VUCA (Volatility Uncertainty Complexity Ambiguity) keeps happening and businesses keep adapting.
I previously wrote about one of my favorite sayings that I learned 50 years ago from a wise man: “Don’t get too depressed in the bad times. Don’t get too cocky in the good times. Things will change.” And here we go again with this mantra applying to the COVID-19 crisis. After months of waiting for a vaccine to protect us, many people got vaccinated and started to feel safe. We thought we were “over” it, but the vaccination rate was not high enough to attain herd immunity. Then the Delta variant caught on and cases exploded again.
- – Daily deaths in many parts of the country are now close to what they were before the vaccine became available.
- – “Unvaccinated Americans account for virtually all recent COVID-19 hospitalizations and deaths,” said Jeff Zients, the White House COVID-19 response coordinator. “Each COVID-19 death is tragic, and those happening now are even more tragic because they are preventable.”
- – Now, even many vaccinated people are taking precautions as if they are not.
Right now, the prospects don’t look good for employers seeking workers:
- – There are 8.4 million unemployed people and 10 million job openings at present.
- – Compounding that problem are the 4.9 million people who aren’t working or looking for work compared to before the pandemic. Also, many are either retiring or not going back to high-stress jobs in the education and health fields.
- – Only 235,000 new jobs were created in August, and unemployment is down to 5.2pc.
Businesses adapt. For example, many are offering higher wages and bonuses to attract workers. However, even states that curtailed unemployment benefits this summer did not experience a big drop. We will see what happens now with federal aid benefits ending.
The supply chain drag continues with all the same issues as before. Shortages of trained [and untrained] workers, record long material lead times, a shortage of critical supplies, and transportation issues keep holding us back.
Continued logistics delays are another major drag to supply chains. Freight costs keep skyrocketing and look to remain that way until mid to late next year. Containers and ships are at an all-time backlog; once they get here, they are snarled up waiting for trucks and rail to move the goods. There are also shortages of trucks, drivers, and warehouse capacity. This is exacerbated by the need to replenish low inventories. Businesses are adapting by planning for more plant onshoring.
Businesses adapt to VUCA. Everyone is making plans to improve supply chain bottlenecks. Microchip manufacturers are an example. Microchips cannot be made quickly. TSMC, Taiwan Semiconductor Manufacturing Co., the largest chip supplier, just announced that they are increasing production to meet the auto industry’s needs over the next few months. In addition to the $12bn plant going up in Arizona, TSMC pledged another $100bn for new capacity. Many chip manufacturers are making plans to build new production, even though it is a minimum $2bn investment and at least two years until start-up. Intel CEO Pat Gelsinger predicts it will be a year or two before chip supply can meet demand.
Other critical goods suppliers are planning similar new plants to relieve bottlenecks. As this occurs, I believe we will see surpluses emerge where bottlenecks currently exist, and instead of prices going up, we will see a return to lower prices. More manufacturing will happen closer to home, and companies will move from just-in-time operations to keeping a safe surplus on hand. Supply and demand will balance out. This will be good news for keeping inflation under control.
My favorite lead indicator for business investment, nondefense capital goods new orders excluding aircraft, continues to be strong. July, the last month it was reported, was up 1pc, and ITR, an economics forecasting firm, expects it to continue growing through 2023. But negative news is coming out of China. Edward Meir reports: “Looking at China’s growth profile ever since COVID started, we note that the country was the first to get hit with the virus, the first to suffer economically from it, the first to recover, and now the first major economy to be slowing.” It is now slipping into slower growth as the Caixin, China’s PMI, dropped to 49.2. Even so, China will still grow more than 8pc this year.
The ISM, Institute for Supply Management, reported the manufacturing sector continued to expand in August, and at a faster pace than expected, even as factories continued to battle supply chain issues to meet strong demand for their goods. Manufacturing is one of the worst-hit sectors in the ongoing labor shortage, with job openings twice what they were pre-pandemic. I could go into detail about demand but you already know what is happening. Nearly everyone remains busy and could produce and sell more except for issues with labor, supplies, and logistics. This is reflected in the Shapiro Nonferrous Scrap Metal Index, which continued to be flat in August as it has all year.
Prime aluminum is starting September on an up note.
- – LME, London Metal Exchange, was up slightly, and the Midwest premium also rose to 34¢/lb. The premium is reflecting metal tightness, and ongoing logistics issues, along with Section 232 and the Russian export tax.
- – Edward Meir forecasts LME aluminum will hit $3,000 per metric ton in Q4 this year. [It just touched $3,000 on Sep 13 and fell off]. The historical LME high was $3,271/mt, or $1.48/lb, in July 2008, and the Midwest premium was hardly a factor.
- – The spot prime aluminum price on Sep 1 was $1.55/lb and is currently higher.
Demand remains strong, but a worldwide aluminum shortage is beginning because China cut back production by 6pc this year. The country suppressed smelting to reduce pollution and meet green targets.
Scrap supply has improved, but prime scrap prices have been only slightly higher to down slightly. Secondary aluminum prices dropped a bit due to reduced car production and logistics problems for scrap exports. Copper and nickel prices also dropped slightly, however, those metals will continue to be in high demand due to their use in electric vehicles. There is talk within the HVAC industry about substituting aluminum for high-priced copper.
Stainless prices were stronger with good demand. Scrap steel prices dropped this month by $40/mt. US steel production remains strong at 85pc capacity. Iron ore prices in China dropped significantly, which caused the price of both steel and scrap steel to drop. Considering this and reduced Chinese steel production because of pollution issues, it wouldn’t surprise me to see steel prices for HRC remain strong.
“What you do today can improve all your tomorrows.” Ralph Marston
Life is good. Family and health are precious. We have lots to be grateful for.
This report was prepared by Bruce Shapiro and reflects his current opinion of the economy. It is based on sources and data he believes to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice.