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Supply chain inflation bow wave washes into Q3’21

Ags - Softs 129 Business Sentiment 182 Cons. Discr. - Durables 453 Cons. Discr. - Retailing 412 Consumer Staples 733 Corp - Shipping 936 Energy - Crude Oil 293 Info Tech - Tech Hardware 735 Materials - Packaging 44 Metals - Aluminum 227 Metals - Copper 66 Metals - Steel 480 U.S. 5193

Global supply chains have been beset by cost inflation since late 2020 with a wide range of commodities continuing to experience rising prices. Panjiva’s basket of seven industrial commodities (sourced from S&P CapitalIQ) plus shipping rates increased by 0.5% as of Aug. 13 versus June 30, following an 18.9% rise in average prices in Q2’21 versus Q1’21. 

There’s been a widely mixed performance though. Prices for lumber and crude oil fell by 32.1% and 4.4% respectively on Aug. 13 versus June 30 while cotton and shipping rates rose by 9.9% and 14.9% respectively. 

The rise in shipping rates may prove particularly persistent on the strength of commentary from container lines and freight forwarders as discussed in Panjiva’s research of Aug. 16, almost all of whom expect rates to remain elevated at least until Q1’22. 

Commodity, logistics price inflation proving persistent in Q3

Chart compares changes in commodity prices. Basket based on unweighted average of components shown. Calculations based on S&P Capital IQ and Shanghai Shipping Exchange data. Source: Panjiva

The global transfer of higher prices has been underway since mid-2020 on the basis of U.S. import price inflation data. Panjiva’s analysis of official figures shows that aggregate import prices increased by 0.3% in July versus June, the ninth consecutive rise and the 14th in the past 15 months. 

Importantly much of the inflation has come through in key supply chain components. Prices for plastics and base metals increased by 1.0% and 2.3% respectively in July and have increased by 14.0% and 29.5% respectively since May 2020. Vehicle parts and computer circuits also increased by 1.0% and 0.3% respectively from June to July, potentially reflecting the global shortage of semiconductors globally.

Cost of international component supplies steadily rising

Chart segments change in U.S. import price inflation by product. Calculations based on Bureau of Labor Statistics data. Source: Panjiva

The transmission of higher commodity, component and assembled goods costs into consumer prices can take several months. That may not take as long as the two to three quarters highlighted in the coffee industry, but a bow wave of higher prices could take a few months to fully feed through into consumer prices.

Indeed, there are already clear signs of higher commodity and import prices feeding into producer prices. Intermediate stage 4 producer prices rose by 1.1% in July versus June and have increased by 15.8% since May 2020 while final core goods producer prices rose by 0.6% in July versus June and by 13.5% since May 2020. 

On an annualized basis that’s meant that import prices rose by 10.2% and final goods Producer Price Index increased by 10.4% while consumer prices rose by 5.4% year over year in July as companies begin to pass through higher costs.

Supply chain inflation suggests consumer prices may have further to go

Chart compares change in U.S. price indices. Calculations based on Bureau of Labor Statistics and S&P CapitalIQ data. Source: Panjiva

All firms are becoming more focused on inflation, particularly the information technology and consumer discretionary sectors, whose mentions of inflation in earnings calls jumped by 98.1% and 90.0% year over year respectively in Q2. Information technology talk about inflation increased further in July from 90.0% to 186.7% year over year, while consumer discretionary growth on the topic slowed from 90.0% to 60.0% year over year.

Both these sectors sell relatively more elastic goods than those with lower growth rates like communications and utilities making inflation a more prominent threat to potential operations. 

Information technology increases inflation talk

Chart shows year over year change in mentions of inflation in earnings calls by sector. Source: Panjiva

Sentiment data accessed through S&P Global Market Intelligence Xpressfeed shows the opposite is true, with sentiment in financial calls increasing by 386.7% year over year in July. Markets that likely will be able to benefit from raised prices or those that can easily raise prices, like energy or real estate, show higher sentiment growth while sectors that may have greater negative impacts from wage growth and resistance to price increases, such as consumer goods, show slower sentiment growth. Notably, the information technology sector saw the lowest sentiment growth, 38.3% year over year in July and 18.8% in the first 15 days of August. This is likely due to the ongoing semiconductor shortage, combined with signs of satiated demand from the laptop market.

Financials have good things to say in 2021

Chart shows sentiment by sector on a year over year monthly basis. Source: Panjiva

Panjiva data for companies in July provides a sneak peak into their Q3 performance. One way to measure this is import momentum, or the difference between the year-over-year change in imports in July versus the year-over-year change in imports in Q2.

Spice supplier McCormick‘s CEO, Lawrence Kurzius, said during the firm’s Q2’21 earnings call that they are investing in our supply chain to expand our capacity and capabilities as well as increase our resiliency.” and rearranging their supply chain. This may be slow coming as imports associated with the company continued to fall by 35.7% year over year in July, a 2.2 percentage point increase from Q2.

Mattress manufacturer Sleep Number saw large import momentum with imports in July rising 44.5 percentage points faster than in Q2. This likely indicates that their supply chain has recovered from “temporary component and labor constraints, inflation and expedited logistics pressures” that occurred in June and July, according to CFO David Callen. Panjiva research notes that the next challenge for the firm is likely to be “absorbing the inflationary impacts of a global supply chain.”

Signify, a lighting company, also saw positive import momentum with imports in July increasing by 25.7% year over year against import growth of 20.7% in Q2. This indicates that the company is managing the “crazy bullwhip effect“ mentioned on the firm’s Q2 earnings call successfully.

Levi, Voxx, Electrolux, Fever-Tree, Thule, Mattel, Hasbro, and Cargotec all saw negative import momentum, possibly showing that the boom in imports associated with reopenings and vaccine optimism this year may be coming to a close. With another critical holiday season for retailers approaching, imports will likely need to recover in Q3.

Sleep Number shows highest import momentum in July

Chart shows imports associated with selected companies on a year over year quarterly basis. Source: Panjiva

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