as part of their civic duty, the companies are forewarning consumers about elevated price levels continuing next year citing a ‘once-in-two-decades inflationary environment.’ 

“We’ve continued to see unprecedented levels of inflation in some of our key input materials. Palm oil and its derivatives, which are used in our skin cleansing and hair care categories, have seen prices climbing further,” says Ritesh Tiwari, chief financial officer of Hindustan Unilever, in an analysts’ meet.
Auto manufacturers have been facing acute chip shortage as has been witnessed by sharp product cuts by local manufacturers.

Recently, both Crisil Ratings and India Ratings cut down growth forecasts of India’s passenger vehicle (PV) market amid deepening shortage of the semi-conductors which has forced India’s largest carmaker Maruti Suzuki and others to significantly reduce their production level in recent months. While Crisil expects the PV market to grow 11-13% year-on-year in FY22 against the earlier forecast of 14-16%, India Ratings expects growth to moderate at 15-18% y-o-y during FY22 from the previous estimate of 18-22%.

Enormity of the situation

According to the OECD, higher commodity prices and global shipping costs are currently adding 1.5% to inflation across G20 nations. By December, it could be up by 1.75% and further up by 1% in 2022. Worryingly, OECD estimates that the drag from the pandemic and supply bottlenecks is unlikely to ease in 2021. 

 As it is, global output in mid-2021 was 3.5% lower than projected before the pandemic, translating to a shortfall of one year of output growth in normal times. Our own RBI, in its monthly bulletin last week, rang alarm bells noting that everywhere, resurgent demand was being choked by supply bottlenecks, placing global recovery at risk. In fact, supply chain disruptions seem to be feeding on one another, amplified simultaneously by decarbonisation drives and trade wars. “There is also the possibility of facing an inventory recession when the supply backlogs are eventually cleared,” warned RBI.

Congestion at ports in the US, Europe and Asia have disrupted sailing schedules and equipment shortage, particularly in exporting countries and has created breaks in supply chains. The average cost of shipping a standard large container (a 40-foot-equivalent unit or FEU) is five times higher than a year ago. The average door-to-door shipping time for ocean freight has gone from 41 day a year ago to 70 days. 

In October, the World Trade Organistaion scaled up its projection for world merchandise trade volume in 2021 to 10.8% from 8% in March. While in Q2, trade volume growth shot up to 22%, for the rest of the year, it’s expected to slow down to 10.9% in Q3, followed by 6.6% in Q4. The most optimistic estimate is that disruptions could take a year to unwind, while the worst-case scenario is of a slowing down and reordering of world trade, as per RBI. And as Moody’s Analytics noted, it’ll get worse before it gets better. Buckle up.

Trading in troubled water

  • Labour shortage, overstretched shipping lines, rising raw material and logistics costs are some of the major roadblocks
  • Electricity demand is expected to grow 8-8.5% in FY22, but risk of a power crisis emanating from coal shortages may dampen supply and hit industrial production
  • Non-power sector consumers, including captive power plants (CPP), aluminum, steel, cement, sponge iron, chemical, paper etc, have been facing acute shortage of coal
  • Auto manufacturers have been facing chip shortage, leading to a sharp production cuts in the recent past
  • According to the OECD, higher commodity prices and global shipping costs are currently adding 1.5% to inflation across G20 nations and it could be up to 1.75% by December


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