Insight & Analysis

Moving in the right direction?

Published: Jul 2022

There is cautious optimism that the worst of the global supply chain crisis may be over, though pricing levels and availability of raw materials remain far from ideal.

Sign post pointing in lots of directions

According to the latest global supply chain disruption tracker report from BNP Paribas, data released in June and early July showed some signs of supply chain pressures easing.

Paul Hollingsworth, Chief European Economist at BNP Paribas Markets 360 refers to improvements in China – where the index of supply chain pressures dipped into negative territory – and in the technology equipment sector where the index of supplier delivery times eased for the second consecutive month as positive signs.

Morningstar Analyst, Michael Field, observes that freight rates have fallen from their late 2021 peak and lockdown measures imposed by governments to stop the spread of COVID-19 have all but ceased, meaning manufacturers are back to running without interruption.

“Labour shortages that contributed to bottlenecks at ports and distribution centres are easing, with numbers employed in transport now back to pre-pandemic levels,” he says. “Capacity on sea freight has been added over the last two years, while the missing capacity in airfreight – which disappeared as passenger flights were grounded – is coming back steadily.”

However, disruptions persist and some analysts believe the easing in backlogs of work may be a sign of softening demand rather than improving logistics. In addition, shipping rates remain high by historical standards.

Field refers to automotive manufacturers strengthening ties with semiconductor manufacturers and upscaling technology as a longer-term fix to the shortages caused by the pandemic and notes that semiconductor inventories are slowly rebuilding as producers are running plants hard and investing in new facilities to meet increased demand.

But car makers still face supply chain challenges. PowerCo, a new company developing electric vehicle batteries for Volkswagen Group, announced last week that it would invest more than €20bn in battery development over the next eight years.

Despite this huge investment, Chief Financial Officer Kai Alexander Mueller has admitted that logistics issues – along with surging raw material prices – have made it difficult to source the materials it needs.

Part of the problem for PowerCo is that it is effectively creating a new supply chain and will rely on suppliers to meet demand. With the company having to start from scratch, Mueller says it needs to understand sourcing and pricing to produce a competitive product.

Multinational gardening power tools manufacturer Husqvarna reported lower second quarter operating profits last week, which it also attributed to problems sourcing sufficient quantities of components to meet seasonal demand in Europe.

Chief Executive Henric Andersson said that the quarter was marked by continued disturbances in the supply chain and while the company was doing its utmost to support customers for the remainder of the season, the global supply chain situation was still ‘fluid and unpredictable’.

One upside for multinational companies is that they have greater scope for increasing prices to offset increased costs for raw materials and logistics.

However, this luxury does not extend to smaller businesses in sectors where margins are already wafer thin and the UK’s withdrawal from the European Union is an added complication.

For example, it was reported last week that the group behind UK health food distributor Tree of Life is in negotiation with banking partners to agree new facilities as it struggles to cope with supply chain issues.

An information memorandum circulated by Health Made Easy to potential trade and private equity buyers earlier this year revealed that Brexit has caused problems with exporting products to the EU, where the Irish market is a significant source of revenue.

Any positivity around the remainder of 2022 is further tempered by the prospect of energy rationing adding further pressures to European supply chains by limiting industrial access to natural gas.

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