INFLATION
While economists debate on narrow-flation (only a few things are actually inflating) and the meaning of transitory, business people discuss their real world experience.
John Authers today:
(…) The bottom line is that inflationary pressure is indeed broadening, and this shows up most clearly in commodities markets, in the labor market, and in complaints from businesses that they are wrestling with higher prices.
(…)these numbers for the 21 S&P 500 companies to have reported so far, produced by John Butters of Factset, do show that bottlenecks and inflation are dominating discussion, and they are doing so more than a year after the worst shutdown conditions were lifted:
There are two reasons to take this seriously. First, note that only three CEOs complained about the weather, while more than three times that number complained about the costs of labor, transport and materials, as well as supply-chain disruptions. There has been plenty of extreme weather in the last few months, and it’s alarming that the inflationary conditions are so much more serious for companies than floods, fires and hurricanes are. Second, only two mentioned currency. The dollar appreciated by about 2% during the third quarter, and it’s up by 5.5%, on a broad trade-weighted basis, since it hit a low early in January. A rising dollar makes earnings generated in overseas countries appear to be worth less in dollars. The many multinationals in the S&P routinely complain about this. So again, we need to take them seriously when they complain far more virulently about costs created by the pandemic.
From recent conference calls (courtesy of The Transcript) (my emphasis)
- “We’re looking at unprecedented inflation, as all of industry is right now. We’re going to have to manage our way through this time of cost inflation, just as we have in the past. It’s going to be a mix of price increases, unfortunately, and also cost-effectiveness through our [comprehensive continuous improvement] program. (…) Across our business right now, the supply chain is really our limiting factor. Demand is extraordinarily high for all of our products both on the consumer side…but also for our flavor solutions and flavor systems business…Transportation and logistics issues, just getting the product from point A to point B, is our single limiting factor. It’s not demand. Demand is incredible.” – McCormick (MKC) CEO Lawrence Kurzius
- “There’s definitely inflation and getting access to resources is not as easy as it was before. And with the labor shortage, we’re finding ourselves in the market that’s easier for employees and harder for employers…So there’s definitely inflation on our side and our restaurants labor cost is a certain amount of pressure for MTY or franchisor as well. And then you look at our suppliers and they’re facing the same thing. Their suppliers are increasing their prices. They have to pay people more to have access to them and they face inflation as well. So it goes throughout the supply chain and there’s inflation at every step of the way (…) I do anticipate that supply chain is going to be a challenge for a certain amount of time.” – MTY Food Group (MTYFF) CEO Eric Lefebvre
- “I expect we’ll probably see a little bit more pricing increases in the first quarter of next year as we deal with the fact that input costs are just higher…That’s just the reality for us and everybody else. (…) What we’re seeing across the world is much lower elasticity on the pricing that we’ve seen historically. And that applies to developing markets, Western Europe and the U.S. So across the world, consumer seems to be looking at pricing a little bit differently than before…as consumers are shopping faster in store and they might be paying less attention to pricing as a decision factor and they might be giving more relevance to the brands or brands that they feel more a bit closer to or more close — yes, I would say, closer more and more emotionally attached to our brand. So we’re seeing less elasticity and we’re adjusting our models as we go. And that’s obviously informing our decisions as we price balance of the year and into 2022.” – PepsiCo (PEP) CEO Ramon Laguarta
- “…we have taken pricing over the last 12-months in anticipation of costs going up, and that’s part of the reason we’re seeing these incredible gross margins over the last couple of months, as we priced ahead of some of these inflationary pressures hitting us.” – Levi Strauss (LEVI) CEO Chip Bergh
- “I’m expecting that gross profit will be unfavorably down compared to last year in the second half of the year because we won’t be able to offset everything that’s coming with price increases. So we will see a little bit of gross profit erosion, I think, due to it.” – Helen of Troy (HELE) SVP, Corporate Finance Matt Osberg
- “Gross margin as a percentage of net sales was 33.4% during the first quarter of fiscal 2022, down slightly from 34.0% during the first quarter of fiscal 2021. The decrease in gross margin was related to increased freight costs that is impacting many companies across the global supply chain.” – Richardson Electronics (RELL) General Manager, Canvys Jens Ruppert
- “…the Company is experiencing significant supply chain and logistics disruptions as well as material and freight cost inflation similar to other companies that are beyond the Company’s prior expectations. The unavailability of parts has impacted the Company’s ability to produce and ship units, particularly at Access Equipment, and has also contributed to labor inefficiencies.” – Oshkosh (OSK) CEO John C. Pfeifer
- “This year is tight. The first half of next year is likely [to be] tight but it’ll get better — we’re an industry that just takes a long time to get anything done so it might take 18 to 24 months to put on a new plant and in some cases even longer than that. These investments were started perhaps a year ago and so they’re coming online as we go through the next couple of quarters” – Advanced Micro Devices (AMD) CEO Lisa Su
China to Let Power Prices Rise in Bid to Fix Electricity Crunch Shortage has slowed factory output, hitting companies around the world
China said it would allow the price of coal-fired power to rise more sharply, in the hope that market forces can address a power crunch that has threatened growth and caused ripple effects around the world.
The decision by the government’s economic-planning arm amounted to an acknowledgment that price controls have warped the market. Power producers have been hit with sharply rising costs for the coal they need to fire their generators, yet government rules have largely prevented them from passing on those higher costs to their customers.
The National Development and Reform Commission said the price of coal-fired power could rise as much as 20% from the commission’s benchmark price, compared with the previous 10% cap. It said all coal-fired power would be part of market-based trading with a fluctuation range, up from 70% now, without giving a specific time frame.
And it said the price cap wouldn’t apply to industries that consume a lot of power, meaning those users could pay even more when supplies are short. (…)
Coal-fired plants generate close to 60% of China’s electricity. (…)
Officials at the Chinese commission said they wanted to soon allow all industrial and commercial users to buy electricity from the market, as less than half can now.
The measures announced Tuesday could help get the power market on steadier footing, but they also point to inflation risk in China as the prices of many commodities rise. (…)
Economists at Nomura estimated that the new pricing mechanism would raise China’s consumer prices by as much as 0.4 percentage point. They projected inflation would reach 2.6% by the third quarter of 2022, still a relatively modest level. (…)
Evergrande bondholders say they have not received $148m interest payments Yields on China corporate junk bonds trade at decade highs as deadline for three coupons passes
Chinese Developer Sinic Warns of Default as Hidden Risks Mount
China Auto Sales Drop as Chip Shortage Endures China’s car sales declined in the third quarter from a year earlier, the first such drop in more than a year, as the global chip shortage continues to hold back the world’s biggest auto market.
Sales of passenger cars in September fell 17% from a year earlier to 1.58 million vehicles, the China Passenger Car Association said Tuesday, the worst decline since March last year. Sales from July to September declined 13% from a year earlier. (…)
In the U.S., September auto sales fell 25%, according to Wards Intelligence. (…)
Last month, the China Automobile Dealers Association said the worst is over with regards to the semiconductor shortage domestically and that it expects supply issues to ease. Still, it could take at least three months for the impact to be felt in the retail market, the dealers association said. (…)
Aside from the semiconductor shortage, car makers and component producers also face price increases for materials including cobalt, lithium, steel and aluminum, according to China’s auto industry regulator, auto makers and suppliers. Cobalt and lithium are necessary for producing most electric-vehicle batteries.
The rising cost of raw materials coincides with growing Chinese demand for electric vehicles. In September, sales of what are known as new-energy vehicles—mostly electric vehicles—more than tripled in China from a year earlier to 334,000 vehicles, the passenger car association said. (…)