Get Ready for More Shortages and Empty Store Shelves

In the early days of the Covid-19 pandemic and lockdowns, you probably got used to walking into a supermarket and seeing empty shelves.

Often as not there were no paper towels or toilet paper. Or the store had no more hand-cleaning and virus-killing products.

Sometimes, though, you saw entire shelves vacant — like where red meat or chicken should have been.

Lately, the supply situation seems to have improved. When you go to the store, you can usually find what you’re looking for.

But beware, because the empty-shelf-syndrome is not over…

empty shelves

Get ready to see these again!

In fact, the next wave of shortages is already built into the system. And it’ll affect much more than the meat section of the supermarket.

The reason is simple — global supply chains are still broken.

This is an issue that reaches across oceans, in many instances back into the factory heartland of China.

Let’s dig into this… beginning in (where else?) China.

China identified outbreaks of COVID-19 in November and December 2019, but hushed up the news.

Most of the world didn’t hear about the problem until January 2020, when the virus was spreading so widely in China that it was impossible to keep under wraps.

So after the initial denials and outright cover-ups, the Chinese Communist Party (CCP) finally took action at the end of January

It placed travel restrictions across the country, impacting movement by plane, train, bus, automobile, and even bicycles and oxcarts.

But the timing could not have been worse

The government locked millions of people in place right in the midst of the Chinese New Year holiday, a celebration that last two to three weeks.

This particular Chinese holiday is a peculiar thing; the equivalent of combining the U.S. version of Thanksgiving, Christmas, New Year, St. Patrick’s Day, Memorial Day, Independence Day and… everything else.

In the 10 days or so before Chinese New Year, hundreds of millions of people leave their jobs and company-supplied housing to travel wherever their family and friends are celebrating.

A few days later, those hundreds of millions of people pack up and head back to their job.

It’s a national migration unlike anything that happens in the U.S. But let’s try to envision it…

Imagine the start of a three-week holiday season where most of the U.S. population west of the Mississippi River travels east while most everyone east of the Mississippi heads west.

Then in the middle of it all, everybody reverses the trek.

It’s essentially what happens in China every January. Hundreds of millions of people relocate, often across the breadth and width of the country. Every form of transport is packed to the gills and rafters. Every train station, airport, bus station, etc., is jammed.

But this year — after a large chunk of the population had already left their jobs and factories to celebrate with distant friends and family— the CCP banned most travel.

So the usual great migration from home back to the factories didn’t happen.

It took weeks, and even months, for many workers to get back to their jobs.

Many returned only to learn the companies were closed or projects were shut down.

In other cases, there were problems obtaining supplies, parts and components. So the factories remained shut down, or working at reduced output.

But you probably didn’t hear much about the China shutdown in conventional news…

It’s not the kind of thing that most U.S. news outlets care to discuss.

Looking back to January, February and March, much of the U.S. news cycle was focused on  President Trump’s impeachment, the Democrat’s primaries and eventually the lockdowns and pandemic issues at home.

Of course, here at the Whiskey bar we discussed China’s plight. It seemed extremely important… And of course we were way ahead of the news.

In our article on Feb. 13 — “A Nation in Facemasks”, I described how Shanghai was a ghost-town… and warned of the looming problems that our global supply chain faced.

I even warned that the virus “is already playing havoc with the global economy. It’s going to smack-down many overvalued plays and players.”

Sure enough, the world suffered as entire industrial sectors across China went cold: mines, mills, processors, fabricators, factories.

For a good visualization of what happened in China, take a look at the country’s coal consumption in the days leading up to New Year and afterwards.

Since coal is mostly used to generate electricity, you can get a sense of what was happening at Chinese power plants.

electric slump

The electric slump of 2020.1

In normal years, Chinese electric power demand begins to fall about 10 or so days before New Year. This represents factory closures for the holiday.

And in normal years, it takes 10 to 20 days for power demand to return to where it was before as people get back to work.

Except not this year…

In 2020, China’s power demand slump lasted well over two months after the holiday. And this offers a solid hint of the scope of China’s ensuing loss of factory output.

Keep in mind, we’re not just talking about the kind of injection-molded plastic stuff that you see on the shelves of Target or Walmart. Yes, it’s that… But also, much more.

Let’s give China some credit… The country has a sophisticated manufacturing sector that is more than capable of cranking out high-end products.

High end, like your iPhone…

Or consider auto parts or electrical equipment. If you drive a late-model car, there are likely a good number of Chinese-made subassemblies and/or parts and components inside.

And many of those power tools at Home Depot and Lowes are also made in China. (Just look at the packaging… It says so right on the box.)

Or here’s another sector entirely…

Over many years, I’ve attended the massive Offshore Technology Conference in Houston, focused on energy development, especially offshore (as the name implies).

In the past decade, it has been a requirement with me to visit the China Pavilion, to see how much and how good their energy equipment is. And it’s quite good…

In many cases, Chinese energy-related goods are equal to Western products and standards, from ball valves to drill pipe and seismic equipment.

But quality products don’t matter if the factories aren’t producing them.  Needless to say, the COVID-related shutdowns led to a significant hit to China’s economy.

For example, for lack of cash, many Chinese businesses simply closed their doors. In the first half of 2020, Chinese business bankruptcies added up into the hundreds of thousands.

The South China Morning Post estimated that nearly half a million Chinese companies went under in the first half of 2020. And “things are almost certainly going to be worse than any forecasts you have read,” noted one reporter.2

With numbers like that, the impact on China’s workforce is well into the tens of millions — people who lost a job or whose business is struggling to stay afloat.

Bad for the Chinese, obviously.

But how does this affect you?

Right now, thousands of U.S. businesses have been and remain affected by canceled or “short” deliveries from Chinese suppliers.

That is, the cargo container may not show up, so the business must scramble to find another supplier. Or perhaps the cargo container shows up, but with only a fraction of what was on the original order.

Of course, this makes it difficult to run a business….

I recently attended a conference (by video, considering the times) in which senior U.S. business executives discussed “supply chain problems” out of China.

One consultant said he has a simple slogan: “Reshore Now!” In other words, re-establish production of critical goods back in the U.S., or in Canada, Mexico or somewhere that doesn’t have the issues of China.

At the same time, the execs were sanguine.

Over many years, companies moved production to China for a reason: Because it worked in the overall scheme of running a business.

In many cases, China offered great deals on land, roads and ports, energy supply and raw materials. Wages have long been low in China, although that’s not the case anymore with higher-end production.

And after years of working in China, the work force is trained, and the overall system is a known quantity.

In essence, it was a multi-decade process to deindustrialize the U.S. and the West and to shift much of the world’s factory-work to China.

It’ll take a generation and more to bring some semblance of all that back home, if that’s even possible.

But right now — in the here and now — it’s fair to say that the big “China Inc.” factory is broken. The China-based supply chain is broken.

Chinese industry is running at reduced levels, and much of the problem can be traced back to the CCP shutdown order in the middle of the New Year holiday. It has still not rectified.

The factories in China are not back up to full speed, and the country is showing structural problems getting itself back into trim.

So don’t be surprised when you walk into a store to buy some product that you take for granted — kitchen utensils, cleaning supplies, power tools, or even auto parts if not an entire car — and see that the shelf is bare.

On that note, I rest my case.

That’s all for now… Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder
WhiskeyAndGunpowderFeedback@StPaulResearch.com

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1 Carbon Brief, Analysis: Coronavirus Temporarily Reduced China’s CO2 Emissions by a Quarter

2 SCMP, Bankruptcy Tsunami Worse than Predicted

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