Supply chain strains, rising costs to pressure profitability: Analysis

Cost increases have been absorbed or negated in a variety of ways: demand offsets, demand shifts, product mix adjustments, hedging, indexation, positive operational gearing, cost pass-throughs and keeping pay growth low.

In the rating agency’s view, profit margin pressure will start to ratchet up in 2022. Its analysts expect supply disruption will persist until the end of 2022 for more than half of all sectors, it said in a press release.

Pay barely above 2019 levels is unlikely to be sustainable amid strong growth and rising costs, and signs of upward pay pressure are particularly apparent in North America.

While the global hard-stop triggered by COVID-19 and its associated restrictions proved a difficult operating environment for the corporate sector, the global restart has not been without its challenges. Clearly the direction of travel has been positive, with vaccines easing health risks and a barrage of fiscal and monetary policy helping companies avoid drastic labor cuts, providing supportive financing conditions and boosting revenues.

Nonetheless, the sheer scale of pandemic-related disruption and altered consumption patterns, along with existing political pressures on supply chains, have created considerable difficulties. Input and freight costs have risen dramatically, shipping volumes have surged and created bottlenecks, and lead times for manufactured goods have worsened.

The magnitude of input cost inflation in the past couple of years is extraordinary and has taken the prices of a swathe of key production inputs far beyond their pre-pandemic levels.

The company’s research shows the percentage changes in prices for a global basket of input costs, encompassing agricultural goods, energy, forest products, metals and precious metals, and key technology items.

Of the 52 items shown, prices for only two fell (wool and cocoa), and for another two (palladium – used in catalytic converters – and coffee) rose less than 10%. The average increase versus pre-pandemic levels has been 95 per cent and the median 52 per cent. Even if rates of increase slow, these are substantial level changes in input costs.

Equally large rises in the freight costs of moving these items also add to the greater input-cost burden.

Fibre2Fashion News Desk (DS)