Supply chain shortages are showing up across the nation. Some items, such as chlorine for America's pools and used cars, just illustrate a lesson we need to learn.
The chlorine shortages illustrate why supply chains are so important and how fragile they can be when faced with something as devastating as the pandemic. Last year, when lockdowns kept most Americans hunkered in their homes, an enormous home improvement wave swept through the country. Demand for home offices on the inside, and new recreational improvements on the outside, skyrocketed.
Gazebos, firepits, and swimming pools were just some of the items that consumers decided would make life bearable under a lockdown. New pool construction and upgrades were a savior to the pool industry, which saw their sales jump 20 percent or more. Roughly 66 percent of the 5.2 million in ground, residential pools in the U.S. use traditional chlorine systems. The last thing new and old pool owners were expecting was a chlorine supply shortage.
All it took was a fire at one chemical plant in Louisiana to drive prices of chlorine pool tablets into the stratosphere. Unfortunately, this facility accounted for a large share of domestic chlorine pool tab production, and there are few remaining sources of supply within the U.S. And as with so many other products in the global supply chain, China is the only significant foreign supplier.
Importing products from China is beset by a variety of problems ranging from bottlenecks in ports, China's own virus outbreaks, and the various economic sanctions and tariffs imposed by the U.S. We are paying a price, and a steep one at that, for our past and present policies of bashing China (and other nations) rather than investing in our own abilities to compete.
The scarcity of new and used automobiles in the U.S. is far a far more serious issue than chlorine, but its cause is just another example of how supply chain disruptions can ultimately impact consumers in unexpected ways. Semiconductors, for example, are used in so many products that they are considered indispensable to the world's economic health. As most readers are aware, there is at present a global semiconductor shortage. For today's gadget-filled automobile that has posed a real problem.
The pandemic is once-again the culprit behind the shortages. Demand by shut-in consumers seeking electronic equipment for home offices, and for chip-heavy gadgets for home entertainment exploded. The companies that build and sell these devices reacted by sending a wave of semiconductor orders through the supply chain all at once. At the same time, many of these global chip makers were being forced to shut down due to their own coronavirus threat. As a result, those U.S. orders quickly overwhelmed the few chip foundries that manufacture most of the world's computer chips.
Automobile manufacturers were caught flat-footed by the semiconductor shortage. The electronic goods manufacturers had quickly gobbled up most of the relatively lean, worldwide inventory of chips. By the time they got around to realizing there was a shortage, it was too late. The production of many new models had to be halted, since many models just couldn't be completed without vital semiconductor components. New car production became a trade-off and dealerships found that their supply of new cars was being rationed.
At the same time, consumer demand began picking up. One reason is that the U.S. passenger auto stock is aging. The average age of America's vehicles is now approaching 13 years old. Consumers shopping for new cars realize there are few to be had and the waiting list is in months, not weeks, long. The result has been a growing shortage of new cars. That has led to a record increase in used car prices. The subsequent rise in used and new auto prices was so strong that it accounted for one-third of April's overall rise in consumer prices.
Cars and chlorine are just two examples of the present supply change imbalances. There are lessons to be learned from this predicament. For one, the world's economies are a lot more vulnerable to catastrophes than anyone imagined. Second, global supply chains are just that — global. Whether we like it or not, we need and depend on the products other nations sell us, and they need ours.
The next calamity may be weather-related, or another virus (like the bird flu resurgence in China today); who knows? Whatever it is, we are dependent on each other if we hope to survive it. The sooner we wake up to that fact, the better off we will be.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at email@example.com.
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