Editor’s note: This story is part of an ongoing series diving into the opportunities and challenges supply chains face in 2023. Read the rest of the series here.
Many of the constraints to supply that caused headaches in 2021 and into 2022 have eased, for reasons good and bad. (Good: Capacity rebounded. Bad: Demand slumped.)
But shortages haven't disappeared completely. Specific circumstances — from geopolitical and environmental turmoil to localized demand surges and more — are leading to stockouts of some goods.
“The macro conditions around Ukraine, climate [and] China are not changing significantly,” Simon Geale, EVP of procurement at the consultancy Proxima, said. “They're all dragging on.”
While the war in Ukraine has pressured commodities including some food staples, the continued concentration of production in China for numerous industries has also created a whole menu of risks that companies are still managing. China has rolled back its strict COVID-19 protocols and is grappling with a surge in case numbers, but the country could soon rebound economically and spark a new demand rush.
“While China is starting to open up, there's still a big backlog from the length of time they were shut down and turning things on and off again,” Ron Scalzo, senior managing director with FTI Consulting, said. “That's affecting everybody.”
Here’s a look at the goods that could give procurement officers a headache in the coming year.
Last year’s invasion of Ukraine by Russia caused several commodities to spike in prices amid concerns about their supply.
Those troubles remain, though fears of disruptions to wheat have eased after Ukraine’s harvest was larger than expected. At the same time, environmental challenges elsewhere in the world are straining the supply of other important crops, including vegetables.
“The drought in California definitely had an impact on lettuce and tomato crops,” Scalzo said, noting also that recent floods in the state could have additional impact down the line.
Dole COO Johan Linden told analysts in November that the fresh fruit and vegetable producer was seeing “complete crop failure” in key commodities.
“This goes across the whole industry, where almost 30% to 40% of all the iceberg and romaine have failed and that is due to an extreme heat that we had in the beginning or late summer [and] beginning of the fall, followed by rain,” Linden said then.
Against that backdrop, buyers are managing inflated prices and tight supplies. Chick-fil-A, for instance, told customers that “some items may be unavailable or prepared differently” and Subway said it would temporarily use less lettuce in its sandwiches.
Eggs have also come under strain as avian flu has laid waste to flocks and driven up costs for farmers. Market prices per dozen eggs at the end of 2022 were up nearly fivefold from last January, according to USDA data. The term “eggflation” has, for better or worse, entered use.
“You can probably find eggs, but the prices have tripled in some cases,” Scalzo said.
Dine Brands Global CEO John Peyton complained in November that business expenses were falling more slowly at its IHOP chain compared to Applebee’s because “IHOP’s costs remain inflated due to the stubborn cost of eggs” as well as the war in Ukraine’s effect on grain prices, which feed into pancake batter.
Denny’s Corp. CFO Robert Verostek told analysts in August that commodity inflation had reached “unprecedented levels,” which included eggs along with pork, beef, dairy, poultry and other foods.
As often happens, tight supplies can translate into a boon for suppliers. In late December, Cal-Maine Foods, which calls itself the largest producer and distributor of fresh shell eggs in the U.S., logged a 110% spike in net sales and record profits, driven by highest-ever egg prices.
Lithium and other EV components
With electric vehicles seen as key to a global energy transition and decarbonization, demand has been on the rise for key commodities used in battery production and other green engineering components. The Inflation Reduction Act, which included incentives for EVs, is expected to raise demand yet further in the years to come.
Prices for lithium — a crucial material to making batteries — have soared with global consumption rising 33% in 2021 compared to 2020, according to the U.S. Geological Survey.
Lithium hydroxide prices were up 156% YoY in December, according to S&P Global Commodity Insights. The consultancy BCG noted in an August report that the price of lithium has increased ten times over in the past two years. High prices are likely to persist as chronic shortages loom, according to BCG.
“Costs are going up, demand is going up, supply is tight,” Geale said.
EV makers are feeling the pain. Tesla’s costs are likely to rise after a lithium supplier amended their agreement to peg the EV maker’s lithium costs to market prices, rather than at fixed prices as in their past agreement.
“[I]n electric vehicles, things like battery-grade lithium are still crazy expensive,” Tesla CEO Elon Musk said in October.
Supplies of other important materials for battery production are also under strain. Graphite, one of the primary components in the anodes of lithium ion batteries, has faced pressure as demand rises, with expanding shortfalls predicted over the next decade.
Shortage fears have also risen around cobalt, which was included in a Government Accountability Office report last year as a critical material for advanced technologies with high supply chain risks due to the U.S.’s reliance on imports.
“Tripledemic” is another recent addition to the lexicon, describing parallel spikes in various respiratory illnesses that hit the world’s population of children hard this year. The trend has pressured demand and supply for medicines common for children during the cold and flu season.
Stories abound of empty shelves and desperate parents. In December, drugstore giants CVS and Walgreens began limiting sales of over-the-counter children’s fever relievers including acetaminophen and ibuprofen. Walgreens said at the time that sales caps were meant to “prevent excess purchasing behavior” amid demand surges.
A form of amoxicillin used to make liquid doses for children also reached an “acute shortage,” according to the Food and Drug Administration in November. The agency said then that the supply shortfalls could “lead to potentially serious or life-threatening situations in particular in the pediatric population” as the respiratory illness season peaked.
The FDA has been working for more than a decade to combat pharmaceutical shortages. With many common medicines, the margins are thin, leaving little incentive for producers to build up excess capacity or stock.
In the case of amoxicillin, capacity is difficult and expensive to ramp up due to lack of flexibility in the equipment and processes used to make the drug.
“There’s not a short-term capacity answer for this,” John Gray, a professor of operations with Ohio State University’s Fisher College of Business, told Supply Chain Dive in December.
Also in short supply is the drug known by the brand name Adderall, used to treat attention deficit hyperactivity disorder, or ADHD. The FDA issued a shortage notice for the drug in October, noting that manufacturer Teva is “is experiencing ongoing intermittent manufacturing delays.” Supplies of other ADHD drugs are also reported to be under strain.
The global chip micro shortage will enter its fourth year in 2023 after multiple disruptions stemming directly or indirectly from the pandemic.
Semiconductor constraints have caused headaches and delays for multiple industries. Supply is increasing for some chips, and 2023 could be the year when, finally, most of the industry stabilizes.
Reduced demand amid a global economic slowdown has lessened the pressure on supply. TSMC CEO C.C. Wei said in the company’s fourth-quarter earnings call, “As customers and the supply chain continue to take action, we forecast a semiconductor supply chain inventory, while reduced sharply through first half 2023, to rebalance to a healthier level.”
Chokepoints remain, though. As Kazunari Kumakura, chief officer of Toyota Motor Corp’s purchasing group put it in November: “[I]n some semiconductors, the supply is getting better and in other semiconductors the chips remains in short supply.”
As with lithium, the U.S. government is trying to boost domestic chip production. In August, President Joe Biden signed legislation that included billions of dollars in subsidies to boost U.S. chip manufacturing with a 25% federal tax credit for companies investing in semiconductor production.