Dreams of improved supply chains 'shattered' for the near term: Citi

Shortages of semiconductors, car parts, and other key items that flow through supply chains are likely to remain for the foreseeable future, Citi warned in a new note.

“Bottom line, we find that supply chain pressures have proved to be more persistent, and apparently deep rooted, than we had expected even a few months ago,” strategists led by Global Chief Economist of Citi Research Nathan Sheets wrote in a comprehensive note. “And the Russia-Ukraine conflict seems to be further amplifying the stresses. Given these realities, any hopes of near-term improvement in supply chain conditions have been shattered. The challenges in the months ahead look to be as acute as at any time over the past two years.”

Inflation, labor shortages, and increased household savings are some of the ongoing headwinds facing supply chains, according to Citi, and these these pressures will be alleviated when the pandemic truly wanes.

“To relieve the stress in global trade, we ultimately need to see an improvement in the pandemic,” Citi stated. “Some specific supply chain issues are beginning to unwind but there are still a number of lingering unknowns.”

The status of the pandemic is key, Citi explained, because the pandemic demolished the idea that global supply chains were fully optimized.

“Until the pandemic, the broad consensus was that supply chains were ‘optimized’ and functioning smoothly,” the strategists wrote. “Firms were thought to have broadly solved the riddle of how to keep inventories lean and simultaneously ensure a reliable flow of inputs for use in production. … Rather than a smooth predictable flow of demand, production, and transportation — the past two years have seen surging demand for final goods coupled with episodic disruptions in the availability of the inputs required to produce those goods.”

Supply chain stress continues to be most acute in the tech industry.

Apple is expected to reveal a new Macbook Air today at its Worldwide Developers Conference. But the latest Apple hardware may be in short supply in the coming weeks and months due to COVID-19 lockdowns in important Apple manufacturing regions in China.

Semiconductors, meanwhile, continue to be in short supply in large part due to China’s zero COVID-19 policies amid solid demand for PCs and autos during the pandemic.

“We are about halfway through [the chip shortage],” Intel CEO Pat Gelsinger told Yahoo Finance Live on the sidelines of the World Economic Forum in Davos, Switzerland in late May (video above). “My expectation now is that it persists through 2024. And the big issue that we’ve additionally faced over the last six-to-nine months is equipment that goes into the [fabrication plants].”

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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