We need some more supplies….
We had an interesting discussion this week during our “morning desk chat”. Before COVID, we used to talk around the desk when everyone was in the office but recently that has changed somewhat. It was one of the most enjoyable parts of my job. The debates would start almost randomly, take on a life of their own and could get quite heated. Debates are useful. It helps us keep our investment views aligned and is also a great way for new people in the organization to learn. However, with physical working space changing over the past year or so, we had begun to feel a little disconnected from each other. So, we created an “informal/ formal” MS Teams meeting each morning just after the market opened. We start the meeting with a review of the world and any important news that people want to talk about and then move into the topic of the day, which can be anything, but each person must volunteer over the course of a couple of weeks to be the “Producer” and pick the topic.
One topic this week was supply chains, logistics and its impact on the economy and inflation. We noticed that across multiple industries and geographies that we follow, there is a consistent theme developing with respect to availability.
- For example, there is a gasoline shortage in the United Kingdom that came from, not a lack of actual supply of gasoline, but from a lack of truck drivers to drive from the storage tanks to the stations. This was exacerbated when the public made a run on the pumps and resulted in the closure of one third of UK petrol stations.
- In China, there has been extreme power rationing because of electricity shortage. It started with industrial power limits and now has progressed to regular people. It is difficult to increase electricity production in China and matched with an unprecedented increase in demand, a critical gap has emerged. Unfortunately, because the only option available in the short-term to meet demand is coal, the government has had to remove all caps on production and burning in order to secure supply. This is obviously not good for the environment.
- We note that even silicon, one of the world’s most abundant minerals, is also in short supply. It is mostly produced in China. With the electricity shortage noted above, production has sunk, pushing the price up 300% this month alone. Silicon is used in several critically important global products including computer chips, glass, solar panels and aluminum alloys used in cars. The fall on effects of price and product availability could be severe.
- Last, we noted that even Costco has leased three ships and several thousand containers in order to guarantee shipping of its own products. They expect that 20% of all goods will now be shipped directly this way.
“This means that” the fall on effect of the pandemic and its mitigation measures are just beginning to make their way through the system. We expect that there is no quick fix for this. For years businesses have been operating their supply chains on a just-in-time basis. This is now not feasible and the impacts on behavior and the economy are wide reaching and very difficult to forecast. We will continue to closely monitor this and its impact on the companies we own.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
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