The Supply Chain Daily provides a curated overview of Panjiva's research and insights covering global trade policy, the logistics sector and industrial supply chains.
Apple and tariffs weigh on China's exports
China's 4.4% year-over-year drop in exports in December 2018 was only partly due to the trade war with the U.S. — China's exports to Japan and Taiwan have also fallen. Indeed, at the product level a large part can be attributed to the telecoms sector. Exports of handsets and components fell 31.1% in December 2018, compared to a year earlier.
Excluding the telecoms-sector effect, China's exports only fell 1.3% year over year in December 2018. Other electronics sectors also posted significant declines including LCD panels, which slumped 19.1%. The drop in telecoms exports is likely down to more than just seasonality. There had already been a 2.1% decline in exports in November 2018, while Apple Inc.'s recent revenue guidance cut reflected fewer handsets shipped. Absent a recovery in smartphone demand, further weakness in Chinese exports is possible.
No room for complacency in shipping after Q4 margin recovery
Global container shipping companies may have earned a respite from declining profitability in the fourth quarter of 2018. Global container volume growth was robust as China's mainland ports handling was up 3.3% year over year, while U.S. port handling rose 6.2%. Average container shipping rates out of China climbed 9.3% after three straight quarters of declines.
A collapse in fuel prices in the fourth quarter mean the gross profit margin per container likely rose by 7.0%, providing an encouraging sign of pricing discipline among the shipping firms. Analysts' estimates factor in a stabilization in EBITDA margins for the seven biggest shippers at 9.6% for the quarter. A.P. Møller - Mærsk A/S and COSCO Shipping Holdings Co. Ltd. are expected to deliver improvements and Hapag-Lloyd AG a decline.
Analysts expect margins to rise further — to as much as 11.4% by 2020. Yet, there is no room for complacency. Shipping volumes will likely fall whatever the outcome of the U.S.-China trade war, dragging on rates unless older vessels are scrapped. Fuel costs are rising again and investment needs are increasing ahead of new emissions rules in 2020.
Dell relies on pricing and pivot to tackle tariffs
Computer maker Dell Technologies Inc. has so far avoided a significant impact on its earnings from U.S. duties on Chinese imports. The firm has "passed that cost along to end users" for its U.S.-built desktop machines, according to vice chairman for products and operations Jeff Clarke. Should tariffs be increased, or applied to laptops that it sources from China, the firm said it would "pivot our supply chain" to "jurisdictions that are not subjected to tariffs," though "there will be a cost." While an extension of tariffs is unlikely in the near term, the industry can ill-afford higher costs. U.S. seaborne imports of laptops fell 1.9% year on year earlier in the fourth quarter. Dell has so far bucked the trend as imports have risen 15.9% while HP Inc. recorded a 7.4% decline.
2019 outlook — The view from Panjiva's co-founder
Will 2019 be a year of pivotal achievement or heavy disappointments for global trade deals? With 2018 having become another outstanding year for global trade, it is tempting to conclude from the early signs of slowing growth and rising protectionism flowing into 2019 that trade's rosy times may lie in the past.
However, 2019 may see a resolution to many of the policy uncertainties that have weighed on the business environment over the previous two years. U.S. President Donald Trump has an opportunity to resolve disputes with China, while entering into new trade deals with the European Union and Japan.
Executives are not waiting around for policymakers. Since most companies affected by tariffs have seen some sort of combination of lower margins and higher prices, they are making plans to revamp their supply chains.
MSC Industrial reaches deal with customers to handle tariffs
MSC Industrial Direct Co. Inc. has reached an ongoing pricing arrangement with its industrial equipment customers. According to CFO Rustom Jilla, the firm's "customers understand" that price increases due to tariffs will be subsequently cut when duties are "rolled back." While the company accelerated its imports of hand tools from China in December 2018, the firm's total imports from China in the fourth quarter of 2018 were only 0.7% higher compared to the fourth quarter of 2017. The late surge in shipments was down to import of hand tools, which represented 41.7% of MSC Industrial's imports and for which it currently has no alternative sources.
Port Houston should not have a problem even after China led shipping growth
Port of Houston Authority ended 2018 on a high note after container handling through the port climbed 6.3% year over year earlier in December 2018. That included a acceleration in import growth to 6.0% from 4.1% in prior three months on average. Shipments from China were the main drive with a 31.6% surge versus a year earlier as importers sought to beat tariffs that have since been postponed. The tariff delay will likely lead to slower handling growth, or even a decline, in early 2019. China only accounted for 20.1% of inbound volumes in 2018, mitigating the risk for the port authority's finances.
Christopher Rogers is a senior researcher at Panjiva, which is part of S&P Global Market Intelligence. 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.
The Supply Chain Daily has an editorial deadline of 7:30 a.m. ET. Some external links may require a subscription. Links are current at the time of publication time. S&P Global Market Intelligence is not responsible if those links are unavailable later.