Macro to Micro: The Microprocessor Shortage

Investing short to medium-term right now might not be for the faint of heart as the market is still adjusting to the inflation numbers, crypto has come under a serious amount of pressure, and volatility is spiking up.

But while it might look like all eyes are on the Federal Reserve and what they might be about to do with the interest rates, the 7% gain in the Consumer Price Index shouldn’t come unnoticed by seasoned investors, especially those in the commodity field given that it marked a 39 year high.

So, why microprocessors exactly? Let’s start out with a bird’s eye view and zoom in to find the answer.

The macro level: the commodity situation

In 2021 supply chains were seriously bottlenecked, energy costs ramped up, and, lastly, government spending paired with high consumer demand drove up inflation throughout the world.

Commodities have been historically a safe haven to many investors when dealing with inflation, especially when dealing with longer-term inflation.

Case and point, commodities outperformed every other asset class last year and seem to be bound to go off on a very competitive run in 2022.

Goldman Sachs, namely Jeffrey Currie, its Global Head of Commodities, has recently called a 10-year commodity supercycle and, as we know, runaway inflation is stepping up to be one of the greatest risks to the market this year.

Zooming in on copper

Copper is seeing an ongoing supply crunch and their price per ton seems to be steadily on the rise. With copper playing a key role in sustainable tech, clean energy, electric vehicle batteries, and microchips, we’re most likely bound for a wild ride in the next couple of years.

Enhancing: Microchips, the industry in which copper turns to “gold”

No, it’s not alchemy that we’re talking about.

What we’re seeing right now in the microprocessors industry is a steady increase in demand being met with a significant downturn in terms of production capacity.

The latest tech requires the faster, state of the art chips which only a handful of companies can manufacture them.

Demand is also showing the shift in the workplace (as companies now employ much more remote workers), the shift in tech towards cloud computing services (which need the infrastructure to scale), the shift in entertainment towards streaming websites, the shift towards electric vehicles, and the shift towards crypto (which made it impossible to buy new graphics cards).

Wrapping up

All of the above require microprocessors and all of the above have a common denominator: copper.

Scarcity combined with this handful of companies fixed max output means that they won’t be able to put the “pedal to the metal” as manufacturing all types of chips simultaneously is simply impossible. Accordingly, what we’re seeing right now is their lead time (a gap between when a semiconductor is ordered and delivered) increasing rapidly by the month.

Even though the lead time might vary depending on chip type, to put things into perspective, a Susquehanna Financial Group report took notice of how semiconductors in November 2021 saw their lead time increased by a whole 6 days and now standing at 25.8 weeks.

Moreover, even environmental factors have taken a toll over the whole industry as the biggest production locations got hit: Texas had blackouts last year and Taiwan faced a massive drought (the industry is heavily dependent on water) and farmer and environmentalist protests (as the water becomes unfit for consumption).

All of these factors combined made the players come out and warn their customers about expecting shortages throughout the year, which means that there is ample opportunity for investment.