Should investors worry about the UK supply chain disruptions?
Over the past two weeks, supply chain disruptions across the UK have led to a domino effect in several industries. Businesses, especially those relying on a delivery network, are taking significant hits to revenue streams due to their inability to fulfil orders. So, what exactly happened? And has this created new opportunities for investors? It’s a fairly complex situation, but here are my thoughts.
How did these supply chain disruptions start?
Back in 2016, the UK voted to no longer be a member of the European Union with Brexit. Without getting political on the subject, this decision has led to several delayed hangover effects that are starting to be felt today. Specifically, a labour shortage, especially when it comes to lorry drivers.
According to a survey conducted by the Road Haulage Association (RHA), the UK is lacking over 100,000 qualified drivers. Brexit appears to be one of the leading factors behind this. However, there are also other contributing reasons, including retirement, new tax rules, and of course, the pandemic.
BP released a statement on 24 September saying some of its petrol stations have temporarily closed due to supply chain disruptions caused by a lack of drivers. Despite the UK having plenty of petrol and diesel in reserves, this announcement ultimately sparked panic buying, triggering a fuel shortage within the country.
The dominos begin to fall
A few days following the announcement, fuel demand skyrocketed by 500%! Consequently, petrol stations across the country ran dry. While this may seem like a temporary nuisance for individuals who need to drive, it’s created some serious problems for small and medium-sized businesses.
AO World, an online electrical appliance retailer, saw its stock crash by 25% in a single day after management cut guidance due to the ongoing supply chain disruptions. But even the businesses that have managed to retain or hire new drivers are still being indirectly impacted by the fall of fuel availability. With supply restricted and demand exploding, fuel prices are on the rise. And this has only been accelerated by oil prices recently breaching the $80/barrel mark.
As the cost of transportation starts to climb, fears of inflation are once again on the rise. Supermarkets and other physical retailers have already begun raising prices to offset the higher supply costs. And given that the Christmas holidays are only a few months away, I think it’s fair to say that demand will keep rising while supply remains restricted.
The opportunities for investors
Needless to say, the situation looks quite bad. But some sectors may actually benefit from higher inflation caused by supply chain disruptions.
The real-estate industry is one of them, as house prices tend to climb when inflation is up. Banking is another, as rising inflation is typically followed by higher interest rates, improving margins on lending activities.
Mining and oil companies can also thrive in such environments as resource prices edge higher. And the fixed-cost structure of the energy sector enables expanding margins as electricity prices begin to rise.
All of this is to say that delivery-based companies along with consumers will likely see rising costs. However, there remains plenty of opportunities for investors to profit from businesses that benefit from higher inflation.
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Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.