Empty Shelves: Supply Crisis Ahead?
Owning a home in suburbia means you spend a lot of time in the hardware store at your local strip mall. (Cue the song: Pleasant Valley Sunday.)
This past Sunday, while wandering the aisles in search of plywood for a backyard project, I noticed a whopping increase in lumber prices. I also saw empty shelves for a variety of other items. When I inquired, a “sales associate” confirmed that the store was suffering supply shortages.
Are we facing a supply crisis and, accordingly, a significant outbreak of inflation? I’m always wary of anecdotal evidence. Let’s look at the hard data.
Overall, the consumer price index (CPI) is rising but not to an alarming degree. The Federal Reserve projects that core inflation, which excludes the volatile costs of food and energy, will run at about 2.2% in 2021, up from 1.6% at the end of 2020.
However, alarms are being raised about supply shortages, which have been pushing up producer prices. Below, I examine the extent of the dilemma and steer you toward a way to profit from it.
According to the Federal Reserve’s latest Beige Book survey, corporate managers said that “Covid-related disruptions in production and supply chain logistics” were causing shortages and price increases of commodities such as “agricultural products, building materials, cleaning products and microchips.” The Fed reports that delivery times are more delayed than at any time since 1951.
The microchip shortage is particularly acute. The automotive industry is feeling the pinch. The Alliance for Automotive Innovation reports that automakers could manufacture up to 1.3 million fewer vehicles this year because of the chip shortage. Carmakers are rationing microchips, reserving them for their most profitable models.
News reports surfaced Monday that Apple (NSDQ: AAPL) can’t make enough MacBooks and iPads to meet huge demand over the next few months because there aren’t enough microchips.
In the housing sector, builders are grappling with higher prices for lumber and other essential materials. The pandemic has caused a lumber shortage, forcing several major lumber mills to cut back on production. Hence my aforementioned experience at the hardware store.
The latest manufacturing ISM Report On Business found that economic activity in the manufacturing sector grew in March, with the overall economy posting a 10th consecutive month of growth. However, the report also revealed that shortages of commodities and spare parts were keeping growth in check.
The research firm FactSet found that in earnings calls for first-quarter 2021, corporate managers were expressing concerns that shortages of vital raw materials combined with COVID-caused supply chain disruptions might force their companies to raise prices.
The commodities shortage has much to do with the sharp rebound of the economy this year. Massive fiscal and monetary stimulus has fueled retail spending to an unusually intense degree, as lockdowns ease and pent-up consumer demand is unleashed. Businesses are scrambling to keep up. After the severe recession of last year, it’s a nice problem to have, but it’s a problem nonetheless.
For now, the Federal Reserve isn’t overly concerned about these inflationary pressures. Neither, it seems, is Wall Street. On Monday, the Dow Jones Industrial Average soared 238.38 points (+0.70%) and the S&P 500 jumped 11.49 points (+0.27%). The tech-heavy NASDAQ, which has enjoyed a hot run lately, took a breather and slipped 67.56 points (-0.48%). In pre-market futures trading Tuesday, stocks were mixed.
The Fed is betting that price increases caused by supply chain constraints will only have a short-term effect on inflation data. The U.S. central bank has promised to maintain its accommodative monetary policy, even in the face of an inflationary spike.
If passed into law (which seems likely), President Biden’s multi-trillion-dollar Build Back Better infrastructure spending plan would exacerbate the shortage of vital commodities. The coming construction boom will demand vast amounts of raw materials.
How to profit from supply shortages…
And that’s where the supply crisis spells opportunity.
It makes sense for investors right how to increase their exposure to commodities. The world already is clamoring for vital raw materials, such as copper, iron ore, zinc, lithium, and rare earth minerals. As economic growth accelerates in 2021, these commodities, especially economically sensitive copper, will soar in price.
Supplies of copper are low but many companies can’t live without the material. The long-term supply-and-demand equation for copper is seriously out of whack (see chart).
Copper is a versatile raw material that’s crucial for building construction, power generation and industrial machinery. As infrastructure spending explodes, so will demand for the “red metal.”
It’s not just America. Notably, China’s ambitious “Belt and Road Initiative” is generating a multi-year tailwind for copper demand. It doesn’t take a member of Mensa to understand that when supplies of a coveted commodity are low but demand is high, prices of that commodity skyrocket.
As of this writing on May 4, the price of copper on the London Metal Exchange hovered at $9,985 per tonne, a 10-year high and near the record high of $10,147.50/t on Feb. 14, 2011.
Governments around the world are pouring trillions of dollars into road and bridge repair, electrification, renewable energy technologies…you name it. All of these initiatives have one thing in common: a voracious appetite for copper.
The fast-growing electric vehicle (EV) industry stands out as a huge copper customer. The electric motors, batteries, inverters, wiring, and charging stations associated with EVs can’t function without copper, because of the metal’s durability, malleability, reliability, and superb electrical conductivity
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