Building Tech & Products

When Strategy Backfires: Producers' Role In Supply Shock

The time to de-risk forecasts for inflation impacts is now, given that the commodities crunch can pivot into consumer price stresses in the months ahead.

John McManus June 8th, 2021

It's gone from an unlikelihood to a top-of-mind concern.

Every forecast, every budget, every predictive financial dashboard needs a thorough going-over.

Transitory is the term now being widely used to characterize domino-effect price jumps across the commodities landscape residential construction player took for granted would meter themselves, with some seasonal puts and takes on the as demand spiked now and then.

It turns out, rather, that a decade of strategic pull-back from capital spending on the commodities front may exert an X-factor impact on whether inflation takes a firm hold in the economy, or resolves itself naturally once normal flow across supply chains catches up with demand.

Wall Street Journal writer Chuin-Wei Yap reports today on the role an intentional retrenchment in capital spending among producers over the past 10 years is now playing in the mismatches between supply and demand stressing a number of key industry sectors.

Languishing commodity prices led producers to slash capital spending on major resources by nearly half over the last decade, shrinking stocks of industrial metals to two-decade lows and reducing supplies across commodities. The crunch is now converging with a buying spree in key markets to supercharge prices—and there is no quick fix.
Since 2011, investments to develop the energy and mining sectors have fallen 40%, according to asset manager Schroders, leaving many producers unprepared for a recent boom in manufacturing and spending in the world’s two largest economies. Prices of resources from corn to lumber to battery metals have risen sharply over the past year, in many cases to twice or more from pre-pandemic levels, aided by low interest rates, a weaker dollar and infrastructure building in the U.S. and China.

The mining, petrochemical production, factory- and mill-related spikes homebuilders are battling now, Yap reports, can cascade even beyond production delays and spiraling home prices to a more worrisome kitchen-table phenomenon.

Consumer inflation hinges more on factors including wages and food, economists say. But the persistently high producer prices are coming at a critical juncture: U.S. consumer inflation rose 4.2% in April, the most since 2008. U.S. regulators have played down the increase as due to “transitory” price increases, but analysts say the recent factory-level price shocks underline longer-term risks.

These risks are where the business model forecasts for builders and their partners get really tricky. They're not just calculating risk for their input costs, but rather an entirely more complex array of household responses to mismatches between income and what they need to pay for.

That bodes trouble, particularly at the already-delicate lower-tier price spectrum, where monthly principal and interest payments, down to the dollar, can be meaningful.

The question many strategists in homebuilding and related private sector businesses have swirling in their minds as they lose sleep is: What is the duration of "transitory?"

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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