From macro to micro: the shortage of microprocessors

Invest in the short and medium term right now it may not be for the faint of heart, as the market is still adjusting to inflation numbers, crypto has come under heavy pressure, and volatility is on the rise.

But while it might seem like all eyes are on the Federal Reserve and what it might be about to do with interest rates, the 7% gain in the consumer price index should not go unnoticed by seasoned investors, especially those in the commodities space. given that it scored a high of 39.

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

The macro level: the situation of raw materials

In 2021, supply chains have been seriously bottlenecked, energy costs have risen and, finally, government spending coupled with strong consumer demand has driven up inflation around the world.

Commodities have always been a haven for many investors in the face of inflation, especially when it comes to longer-term inflation.

Case in point, commodities outperformed all other asset classes last year and look set to have a very competitive run in 2022.

Goldman Sachs, namely Jeffrey Currie, its global head of commodities, recently announced a 10-year commodity supercycle and, as we know, runaway inflation is intensifying to become one of the biggest risks to the market this year.

Zoom on copper

Copper is experiencing a continuing shortage of supply and its price per tonne appears to be steadily increasing. With copper playing a key role in sustainable technologies, clean energy, electric vehicle batteries and microchips, we are most likely destined for a wild ride in the next couple of years.

Improvement: microchips, the industry in which copper turns into “gold”

No, that’s not chemistry we’re talking about.

What we are currently seeing in the microprocessor industry is a steady increase in demand that is being met with a significant drop in production capacity.

The latest technology requires faster, state-of-the-art chips that only a few companies can manufacture.

The application also shows the evolution of the workplace (as companies now employ many more remote workers), the evolution of technology towards cloud computing services (which need the infrastructure to scale), l the evolution of entertainment to streaming websites, the evolution to electric vehicles, and the move to crypto (which made it impossible to buy new graphics cards).

Wrap

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

The scarcity combined with this handful of companies with fixed maximum production means that they will not be able to put the “pedal to the metal” because manufacturing all types of chips simultaneously is simply impossible. As a result, what we are currently seeing is that their lead time (a gap between when a semiconductor is ordered and delivered) is rapidly increasing month over month.

Even though the lead time may vary depending on the type of chip, to put things into perspective, a report from Susquehanna Financial Group noted how semiconductors in November 2021 saw their lead time increased by 6 days. entire and now stands at 25.8 weeks.

Moreover, even environmental factors have had an impact on the whole industry when the largest production sites have been affected: Texas experienced blackouts last year and Taiwan faced a massive drought (industry relies heavily on water) and protests from farmers and environmentalists (as water becomes undrinkable).

All of these factors combined have caused players to come forward and warn their customers of expected shortages throughout the year, which means there is great investment opportunity.

Invest in the short and medium term right now it may not be for the faint of heart, as the market is still adjusting to inflation numbers, crypto has come under heavy pressure, and volatility is on the rise.

But while it might seem like all eyes are on the Federal Reserve and what it might be about to do with interest rates, the 7% gain in the consumer price index should not go unnoticed by seasoned investors, especially those in the commodities space. given that it scored a high of 39.

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

The macro level: the situation of raw materials

In 2021, supply chains have been seriously bottlenecked, energy costs have risen and, finally, government spending coupled with strong consumer demand has driven up inflation around the world.

Commodities have always been a haven for many investors in the face of inflation, especially when it comes to longer-term inflation.

Case in point, commodities outperformed all other asset classes last year and look set to have a very competitive run in 2022.

Goldman Sachs, namely Jeffrey Currie, its global head of commodities, recently announced a 10-year commodity supercycle and, as we know, runaway inflation is intensifying to become one of the biggest risks to the market this year.

Zoom on copper

Copper is experiencing a continuing shortage of supply and its price per tonne appears to be steadily increasing. With copper playing a key role in sustainable technologies, clean energy, electric vehicle batteries and microchips, we are most likely destined for a wild ride in the next couple of years.

Improvement: microchips, the industry in which copper turns into “gold”

No, that’s not chemistry we’re talking about.

What we are currently seeing in the microprocessor industry is a steady increase in demand that is being met with a significant drop in production capacity.

The latest technology requires faster, state-of-the-art chips that only a few companies can manufacture.

The application also shows the evolution of the workplace (as companies now employ many more remote workers), the evolution of technology towards cloud computing services (which need the infrastructure to scale), l the evolution of entertainment to streaming websites, the evolution to electric vehicles, and the move to crypto (which made it impossible to buy new graphics cards).

Wrap

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

The scarcity combined with this handful of companies with fixed maximum production means that they will not be able to put the “pedal to the metal” because manufacturing all types of chips simultaneously is simply impossible. As a result, what we are currently seeing is that their lead time (a gap between when a semiconductor is ordered and delivered) is rapidly increasing month over month.

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

Moreover, even environmental factors have had an impact on the whole industry when the largest production sites have been affected: Texas experienced blackouts last year and Taiwan faced a massive drought (industry relies heavily on water) and protests from farmers and environmentalists (as water becomes undrinkable).

All of these factors combined have caused players to come forward and warn their customers of expected shortages throughout the year, which means there is great investment opportunity.

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