Semiconductor Strains Are Increasing Transportation Costs

West Palm Beach FL

29 September, 2021

1:45 AM

Description

Semiconductor shortages are causing supply chain headaches for the auto industry, resulting in prolonged factory shutdowns and higher used car values. The shortage is also causing ripples in a variety of other industries including freight and transportation. A recent post on heavy-duty trucks shows that the same semiconductor supply constraints are also impacting new and used heavy-duty truck prices, which will end up increasing the overall consumer price inflation through higher freight rates. Heavy-duty trucks are used to transport most physical goods in the United States. Imports from China and Europe reach a port, and then often travel by both railway and trucks to reach retail stores and factories. Freight rates have increased by more than 25% in 2021 due to strong economic trends, truck driver shortage, and higher used truck prices. As a result, the cost of all basic goods and services will rise because consumers will have to pay more to get their goods delivered to their stores and homes. During the summer of 2021 many heavy-duty truck manufacturers including Volvo, Peterbilt, Kenworth, Mack, Freightliner and International were forced to take prolonged production downtime due to supply chain issues. Many of the companies noted reduced visibility in their components procurement, and they expected a higher level of uncertainty going forward. This month ACT Research, an industry leader in covering Class 8 truck orders, sales, forecasting, used truck sales, freight rates and trailer sales, reduced its heavy-duty heavy-duty truck production outlook for the remainder of 2021 and into 2022. ACT Research cited continued supply chain issues impacting heavy-duty truck manufacturers. In addition to supply chain constraints, the costs of basic inputs for heavy-duty trucks and trailers have risen over the past year. Steel, copper and sheet metal have all seen strong double digit gains as a result of lower global inventories. These input costs will continue putting upward pressure on truck prices, and ultimately freight rates and consumer price inflation. Other modes of goods transportation are seeing constraints as well. Global shipping container rates have risen sharply in 2021. Factories around the world are bidding up container rates in an effort to secure space from a shipping container market with limited capacity. These higher container rates will also add to overall inflationary pressures and consumer prices. The Equipment Radar report notes that semiconductor cycles tend to oscillate over time. The report noted that semiconductor cycles tend to be “boom-bust”, and this cycle could follow historical cycles. Semiconductor manufacturers are aware of historical boom and bust patterns, so they will likely be hesitant to add meaningful chip supply during a hot market like the one we are experiencing currently. Buyers of semiconductors tend to increase their orders and demand when the market tightens. This creates an even more strain on an already tight market. Eventually, the supply will meet demand, and semiconductors buyers will be left holding more inventory than they need. Buyers will then reduce their purchases to work down their excess inventories. For the time being, it seems that the constraints in heavy-duty trucking and broader transportation could lead to additional consumer price inflation in the coming months. It will be important to watch since investors are focused on the direction of interest rates and the Fed’s response to inflation reports.