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DEC. 03, 2021

Have You Done Your Christmas Shopping Yet?

It all started with toilet paper and yeast one and a half years ago, then we ran out of exercise equipment, rental cars, lumber, metals, computer chips, and the list goes on and on. These shortages are reaching new heights just after Black Friday, 4 weeks before the holiday season. With consumer demand resurging, in particular in the US, as economic growth is coming back, the country seems poised for a challenging holiday shopping season.

Right now, most consumer products and their components are sitting in containers anchored outside the main maritime hubs: up to 15% of all container ships are currently staying at anchor outside ports. The port of Los Angeles (which accounts for 40% of all US maritime imports) is struggling to unload the containers because there is no space on its berths.

Why have we reached this point? Global trade volumes, that historically have been growing at a nearly constant YoY rate, had an initial stop in 2018, with the trade war between the US and China. This was followed, in early 2020, by the pandemic. Shipping companies anticipated a decrease of the overall demand for goods and, as a result, they cut their shipping schedules. What they did not anticipate was the shift in demand from leisure experiences to electronics, furniture, and home improvement goods. Stocks were depleted and companies could not increase the production due to lockdowns and employees on sick leave. At the same time, shipping companies did not see the need to invest in a new fleet. Now, at the end of 2021, with an almost pre-pandemic life, the demand for goods put even more stress on an already strained supply chain, and the just-in-time management of the stocks is a large part of the picture.

Nowadays, firms are not vertically integrated and they keep warehouses to the minimum to be more cost-effective. With a disrupted supply chain, component A might be delivered, but not component B. The producing company might then just leave the container with component A on the berth because it cannot start production, further exacerbating port congestion and delays. Beyond this vicious cycle, other factors are crippling the global supply chain, such as the lack of lorry drivers and shipping companies that have to cope with a fleet more than 10 years old.

A recent FED survey on the business conditions in the US found that many economic players are still uncertain about when these supply chain issues might begin to ease. Most survey participant are also worried about the impact of these shortages on the overall price level and therefore on inflation.

While you might have to consider a less materialistic holiday season, we are looking at which companies are best positioned to benefit from this environment. We like vertically integrated companies that rely less on external suppliers and companies with strong pricing power that can transfer the increase in the price of their components onto the final products.

We thank you for the continued support.

The FAM team