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Through a coronavirus lens, darkly — Q2 supply chain outlook

This report provides a summary of Panjiva Research's Q2 2020 Outlook, which investigates six major issues facing global supply chains in the coming months.

Companies are struggling to determine the way ahead — Panjiva's analysis shows more than 400 companies withdrew their earnings guidance in March, including logistics companies such as A.P. Møller - Mærsk A/S and capital goods manufacturers including Deere & Co. That increases the importance of alternative datasets in tracking corporate activity.

The spread of lockdowns will have a significant impact on trade activity. The potential magnitude is shown by U.S. seaborne imports from China, which fell 59.5% year over year in the first three weeks of March, while shipments from Taiwan and Vietnam climbed 17.4% and 25.5%, respectively.

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Just as supplies from China are returning to normal, there is a concurrent slump in demand, reflecting the bullwhip effect, with more than 61% of Chinese textile companies reporting orders that are less than half their normal levels. U.S. apparel importers already slashed their shipments. Seaborne imports linked to Target Corp., Walmart Inc. and H & M Hennes & Mauritz AB (publ) all fell by 50% to 55% in the first three weeks of March compared to a year earlier.

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The logistics industry has responded to lower demand by cutting capacity in both the container-line and airfreight sector, and more will be needed as coronavirus disruptions spread. A build-up of undelivered cargo has started, leading MSC Mediterranean Shipping Co. SA to offer space at its transshipment hubs to customers that cannot take delivery at the usual destination. The largest users of MSC's U.S.-inbound shipping services in 2019 who may make use of the service include Walmart and Best Buy Co. Inc. among retailers and Newell Brands Inc. and Mattel Inc. among industrials.

A surge in air freight rates has led FedEx to raise its surcharges, while wider complications have led FedEx Corp. and United Parcel Service Inc. to trim their service guarantees. FedEx's seaborne shipping customers who might transfer airfreight over include Wistron Information Technology & Services Corp. and Apple Inc., with 673 and 626 shipments linked to each company, respectively, that were shipped to the U.S. by sea in 2019. In extremis, logistics companies may follow Ceva Logistics AG and Deutsche Post AG's DHL in declaring force majeure.

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The healthcare supply industry has been roiled by a mixture of surging demand and export restrictions. A G-20 initiative to limit the latter may not prove effective. While import barriers are being removed, U.S. imports of ventilators and personal protective equipment fell 35.5% and 33.5%, respectively, compared to a year earlier in the first three weeks of March. Pharmaceutical imports fell only 3.5%, but lockdowns in India and Europe introduce risks.

Negotiations to formulate new trade deals are likely to be on hold, particularly in terms of U.S. plans for deals with the EU, the U.K., Kenya and India, while progress in Asia on the RCEP and CPTPP are unlikely in the second quarter. Implementation of the USMCA is delayed until at least July. U.S.-China relations may continue to deteriorate. Chinese imports of products covered by the phase one trade deal in February were 62.8% below the level implied by China's purchasing commitments for 2020, as well as 18.4% lower than a year earlier.

More pressingly, the U.K. needs to decide whether to extend the Brexit withdrawal period and how it may shore up access to critical goods. The EU represented 80.9% of British medical imports in 2019, while shipments slumped 20.9% year over year in January.

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Christopher Rogers is a senior researcher at Panjiva, which is a business line of S&P Global Market Intelligence, a division of S&P Global Inc. This content does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence. Links are current at the time of publication. S&P Global Market Intelligence is not responsible if those links are unavailable later.