COVID-19 Impact on the Electrical Supply Chain - A perfect storm
8 MIN. READ
For decades, the United States electrical contracting sector has enjoyed the benefits of a global supply chain and economy. Globalization opened up new sources of supplies, introduced competition and kept relatively stable price levels. However, the COVID-19 impact on the electrical supply chain is emphasizing the downsides of globalization.
Over the years, an extensive and complex network of manufacturers, distributors and buyers - who are highly dependent on a web of maritime, road and air freight logistics providers - has developed. While it has survived many pressures in the past, nothing damaged it like the pandemic, and the web has begun to tear.
Preface to the COVID-19 impact on the electrical supply chain
The pandemic's effect is especially pronounced on electricians and the electrical supply chain. This sector imports the majority of its parts and components, including copper wire, conduit, breakers, EV charging stations, breaker panels, generators and more.
At the same time, an already short supply of skilled electrician and manufacturing labor was hit with a wave of COVID-19, inducing unemployment and pushing labor costs up.
In short, the COVID-19 impact on the electrical supply chain caused a perfect storm by combining with already stressed supply chains, shortages of raw materials and upward price pressures on electrical parts and components. It impacted the electrical supply chain by piling on at the worst possible time.
Then a surprising whiplash of an economic recovery in the US caused a surge in demand and more upward price pressure. This article will cover the colliding fronts of this perfect storm and their impacts on the electrical supply chain.
1. Jobs and labor shortages and the whiplash economic recovery
Jobs and labor shortages
COVID-19 cost America 15.9 million jobs between February 2020 and June 2020 (almost 10%). The US unemployment rate exploded from 3.5% in February 2020 to 14.8% in April 2020. To date, it has rebounded to 5.4% (still worse than the pre-COVID-19 rate).
Despite this improvement, US labor shortages that existed before the pandemic are still there and are looking to stay for a while. The reason? The COVID-19 recession led to the automation of many less-skilled manufacturing jobs in the US, but the technology used increased the number of skilled positions needed.
A scarcity of those skills has led to a shortage of US manufacturing labor, which, in turn, reduces output and contributes to shortages of parts and supplies.
Globally, the scale of job loss is immense. COVID resulted in a loss of 8.8% of global working hours, equivalent to 255 million jobs in 2020. Assuming no further COVID disruptions, global unemployment as of June 2021 stood at 5.7%. It is not expected to recover until 2023.
When reduced work hours are included with jobs lost outright, the total amounts to the equivalent of 100 million full-time jobs, according to the International Labor Organization.
In addition, because of the diversity of economies, the rate of employment recovery varies by country.
A shortage of electricians
The US electrical industry was already burdened by a shortage of skilled electricians before the pandemic. The National Electrical Contractors Association (NECA) estimatesthat 10,000 electricians retire each year, but are replaced by only 7,000.
COVID made the situation worse. New protocols for safety have had a negative impact on productivity. In fact, a recent NECA study found that the total time lost to COVID protocols amounted to seven hours each week and 29 hours each month, or 17.9% of lost time per worker per day.
The whiplash economic recovery
The US economy, as measured by Real Gross Domestic Product, fell by 2.3%, or one-half trillion dollars between 2019 and 2020. However, in 2021, the economy has bounced back by 3% and is now at or past pre-COVID size.
This is a remarkably fast recovery by any standard. But another storm cloud lurks - inflation is trending upwards. The Consumer Price Index for Q1 2021 showed an increase of 4% over the past quarter, and 2.6% over March 2020, pre-COVID-19.
The reason for the increased inflation is that the rapid US economic recovery resulted in a surge of demand for products and services that collided with labor and material shortages that already were present.
Thus, the US is experiencing higher prices and record supplier lead times – the longest since 1987. Additionally, order backlogs are at their highest since 1993, and prices are at their highest since 2008. In short, there is too much money chasing too few goods.
The global picture offers little short-term relief. China is the world leader in wire and cable manufacturing with over 20% of the world market. They suffered a significant COVID-induced manufacturing slowdown in 2020. They are also slow to recover, with higher raw materials pricing and long lead times as recently as July 2021.
2. Logistics bottlenecks
The COVID-19 impact on the electrical supply chain revealed the fragility of the global one. It has become so fragile that a single small accident “could easily have its effects compounded,” according to HSBC Holdings Plc., a London-based global bank.
Maritime shipping
COVID restrictions, container shortages, skyrocketing freight rates and energy costs are plaguing the shipping industry. The cost of shipping a container from Shanghai to Los Angeles is now 6 times higher than in May 2020.
This mode delivers over 80% of the world’s merchandise. A reduction in manufacturing output, as well as COVID operating restrictions, led to a 20.8% drop in port calls in weeks 21-24 of 2020, preceded by decreases of 15.4% and 13.2% in previous periods.
Congested ports and container shortages are expected to last into late 2021 or early 2022.
Airfreight cargo
This mode appears to be a resilient bright spot in the supply chain. While air cargo capacity was down 12% in July 2021 compared to 2019, US air imports increased in the month of June by 37%, part of a five-month surge in air imports.
In 2020, air imports dropped by 300K tons; in 2021, they have increased by 600K tons.
Trucking
The picture here is mixed. On the one hand, 90% of US trucking and trailer suppliers believe that an original equipment production bottleneck is in progress. As an industry, though, trucking appears to be on the rebound from COVID. Truckload freight volumes hit new highs in June 2021.
Notably, spot and contract rates have stayed in record territory, signaling more upward price pressures on parts and materials. Inbound delays as of early 2021 averaged 16.3% and 8.8% on outbound shipments, translating to 15- and 7-day delays respectively.
3. Raw materials shortages
The COVID-19 impact on the electrical supply chain leads to raw materials shortages in these critical components.
Copper
Widely used as a conductor in wire, cable and other electric parts, copper was trading on August 16, 2021, at around $4.33 per pound, up from $2.33 on May 11, 2020, almost a 100% increase.
Some experts point out that current stocks cover only three weeks' demand, and copper could hit $9.07 per pound by 2025. Others believe that copper prices will retreat in 2022 to around $3.17 per pound.
The only things that are reasonably certain of the COVID-19 impact on the electrical supply chain are that copper has had an inflationary effect on electrical material prices, there is a shortage of it, and it will be with us for at least the short term.
Steel
The cost of steel has outpaced the rise of copper. Since March 2020, steel prices are up an amazing 215%. Steel producers, who expected a steep drop in consumption due to COVID, made bad bets and shut down mills. They were surprised by a shift in buying patterns as consumers bought grills and other steel items for their homes, where they were confined by COVID.
Thus, demand for steel surged. And now as oil and gas are ramping up, demand has surged more. Once the chip shortage passes, car production will surge, and prices will rise more. US steel mills are struggling to ramp up.
In the electrical world, steel shortages are causing steady increases in transformer prices, and rigid conduit has increased in price significantly.
There is not much short- to mid-term good news for steel prices and the electrical industry due to the COVID-19 impact on the electrical supply chain.
PVC
Polyvinyl chloride is the raw material for PVC conduit. Much of it is produced in petrochemical plants in the southern US. A winter storm in February 2021 slashed PVC production by 57%.
Meanwhile, the demand for PVC is rising. The price has increased from $5,480/ton in April 2020 to $9,570 per ton in August 2021.
Additionally, Hurricane Ida is bearing down on Louisiana, the site of many petrochemical plants. The forecast for this category is steady high demand and high prices in the short to mid-term.
4. Wiring and lighting products
Anything containing copper, steel or plastic will see upward price pressure in the near term due to the COVID-19 impact on the electrical supply chain. Electricians have reported shortages and rising prices in this category. The National Association of Home Builders reported that builders are experiencing a 26% increase in building material prices.
5. What next?
If you own an electrical contracting business, pricing and supply chain challenges are everywhere, but so are opportunities for growth in many areas, including EVs, home construction and infrastructure.
Expect rising prices, shortages and shipping delays to be the new normal for the short- to mid-term. To meet these challenges and prosper, you need to be proactive and manage your business accordingly. Contact Raiven to see how we can help with the COVID-19 impact on the electrical supply chain.
