April 2021 Market Update

2021 is shaping up to be a volatile year in manufacturing – as one challenge subsides, another intensifies. Ocean freight has been an ongoing concern since the pandemic started last March, and there are now faint signs of a more stable freight market. Ocean freight rates have stabilized from the record highs last month, and the backlog at the busiest ports is beginning to let up despite a 47% increase year over year in imports.

Raw material shortages are the new focus with scarcities and price increases on plastics, steel, cardboard, and wood. The freak freeze in Texas has some of the largest petrochemical manufacturers shut down. The ongoing issues are starting to trickle down to consumers, with many retailers (Nike, GAP and Best Buy to name a few) listing supply chain delays as causes for reduced sales. Many estimates suggest that material shortages will remain until at least early summer when opening entertainment, retail and travel sectors relieve some demand-pressure from manufacturers.

The US economy is looking brighter if we can live with a little inflation. The Federal Reserve suggested last week that they would not be raising interest rates through 2023 and would accept some inflation to help recover lost jobs from the pandemic. Manufacturing output increased in March, although many companies list labor shortages as the cause for production delays as they struggle to hire workers. Vaccinations are rolling out quicker than planned and many states are allowing access to all adults within the next few weeks.  

New Trends

Raw materials markets have been volatile due to high demand and in some cases, weather. The freezing conditions in Texas could cause months of plastics shortages, with PVC, HDPE and other plastic costs rising sharply. Steel mills domestically and in Asia are still struggling to meet demand as the global economy rebounds sharply. Our factories have told us of rationing and monthly quotas from steel mills, especially on specialty steels such as 316 Stainless. Even domestic mills are increasing lead times by 50-100%. Looking at Federal Reserve Economic Data, other metals such as Copper, Aluminum, Brass and Zinc have all been rising since late 2020.

There are some signs of easing at key US Ports – Last month more than 50 container ships were at anchor outside of Long Beach and now there are about 20 (the lowest since December 2020). Carriers have been adding any capacity they can and scheduling blank sailings to ease the congestion on the west coast. About 1/3 of the total freight volume in NY/NJ is empty containers moving back to Asia. Domestic trucking and inland freight from ports has become expensive as weather conditions earlier in March and increased demand has driven pallet rates higher. Spot rates have come stabilized from the highs of last month, and there are signs that the freight market may be less volatile going forward as dockworkers are vaccinated and demand for goods alleviates with the re-opening of restaurants and travel this summer.

Ongoing Concerns

The USD has weakened relative to most other currencies since the pandemic began, although recent signs show a strengthening. Most of the decline in value has been since October 2020. Wall street analysts are suggesting that a weak USD will continue for some time, with US interest rates expected to stay at or near 0%. The USD did gain on some other major currencies in the past month, which analysts say is due to vaccine rollouts domestically and 3rd waves of the virus hitting Europe and parts of Asia. The wall street “Fear Gauge” VIX Index, which measures volatility in markets, hit the lowest point since the Coronavirus started last year signaling stability in markets.

Adding to lead times, secondary processors like painters and platers are backed up with work. On large quantity items, lead times have been significantly extended as there is simply not enough capacity to meet the current demand. We are still seeing some RFQs rejected outright due to lack of capacity at painters. Unfortunately, most factory capacity is fully booked through the 3rd quarter of 2021. Owners are reluctant to add much capacity to their lines, as they have told us they do not believe the strong demand will continue beyond 2021 as manufacturers replenish inventory that ran low during the pandemic.

The Solution

Ocean freight is starting to stabilize, and vaccine rollouts are going well in the US. Material shortages will be a threat for the next few months, and the possibility of 3rd waves of Coronavirus variants still pose a risk to stable manufacturing markets beyond the summer. With these numerous risks in a global supply chain due to COVID and its associated effects and the solution is still to plan much further in advance than you have historically to account for unpredictable events. It is also crucial to have transparent communication from all members of your supply chain. We will successfully navigate 2021 together with foresight and planning.

If you have any questions on how to mitigate these risks or concerns, please reach out to us at 1-800-535-2800 or email sales@uneedabolt.com

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