Supply chain issues that have weighed on the economic recovery are showing signs of easing as we approach the end of 2021. This could support growth, which slowed significantly in the third quarter, and provide at least a temporary tailwind for financial markets.
For some time now, the global chip shortage has hampered the production of a wide range of goods, from smartphones to cars.
The situation became so severe in the summer that a number of car manufacturers were forced to halt production at some of their plants. Now there are the first signs that the pressures could be starting to ease.
In their third quarter earnings reports, car manufacturers highlighted that chip supply conditions are improving.
For example, Ford said in its Q3 statement: “Semiconductor availability remains a challenge, but markedly improved from the second quarter”. Toyota said that while it had to cut the output for November, it maintained its full-year production target.
Even though normality might not return for quite some time in the chip market, it is clear that supply has started to adjust.
Looking at the subset of the memory chip market, RAM prices, which tripled in early 2021, have already fallen 30% since July. This highlights how higher prices become an incentive for greater supply, eventually relieving the imbalances.
On the shipping front, logjams in major ports have significantly disrupted the flow of goods. Sharp increases in goods demand and strict pandemic lockdowns in China’s manufacturing hubs and ports have resulted in skyrocketing shipping costs and increasing delivery times.
For example, the cost of shipping a 40 foot container between China and US West Coast increased to more than $20,000 in September, four times the price at beginning of the year (Source: Freightos).
Fortunately, global shipping indices are now showing signs of peaking, with some indices already falling rapidly. The Baltic Dry Index, measuring the shipping cost of dry bulk commodities, such as iron ore or coal, has fallen more than 50% since early October.
The HARPEX Index, measuring worldwide container ship charter rates, fell in the last week of October for the first time in 16 months. The shipping cost between China to US West Coast fell to $16,000 in early October, although it has increased slightly again in the last few weeks.
Looking ahead, global shipping costs are likely to remain elevated as goods demand remains robust. Nonetheless, the falling shipping prices mean that the pressure on supply chains could be easing in time for the crucial holiday season. This would be good news for holiday shoppers as well as investors.
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