Supply chains aggravate commodity sectors

 Lumber is one of many commodities that has been significantly affected by volatile supply chains recently. | Paul Yanko photo

When obscure commodity and supply-chain stories become mainstream news, you know that commodities have become a big deal.

And so it seemed May 21 when the first half hour of CBC radio’s flagship current affairs program, The Current, was dedicated to lumber supply-chain woes.

It followed news that people had chopped down and stolen trees in British Columbia because of the hot lumber market.

In fact, the term “supply chain,” seldom heard outside of commodity circles until recently, has come into common use in the mainstream media.

Whether it’s lumber, copper, rare earth metals, canola or iron ore, the scarcity of many commodities and the supply chains that bring them to consumers are big news.

Even today’s stories about bicycle shortages have people talking about container ships and overwhelmed supply chains, as are stories about the global semiconductor shortage, which has F-150 pickup truck assembly lines shutting down.

There are four main causes of today’s volatile commodity and supply chain issues:

The pandemic caused buyers around the world to cancel and hold back orders of products, supplies and raw commodities when the pandemic struck and many forecast a massive economic slump.

The slump indeed hit, but in the advanced world it was matched by a mass of online ordering of many products, causing a surge in sales from many companies that soon ran short on supplies. When they attempted to get more from their suppliers, they found long queues and maxed-out ocean freight and railway companies struggling to keep up with the unexpected demand.

Some ports have been closed and many companies throughout the globe’s supply chains have been slowed by COVID-19 infections and added safety procedures, so things have slowed down as demand has been spiking.

In many countries protectionism has become a common policy, favouring domestic producers and disadvantaging foreign ones. That has snarled many supply chains, slowed down transportation, and left products and commodities stranded behind tariff and regulatory walls.

China’s use of commodity purchases as diplomatic leverage, as with its strangling of Australian iron ore and much Canadian canola, has further complicated the already fraught situation.

Many countries have become alarmed by China’s bellicose power projection through its trade, diplomatic and military forces. Many companies and most advanced western governments are attempting to “re-shore” critical industries and make sure supply chains aren’t reliant upon China.

This has caused complications, disruption and inefficiency, further adding to supply shortfalls and slow deliveries.

Few expected a worldwide commodities boom and raging bull market to come out of the first year of the pandemic.

But it did — with a vengeance. Demand for almost everything is up, investment has plunged since the crash of the last commodities boom in 2014, and commodity producers will only be able to increase overall production slowly and incrementally, long after this consumer goods boom either proves to be a long-lasting phenomenon or quickly flares out.

If the world’s economy continues to reflate, at least in the advanced economies of Europe, North America and Asia, the commodity boom and associated supply-chain challenges are unlikely to end soon.

It could take years for increased production to catch up with higher sustained growth.

If the consumer goods boom lasts for a few months more, supply chains will continue to struggle to keep up with demand while commodity producers simultaneously strive to increase production. If that growth stagnates, then higher commodity production and less-stretched transportation capacity should allow supplies of commodities and products to catch up, and prices to fall.

If the consumer boom gets snuffed out soon, then supply chains will become looser and more flexible, commodity producers will be able to maximize existing capacity to poach great prices while they’re still available without overdoing new investments, and the relative weakness of commodity markets will return.

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