Shortage of semiconductor chips is hard to relieve for now|Chung Sau-ha


Last time, yours truly mentioned prices of bulk commodities rocketing up. How would it impact on the profit outlook of Chinese enterprises? It hinges on whether an enterprise is able to shift away its costs. It is easier for enterprises of high-end pricey products, such as automobiles worth tens of thousands of dollars, to shift the costs away to consumers, but it is more difficult for enterprises of low-priced daily consumer goods to relieve the pressure of soaring costs.

Actually, China and the entire supply chain in Southeast Asia, including industrial plants in Vietnam and Cambodia, are encountering the challenge of rising costs. Affected by the coronavirus pandemic, the port of Yantian in Shenzhen has been seriously clogged recently, which might deal another blow to worldwide supply chains.

Besides, supply of commodities is influenced to a large extent by policies adopted by China. Since the Chinese government has been making great efforts in improving the environment and reducing carbon emission in recent years, some regions have been bound to produce less or even stop producing coal. Moreover, we won’t rule out the possibility that the recent substantial rise in prices has something to do with short-term speculation. A lot of factors have come together to get a perfect storm of commodities prices in shape, so prices have taken to the air. Admittedly, the environmental policy mentioned above is flexible and adjustable, as compared with the peripheral or pandemic factors. If we take a closer look at it, we will find that China is not running short of commodities such as iron and steel. As far as yours truly surmises, the supply of iron and steel has turned from being “highly excessive” to “moderate excessive”, hence the price of it being expected to go down in the long run.

Prices are subject to policy direction

When it comes to the supply of semiconductor chips, the issue is more challenging for it is related to the international supply chain having broken down as well as sanctions imposed by the US. Nowadays in fact semiconductor chips are not only indispensable to various electronic products, but also different categories like automobiles, home appliances, medical equipment, express rail links, power grids, plants of the manufacturing industry and logistics accessories. It is believed the entire world will have to put up with the shortage of semiconductor chips in the coming two quarters. The situation will not improve until next year.

Although the Chinese government has risen to catch up in recent years, stressing domestic research and development, it is hardly possible to “localize” the production of all spare parts in the short run. Take the chip used by electrical automobiles as an example. Not only does the technology of it have to be up to standard, but also the safety and stability of it are phenomenally important, as it concerns road safety. On the contrary, the resistance to using chips made in China for domestic plants and logistics centers is not that strong, as the safety standard is relatively low.

In the last quarter last year, yours truly increased commodities stock in the investment portfolio for the cyclical economic recovery resurfacing. That said, investors have to keep their eyes peeled for government policies because on the one hand, they would change the outlook of commodities prices; on the other, they are unpredictable. So, investors have to be cautious about making an investment, and be sure they make diversified investment and do risk management well.

(Chung Sau-ha, senior portfolio manager with Allianz Global Investors)

This article is translated from Chinese by Apple Daily.

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