Recyclers enjoying good prices as economies recover from the pandemic should beware an inventory recession if demand falters in the coming months.
In May 2021 a critical fuel network on the eastern seaboard of the United States was forced to briefly shut down. Long lines of cars queuing for gasoline quickly appeared. Images of bizarre hoarding behaviour appeared in the media, increasing the perception among the public that there was indeed a shortage. Naturally, this resulted in vicious feedback loop, in which vehicle owners topped up just in case.
Within days more than half of the gas stations had run out of fuel as drivers collectively panicked. Five months later it was the UK’s turn to panic as similar scenes unfolded across the country. Another behavioural phenomenon was occurring in the construction market, less spectacular in terms of media imagery but just as disruptive to supply chains. With homeowners spending more time at home, growing dissatisfied with seeing the same four walls each day there was a surge in renovation.
The unexpected leap in demand was made worse by each part of the supply chain ordering more than they needed to be sure they got hold of materials. This sent a massive but artificially high demand shock to construction-related commodities – timber, steel, etc. – resulting in prices surging to record levels and delivery times lengthening.
Each of these behaviours, hoarding and phantom ordering, is perfectly rational for individuals. Collectively. though. the purchasing activity results in a sudden and often artificial surge in demand. Other people, perceiving a threat to scarce resources continue the cycle of buying more than they need which then makes the situation worse.
The cycle of artificially high demand doesn’t end there. Companies thinking that the jump in demand is permanent, seek to expand their capacity. But the jump in demand is not permanent as the cycle cannot continue indefinitely. Eventually we all have enough of whatever it is we are worried about.
To see what happens next check out the chart below. It shows the annual percentage change in the share price of global delivery company FedEx, versus the change in global trade volume. The FedEx share price has been a strong leading indicator of global trade volumes for decades, pointing to a rebound in trade after the financial crisis of 2008-09 and the potential for a weak economy in 2020 – even ahead of the emergence of the virus.
In recent months, FedEx has accurately signalled that there would be a surge in trade volumes during the second and third quarters of 2021 as household spending rebounded. More immediately of concern is what happened to FedEx equity performance during Q3 2021. Here it is pointing to a dramatic pullback in global trade volume growth, one that could mean annual trade growth stagnates during Q4 2021.
This may not appear to be significant given the sharp increase in overall trade volumes we’ve seen in 2021 but the rate of change at which this slowdown is expected to occur is significant. Businesses that have planned on continued strong growth are likely to be disappointed. It’s not only gasoline and construction products that have been affected by hoarding and phantom ordering – it’s global. As the front page of…
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