Supply and demand theory postulates that the relationship between supply and demand determines pricing and capacity adjustments. This is true, but more likely to develop over the long term. Supply/demand imbalances can have many causes and it is incumbent on investors to understand the underlying factors.
For example, the early 2020 apparent lack of TP supplies resulted from a very temporary, elevated demand due to public hoarding. Long term demand for TP is almost entirely a function of population and relatively predictable. Earlier, as the public’s reaction to Covid-19 overwhelmed the supply chain, apparent shortages further encouraged hoarding. Now, with demand reduced as individuals work down their oversupply, retailers are running sales to clear inventories. Clearly, the so called TP crisis was more apparent than real.
On the other hand, recent well publicized shortages of semiconductor chips are very real and likely to take a year or more to resolve. The impact on various chip users is still not fully understood, but major manufacturers, notably the vehicle industry, have announced production reductions and reduced sales and earnings expectations. Investors take note.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®