The AdBlue crisis, a symptom of bigger problems in the global economy
Prices for ammonia and urea have more than doubled, and the price of another form of fertilizer, potash, has increased by more than 70% this year.
Beyond its impact on AdBlue, soaring fertilizer costs will cause production levels to drop and food prices to rise globally.
It is no coincidence that a key element of China’s leadership ‘strategic reference plan’ set for 2022 last week was to secure supplies of agricultural products. China is concerned about food security.
Supply and demand imbalance
The factors at the origin of the energy crisis which particularly hit Europe and China are many and varied: the meteorological conditions, in particular the hurricanes in the United States which damaged key chemical complexes, the supply constraints of OPEC, China’s ban on Australian coal, reduced investment in new generation during the pandemic, and the global push towards decarbonization. But ultimately, they boil down to an imbalance between supply and demand.
This imbalance is at the heart of the broader problems plaguing global supply chains.
The supply has been and continues to be disrupted by the pandemic. With closures and labor shortages all along supply chains – from factories to containers, ports and distribution to final destinations – there have been capacity shortages due to a pandemic.
In China, with the Beijing Winter Olympics looming early next year and its leadership determined to show clear skies, it is likely that there will be more factory closures in the cities. major production centers close to the capital ahead of the Games, adding another source of supply disruption. .
On the other side of the equation, demand – fueled by unprecedented global fiscal and monetary stimulus – has skyrocketed.
Consumer behavior has been altered by the pandemic and the lockdowns that resulted from it. Consumers have embarked on a spending spree that perhaps reflects a pandemic-induced shift in work-life balances, as well as shifting work habits.
The most dramatic illustration of these developments – and with real geopolitical consequences – is the global semiconductor shortage that has reduced the production of cars and electronics.
Dependent and vulnerable
The world’s dependence on Taiwan for chips, especially for the advanced chips that will power key technologies that will shape this century, including military technologies, has been revealed. China’s increasingly aggressive stance towards Taiwan underscores the world’s vulnerability to this dependence.
Global supply chains were not prepared for such sudden and dramatic changes in supply and demand. For decades, companies have tried to source from the most efficient producers in the world. Globalization has made China the world’s manufacturing base.
Global supply chains had become so efficient and reliable that they enabled the almost universal adoption of the “just-in-time” approach to inventory pioneered by the Japanese in the 1970s, which allows companies to reduce the amount. of the working capital that they have immobilized in stock. – but leaves limited quantities of products available if the supply chain does not operate transparently.
Logistics issues within supply chains are gradually resolving, although the pandemic and China’s ‘COVID-zero’ approach are still sources of disruption, as are labor shortages in local businesses. developed economies.
Over time, supply chains will be rebuilt, but they will reflect the experience of the pandemic and a geopolitical context that continues to evolve as tensions between China and the United States and other like-minded democracies. ideas continue to increase.
More and more offshoring of critical goods, whether medical, industrial or technological, is occurring now that governments are aware of their vulnerabilities. Government subsidies for the manufacture of key products and technologies are increasingly common.
The cost of certain goods, whether of national strategic importance or simply essential to an industry’s ability to function, will increase as security of supply becomes more important than cost.
The protectionism that characterized the Trump presidency in the United States is gaining ground, and not just in the United States. National security is being used, not only to respond to the effects of the pandemic, but as a rationale for industrial policies that reflect heightened geopolitical tensions. This will add another layer of de-globalization and cost.
It is unlikely that as the pandemic passes or its effects are at least contained, global supply chains will return to what they once were.
The pandemic and the collision between China’s ambitions and America’s desire to protect its economic and political hegemony almost guarantees a significant change.
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