The supply chain crisis: Q&A with our experts

The supply chain crisis is one with many facets. What we're seeing is not only disruptive. It's historic—the first major disjunction in the synchronized supply chain system in 30 years of globalization.

Supply chains used to be something only supply chain managers talked about. Now you'll hear about them in profit reporting by companies like Amazon, Apple, and Gap. You hear about them as explanation of the decline of Japanese GDP. You hear about the crisis from consumers worried about their holiday packages. And you'll hear about it in anguished discussions, ranging from retail shop owners to prime ministers and presidents.

These insights came from IHS Markit Vice Chairman Daniel Yergin, Ph.D. in our recent webinar Supply Chain Crisis: What's Ahead for 2022. He was joined by a panel of IHS Markit experts:

• Chris Williamson, Chief Business Economist
• Peter Tirschwell, Vice President, Maritime & Trade
• Matteo Fini, Vice President, Automotive Supply Chain, Technology and Aftermarket
• Jim Burkhard, Vice President & Head of research for oil markets, energy & mobility
• Tom Scott, Global Director, Agribusiness Consulting
• John Anton, Director of Pricing and Purchasing
• Nathalie Wlodarczyk, Vice President, Risk Intelligence Solutions

The panel provided a panoramic view of the crisis through an in-depth Q&A session. Here are some key highlights.

Yergin: Does this supply-chain disruption reflect the longest delay we've tracked?

Chris Williamson: It is by far the longest disruption that we've seen in nearly 30 years. The rate of deterioration isn't quite what it was in the summer. There are signs of it easing a bit. We're getting some good production numbers coming out of Japan and Southeast Asia. Even China is stabilizing. So that's helping a bit. But nevertheless, these shortages are quite unprecedented.

Yergin: I think we've all seen the pictures of all those container ships stacked up off the coast of Southern California. What is going on with shipping and transportation?

Peter Tirschwell: We're in the deepest crisis that the container shipping supply chain has ever seen. And I'd like to be able to say that we see signs of abatement, we see signs of the log jam breaking. But frankly, we don't. One reason is that e-commerce sales saw anywhere from 5 to 7 years of growth in a single year. E-commerce requires distribution centers. The distribution center footprint was not prepared and still remains completely unprepared for that level of volume.

Yergin: One shortage that has been particularly conspicuous throughout the supply chain crisis has been that of computer chips. Where does the computer ship shortfall stand now?

Matteo Fini: We think that the one-off shock is largely in control. However, there are other areas of the chip shortage to be concerned about because, obviously, semiconductors are formed by quite a few component families. And as we look at 2022, we think that analog chips will be another area of a big concern.

But computer chips will absolutely still be a problem in 2022. We're looking at lead times that normally would be in the region of 12 weeks shot up to 26 weeks. And that has major repercussions for the auto industry. The chip shortage has meant that a vast portion of manufacturers' portfolios could not be manufactured. As we look at 2024, 2025, 2026, there is a significant structural deficit that has to be addressed, which would require significant investment in capacity. That takes time to build and takes time to execute on.

Yergin: How have supply chain issues affected oil and gas price trends? And I know it's a little complicated with Omicron…

Jim Burkhard: With Omicron, it's very early days. We don't know anything definitive about it. But what we do believe at this point in time is that this is not a repeat of March and April of last year, when oil demand globally fell about 20%. You're not going to have that type of reaction. However, this is clearly a negative for demand. It's going to hurt jet fuel demand in the short term. We think it will cut off about 100,000 barrels per day of jet fuel demand. We're talking an oil market of 99 million barrels per day of consumption. So that's a relatively modest impact right now. But again, it's early days in terms of understanding it. But Omicron hits at the heart of oil demand and that's mobility. Looking to next year, market conditions are not static, they're dynamic. 2022 will be different from this year.

Yergin: Let's talk about a liquid commodity that's not oil. Coffee has been very good case study of what's happening. Can you tell us why?

Tom Scott: The supply chain problems compounded other problems. Coming out of the pandemic, we saw demand increase for all foods. The onset of the supply chain issues increased costs by about 30%. The price of coffee, consequently, has risen some 30-40%.

Yergin: What's going to change in food and agriculture industries from these supply chain disruptions?

Scott: We spent a generation working our supply chains with just-in-time supply, keeping inventories minimal. I'm not saying we're going to reverse that 100%. But we're definitely encouraging our clients and the people we work with to think about their inventory levels and what they need in terms of buffer stocks to guard against these disruptions.

Yergin: John, as Director of Pricing and Purchasing, one of the things you do in your job is worry about commodities. Can you tell us which commodities you're particularly concerned about for 2022?

John Anton: There is not enough electrical. Historically, electrical steel was used to make electric motors, generators and transformers. Now it has to make all of that—plus batteries. And there's not enough capacity to meet that new demand sector. And while there was ample idle capacity before, it will be stretched too thin now. Battery vehicles for 2022 will get all the steel they need. But if you make electrical machinery, you're only going to get about 80%, at best 90%. And we've heard this from the major electrical machinery makers around the world. We have been told the same thing by the mills.

Yergin: We've been talking about pretty short-term impacts, short-term being 2022 into 2023. But obviously, companies are balancing these short-term decisions with longer-term strategic plans. What other risks around supply chains, longer term, are on the horizon?

Nathalie Wlodarczyk: What we're expecting to see as we go through 2022, and certainly beyond, are political decisions playing a much more significant role. We see this, particularly, as governments start to make decisions about strategic resources and how to secure competitive advantage and focus on things like strategic minerals and components critical to energy transition.

There is increased focus on climate risk, on ESG responsibility. And there are two dimensions there. One of the direct impacts is when climate ends up leading to disruption because we don't have enough resources being produced, there's not enough supply. But social and governance instability that can surround that as well, as climate action starts to come into focus.

Yergin: So, for supply chain managers, what does geopolitical risk mean? And how will those risks manifest themselves?

Wlodarczyk: It's largely about governments and government decisions that ultimately trickle down to very specific impacts. We're starting to see a much stronger focus on supply chain resilience from governments, whether that's Build Back Better in the US or emphasis in China's 14th Five-Year Plan on self-sufficiency. The EU has similar focus on strategic autonomy for high-capacity batteries, semiconductors, and critical minerals required for these newer, greener technologies. Competition for key minerals and resources is going to be much starker.

There's more to learn from this insightful webinar. Watch the full recording here