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Global producers face a sharp deterioration in suppliers'
delivery times over November
Anecdotal evidence highlights delays in freight shipping and
weak port capacity
Supply chain disruption most severe in Europe and North
America
Hold-up risks steep rise in input costs and consumer prices
Global supply chains are facing resurfacing problems at the end
of 2020. After a year of disruption from the coronavirus disease
2019 (COVID-19) pandemic, the volatility in demand trends has led
to an imbalance in the global supply of freight containers and
meant suppliers are increasingly struggling to provide inputs to
manufacturers in a timely manner.
With
global manufacturing output growing in November at one of the
fastest rates recorded over the past decade, import demand is
on the rise, putting increased pressure on global supply chains.
There is consequently a risk that weak supply and higher freight
charges will drive a further rise in input costs in the near
future, which firms are likely to pass on to consumers as they
continue to struggle with weak margins after the global
lockdown.
Suppliers' delivery times lengthen markedly in
November
The JP Morgan Global Manufacturing PMI illustrated the impact of
deteriorating global supply chains in November, as the Suppliers'
Delivery Times Index indicated a steep lengthening of lead times
faced by manufacturing firms. Excluding the period of heavy
disruption from the COVID-19 pandemic through February to May 2020,
this marked the strongest deterioration in supplier performance
since April 2011.
A key reason for the supply delays in November, according to
surveyed firms, was that global freight shipping took much longer
to arrive, often due to a delay in Chinese exports. At the same
time, many businesses noted that port capacity was coming under
pressure, as the fall in global demand and reduced shipping
schedules earlier in the year have led to a bottleneck of empty
shipping containers in western ports. Thus, processing capacity for
new cargo arrivals has reduced sharply, all whilst import demand
has surged following the lockdown.
Our analysis of PMI survey contributor comments - which tracks
the frequency or words or phrases in the qualitative reasons given
by global panellists in relation to key metrics monitored by the
PMI survey - has picked up these trends. The frequency of mentions
of 'port' or 'shipping' delays rose markedly in November to
approximately 20% of all global respondents. This was higher than
the previous peak of 16% in March, when COVID-19 measures in Asia
curtailed global shipping activity.
Europe and North America see strongest declines in
supplier performance
The current problems with global supply chains are notably
concentrated on east-to-west routes, as a lack of containers in
eastern ports have meant goods exports are being delayed, while
ports in Europe and North America face heavy congestion.
Consequently, some shipping companies are reportedly having to
redirect containers to other ports, such as Maersk which has
switched from Felixstowe to Liverpool for UK arrivals for the final
weeks of the year.
This was illustrated by national PMI data in November, which
showed that the sharpest lengthening in suppliers' lead times among
major economies were in the UK, Canada and France. Moreover, these
countries, as well as USA and (notably) Germany, recorded faster
deteriorations in supplier performance compared to October. In
contrast, Asian countries saw only modest slowdowns in
deliveries.
Disruption risks setback in global manufacturing
recovery
The manufacturing sector has been a bastion of the global
economic recovery in recent months, recording stronger expansions
than the services sector as COVID-19 measures have enabled goods
production to scale up more quickly. In November, the JP Morgan
Global Manufacturing Output Index posted 55.2, while the Global
Services Business Activity Index posted 52.2, marking a fifth
successive month where manufacturing growth has outpaced that of
services.
However, the constraint of slower freight deliveries could
subdue overall manufacturing growth in December and the first
quarter of 2021, especially if producers are unable to procure
inputs. This risk was illustrated by Honda's announcement on 9th
December that production had stopped at their UK plant in Swindon,
due to a shortage of parts and a hold-up at domestic ports. That
said, the UK is facing additional short-term pressures as companies
move goods in and out of the country ahead of the Brexit deadline.
Nonetheless, similar events could unfold elsewhere, particularly as
manufacturers have often held fewer stocks during 2020 in an effort
to reduce inventory holding costs, thus relying more on speedy
input deliveries.
Inflationary pressures likely to rise
Another strong headwind on global producers is a marked rise in
input prices midway through the fourth quarter, as freight costs
surge in response to lower capacity and the imbalance of supply and
demand. Shipping companies have seen Chinese container prices rise
three- or four-fold in a matter of months, contributing to the
highest rate of overall input price inflation since November
2018.
With companies still batting weak margins after the global
economic downturn, these higher costs have often been passed on to
consumers, as indicated by a solid rise in output charges in
November. While the pace of increase remained slower than for input
costs, it is still trending upwards, driven by faster inflation
across the US, UK and eurozone. These inflationary pressures have
the potential to build further during the busy Christmas period,
meaning consumers could also face a sharp increase in prices.
Going forward, these largely structural issues for global supply
chains mean disruption could continue well into next year. As
shipping routes recover to their normal schedules, empty containers
should slowly return to Asian ports, increasing capacity on
east-to-west routes and reducing the pressure on freight prices.
How long this takes remains unclear though, which makes PMI data as
important as ever for tracking these global manufacturing
trends.
The next JP Morgan Global Manufacturing PMI is released on
Monday 4th January 2021.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
