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The next phase of the supply chain crisis is too much of everything

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Snarled supply chains are creating havoc throughout the global economy. But what happens if today’s shortfall in running shoes and computer chips becomes tomorrow glut?

Mountains of containers waiting in ports for transport could be a warning. Companies were caught short when lockdowns to contain the pandemic were lifted and demand roared back to life. Businesses are still trying to catch up, likely double- and triple-ordering beyond what they actually need, says star stock picker Cathie Wood, founder of ARK Invest.

Will the supply chain catch up?

Analysts are looking for the turn, peppering executives with questions about double-ordering, according to earnings call transcripts compiled by Sentieo. Christoph von Plotho, CEO of semiconductor maker Siltronic, said it’s likely that businesses are ordering more than they actually need because his firm can’t meet their full demand for chips.

“Customers don’t want to be in the same position in 2022 that they were in 2021,” said Christian Storch, CFO at Altra Industrial Motion, a vehicle-parts maker. “They have doubled-, tripled-up on orders given the extended lead times.”

Some manufacturers are building partially completed cars while they wait for certain supplies to arrive, said NXP Semiconductors CEO Kurt Sievers. If many companies are using this strategy, it suggests production of some items could take off when key components become available.

How much longer will shortages last?

There are signs that some key shortages are peaking. The delivery time for chips increased in October by the smallest amount in some nine months, according to Bloomberg, citing research by Susquehanna Financial Group, a trading firm. That so-called lead time is the longest since Susquehanna started tracking it in 2017, but certain types of chips, such as those for power management, are easier to obtain.

Of course, an over-supply of goods seems far away at the moment. Supply-chain bottlenecks have already endured longer than many expected, and plenty of executives say there are few signs of them abating anytime soon.

A number of corporate leaders insisted in recent earnings calls that they’re insulated from over-ordering. Vicor executive Philip Davies said he gets asked about double-ordering by customers of his electric-power component company and that he doesn’t see it. “It’s real demand,” he said.

But even though it’s impossible to predict when the reversal of shortages will happen, bloated inventories are pretty much inevitable, according to John Kennedy, the founder of Platform Science, a fleet-management company. “There will be a glut,” he said during a conference call hosted by logistics company Prologis. “Like, we’re forgetting that part. Every scarcity period is followed by a glut, which is going to screw us up again in another way.”

Do supply chain issues cause inflation?

That screw-up could result in deflation—the opposite of the surprisingly high inflation many economies are going through. Policymakers at the US Federal Reserve resisted reacting to supply chain bottlenecks, but now acknowledge that shortages are likely to last a while, causing an imbalance between supply and demand that drives up prices.

The prospect for mountains of inventory to whipsaw prices in the other direction shows how difficult their job has become: Central bankers risk tightening interest rates to cool the economy at the very moment that other forces, like a glut of supply from double-ordering within the supply chain, also clamp down on prices.

“Once the holiday season passes and companies face excess supplies, prices should unwind,” said ARK Invest’s Wood.

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