Remember Tony Montana’s last words in the bloody chainsaw scene in Scarface: “Chichi, get the yayo!” Well, much has changed since 1983, and nowadays Chichi would fire back; “Fuck the yayo, I’m grabbing the creatine!”
Before you start thinking I’ve lost my mind, let me get to the point. You all know I manufacture dietary supplements. Earlier this year I was paying $85,500 for a container of creatine monohydrate. Two months ago, that same container cost me $270,000. Last week, the spot price for creatine mono rose to $630,000 per container. Folks, these are real numbers: $630,000 for a container of creatine. That’s a 700% increase since January. Now, I didn’t pay that price, but the mere fact that serious offers are coming through so high shows you just how desperate the market is right now.
Spot pricing refers to the price if I wanted to grab a container right now. If you’re wondering why I would purchase on the fly instead of contracting six months or more in advance, well, normally I wouldn’t. But understand it’s a different world out there now. The supply chain is so bad and ingredients are so scarce that contracts and blanket purchase orders aren’t worth the paper they are written on.
Months ago, Mitsubishi Foods started the trend of cancelling purchasing contracts by using force majeure. It’s a common clause in contracts that frees both parties from liability and obligation when an extraordinary circumstance beyond the control of the parties prevents them from fulfilling the terms. It’s not just happening to small CPG players. Recently the price of sucralose jumped from $32/kg to $58/kg overnight. Soon after, Coca-Cola received a declaration of force majeure from their supplier, forcing them to renegotiate.
I’m not blaming suppliers like Mitsubishi: if they can’t get the product to sell, they have no choice. Purchasing now is like the wild West—it seems anything goes. You think Tony was tough? Today’s purchasing agents would eat him alive.
So those are just two examples of the recent drastic increases in the cost of raw materials. It doesn’t end there: whey proteins are up 150%, citrulline is up more than 200%, citric acid has doubled and malic acid has tripled in cost, amino acid supply in general continues to tighten, and the list goes on and on. Costs are increasing daily on just about everything—raw ingredients, bottles, caps, labels, scoops, pallets, machinery, parts, cleaning chemicals, labor. Nothing has been left unscathed. The supply chain crisis is by no means limited to dietary supplements. It is far reaching, and its tentacles extend out into every industry: automobiles, transportation, lumber, electronics, food, gas, and on and on. Needless to say, rising inflation is now a forgone conclusion.
Much of this supply chain nastiness is being blamed on COVID, and there is some merit to that, but there are bigger forces at play here. Yesterday I posted the big news that freight costs from China to the US started plummeting. Last week the cost dropped $6,000, so I've been holding back on shipments. This week’s offers are getting even lower. Shanghai to New York dropped from $31,000 to $17,000, and China to LA as low as $11,000. But don’t get too excited until you understand why. Trust me, it’s not because freight carriers feel bad for us. This price drop is a double-edged sword, and the other edge cuts a hell of a lot deeper. So hold on, it’s about to get worse before it gets better.
How long will this supply chain crisis go on, and how deep it will go? Most analysts are hoping for a 2022 Q2 correction, but no one really knows. What we do know is why the cost of shipping a container from China to the US is plummeting, and it doesn’t tell a pretty story. China has shut down a large percentage of its manufacturing capability, and there isn’t much more left to ship to us. It’s pretty much that simple. Demand for containers is dropping, and prices are following.
China continues to crack down on energy consumption and pollution. China has a national energy crisis stemming from a shortage of coal, so they are rationing energy use among their factories. In some regions, factories have been forced to drop from a five-day production week to as few as two days. That’s a loss of 60% of their production. China has even started releasing coal from the million tons locked up in bonded storage because of a yearlong ban caused by the trade war with Australia. But that won’t help much because one million tons of coal is equivalent to just one day’s import
Now add to that the effect of China’s pollution crackdown. China has shut down tens of thousands of factories because of environmental issues. And when China shuts down a factory, it’s not done with a notice in the mail—they just shut down the power and gas directly at the source. For the global environment, this is great news, as China is finally taking seriously the environmental impact it is having on the planet. But shutting down entire industrial regions wreaks havoc on the supply of goods to the rest of the world. And it’s not just limited to Xboxes and TVs. The raw material US factories need to produce goods are, for a large part, imported from China. So are electronics, machine parts, fasteners, electrical supplies, and a host of other goods that keep our factories running day by day. When China’s factories shut down, US factories are not far behind.
The short fix for all of this is out of our control; China must get its act together quickly. They must find ways to solve their energy and pollution crises without tanking their own economy and taking ours down along with it. What’s more important for us as a nation is the long game; the US must get control of its own destiny by stopping its heavy reliance on China. Why should we suffer when they screw up? The hell with the global economy—we can do the best for the world and ourselves when we are economically strong.
We must bring manufacturing back to our country. For the jobs it will create, but more so to gain control over our own fate. It will take a long-term strategy that requires the coordination and efforts of our citizens, our industries, and our government. This is not as easy as it sounds because China has positioned itself to prevent this, but we no longer have a choice.
To be fair, China isn’t our only problem. COVID is still hurting us domestically, shutting down our factories and slowing down our ports. Perhaps the biggest challenge manufactures are facing is the workforce. People do not want to work. Of the dozens of businesses I speak with weekly, not a single one I can think of wasn’t down 10% to 30% of their workforce.
So what does this mean for dietary supplement brands and retail stores? It’s been a tough run and it will get worse before it gets better. Much of the negative impact caused by the supply chain crisis is still trickling down and hasn’t fully presented itself to retail stores or consumers. We’re seeing brands increase prices, pull products off the market, and of course backorders are getting worse by the day. Depending on where a brand is in their inventory cycle, they may or may not have reacted yet, but what’s coming is inevitable, so be prepared. Ingredients, packaging, and transportation costs are up across the board so expect shortages, delays and backorders. Prices will rise and in some cases like whey protein and creatine may skyrocket.
So what should we do? I think Mel Bernstein said it best with his advice to Tony Montana: “every day above ground is a good day.” Those who work harder, smarter, and think outside of the box will survive this. Those who allow fear to cripple them, will fall to the wayside. We made it through COVID, the darkest time in our industry’s history, so we’re battle hardened, we’ll make it through this as well.
It’s inevitable that whenever I discuss this topic, someone comments that we can easily resolve the problem by buying domestically. I am proud that NutraBio manufactures our products here in the USA, in our own facility, and has always focused on purchasing American ingredients, packaging, and machinery. If I can purchase “American made,” I do, and I have made that a priority since I opened NutraBio 25 years ago. I strongly believe in supporting American workers and our economy. I am proud to be an American; I am proud of the United States of America, my country; and I will always support its people in any way I can.