Containers loaded on a ship
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Supply Chain Shortages Worsen Amid COVID-19 Outbreak, Russia-Ukraine War

Mohit Oberoi, CFA - Author
By

Jun. 14 2022, Updated 8:22 a.m. ET

The global supply chain shortages have crippled industries for the past year, and the situation doesn't look like it will improve soon. If anything, it could get worse for some products, especially food. Many people are wondering when the supply chain shortages will end.

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The supply chain problems are also impacting economic activity and adding to inflationary pressures. Inflation is running above comfort levels in most countries and Central Banks in many countries have pulled the plug on accommodative monetary policies. The U.S. Federal Reserve has already raised rates by 75 basis points in 2022 and is expected to raise rates multiple times this year.

Why is there a supply chain shortage?

There has been a perfect storm in global supply chains. Demand picked up globally in 2021 and many companies restocked after eating into their inventories in 2020 amid the COVID-19 pandemic, but the supply of many goods didn't keep up.

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There was a logistics nightmare in 2021. We saw a shortage of shipping containers, jammed ports, and a shortage of drivers to transport goods inland. The hoarding of some products didn't help either.

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Global supply chains were expected to get better in 2022

It was widely believed that the global supply chain shortages would get better in 2022 as the boost from holiday shopping dies down. Also, the labor shortage situation was expected to get better in the year. Companies were also adding capacity while demand growth was expected to slow down in 2022 amid a slowing global economy.

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However, things haven't improved in 2022. The labor shortage situation and other logistics issues have continued, and in many cases only worsened in the year.

The global chip shortage has continued in 2022.

The global chip shortage is possibly among the most crippling aspects of supply chain problems. The global automotive industry lost billions of dollars in 2021 due to the chip shortage and the situation hasn't improved much in 2022.

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Leading automakers like Ford posted a sales decline in the first quarter of 2022 because there aren't enough chips to build cars. Automakers have seen a pileup of unfinished inventory, which is also impacting their cash flows.

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Why did supply chain problems get worse in 2022?

Global supply chain problems have gotten worse in 2022. There are multiple reasons why supply chain shortages haven't ended in 2022. First, the global economy was hit by the omicron variant of the COVID-19 virus in early 2022. This added to the supply chain disruptions as many countries imposed restrictions.

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Second, the Russia-Ukraine war added to the supply chain woes. This especially holds true for wheat, sunflower oil, fertilizers, and most importantly energy. The global energy market is staring at a crisis amid the Russia-Ukraine war and gas prices have skyrocketed to record highs.

Also, if the Russia-Ukraine war wasn't enough, countries like India and Indonesia imposed restrictions on some food exports to contain domestic inflation. These moves also added to the supply chain problems.

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China's COVID-19 outbreak is also hurting global supply chains.

The COVID-19 outbreaks in parts of China also aggravated supply chain issues. While the rest of the world is learning to live with the coronavirus, China still has a strict zero-COVID policy. Lockdowns in parts of China had a negative impact on the supply chain of several goods.

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Looking at the U.S. markets, we have had some fire incidents at food processing plants, which have put pressure on the food supply chain. We also had some product recalls like the baby formula from Abbott and peanut butter from Jif, which had a negative impact on their supply.

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Climate change is a threat for global food security.

Climate change is also adding to food supply chain shortages in 2022. For example, the Indian wheat crop yield has been impacted negatively by hotter-than-usual summers. Sriracha also hasn't been able to procure the desired chilies due to drought in Mexico and parts of the U.S.

Adverse weather conditions in multiple parts of the world have made the food supply chain worse at a time when we already had a shortage of several food products due to the Russia-Ukraine war.

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When will the supply chain shortages end?

The supply chain shortages might persist for some more time. Things are gradually getting better for some products like chips and baby formula. Also, we have an oversupply of some consumer discretionary products. Consumers have cut back on spending amid the rising inflation.

The global supply chain for manufactured products should get better in the second half of 2022. However, the food supply chain continues to grapple with the Russia-Ukraine war and climate change. There's already a food shortage in many parts of the world and the situation might not get better anytime soon.

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