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How are supply chain issues disrupting profits?

How are supply chain issues disrupting profits?

I believe that supply chain issues will add to the pressure on company profits over the coming 12 months. Such issues are causing a loss of business and rising costs, though some companies will be beneficiaries.

There are currently a number of bottlenecks. First, the quick rebound in demand after the first Covid-19 lockdown caught many producers by surprise.

This resulted in their placing large orders for components that could not be provided by their suppliers.

Shortages of semiconductors are causing disruption to a number of industries at the moment, including the auto industry, while last year timber prices soared as construction activity rebounded. Also, cement prices in China have recently increased by 50 per cent. 

Second, regional lockdowns have disrupted distribution systems, with ports closing in China and ships in short supply (the Baltic Dry Index rose 14-fold between May 2020 and July 2021). 

Third, a lack of workers in key sectors is resulting in much disruption.  

The UK finds itself in a delicate position, with the triple whammy of workers retiring or leaving the country due to Brexit, and those that remain being unavailable due to the high level of Covid infections. 

The food industry is suffering particular problems, both on farms and in abattoirs/processing plants, while a lack of HGV drivers is causing widespread disruption. 

This is not just a UK problem, with ports such as Los Angeles suffering congestion due to the lack of drivers to take the goods away – warehouse space is now at a premium. 

All of these labour problems are leading to wage pressures, which can only be exacerbated in the UK by the recent announcement that the living wage is set to rise by twice the rate of inflation.

The rise in natural gas prices could also be considered to result from supply chain issues, with the lack of wind power resulting in higher demand for gas at a time when gas networks were undergoing maintenance. 

Given that natural gas accounts for one-quarter of the world’s primary energy usage, the recent surge in prices can only add to cost pressures. UK natural gas prices surged 35-fold from the low of May 2020 to October 2021 or sixfold if we compare to the norm of recent years. 

This has had a knock-on effect on oil and coal prices, thus raising energy prices in general and electricity prices in particular.

After a 24 per cent gain in earnings per share in the year to end-September (my calculation based on the Datastream UK Index), I suspect that UK profit growth will be more sluggish over the next 12 months. 

Profit growth predictions

Firstly, profit growth follows the pattern of industrial growth, though with a lag of six to nine months. 

Given that the UK economy has plateaued over recent months (with retail sales volumes falling for a fifth straight month in September), I would not be surprised to see less profit growth as the end of 2021 approaches.