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 and draws from global shipping and freight data.
The year it (might) all go wrong — Black swan risks in 2020
There is no shortage of black swan risks — low probability, high impact events — that can lead to physical and/or financial disruption of global supply chains in 2020. We identify eight examples.
A closely contested U.S. election could cast doubt over the direction of trade policy and may lead to a pause in business decision-making, dragging on activity and investment. It would at least come during the off-peak shipping season with first-quarter U.S. imports 12.8% lower than the average for the past five years.
Protests in Hong Kong in 2019 raise the risk of Chinese military intervention and the subsequent removal of the city's special trade status with the U.S. That could disrupt the supply chains of over 36,000 U.S. importers including retailers such as Walmart Inc. and consumer goods suppliers such as Mattel Inc.
Conflict risks involving China also include the nine-dash territorial claims in the South China Sea and relations with Taiwan. U.S. involvement may be limited by a desire to preserve the "phase one" trade deal. Economic restraints on North Korea remain in Chinese hands given its continued $2.4 billion trade surplus with the DPRK while maintaining U.N. sanctions.
Conflict in the Middle East is more of a grey than a black swan after events in 2019. However, closure of the Strait of Hormuz and increased economic pressure on Iran by the U.S. may disrupt supply chains. Action against alternative payment mechanisms could hurt Indian exporters who relied on $4.1 billion of exports to Iran in the 12 months to Sept. 30, including rice.
Relations between India and Pakistan worsened in 2019 and always carry the risk of conflict. The two countries have minimal trade — India represented just 0.7% of Pakistan's exports in the 12 months to Oct. 31, 2019. Supplies of textiles and apparel from Pakistan to the EU and U.S., including purchases by Walmart and adidas AG could be disrupted by a conflict.
The power of drones to disrupt supply chains was shown by attacks on Saudi oil fields in 2019. That comes on top of traditional terrorist and piracy risks which can increase insurance costs and disrupt specific supply chains. Piracy in Asia rose 19.5% year over year in 2019, focused on shipping in the Strait of Malacca and Singapore.
Climate change related policies may finally have an impact on the shipping industry. Trucost data indicates global maritime shipping emissions reached 1,250 tons of CO2 per $1 million of revenue in 2018. As a result each $10 per ton of CO2 emissions pricing could cut industry profit margins by 1.3%, compared to an EBITDA margin of 11% in the 12 months to Sept. 30, 2019.
The prospects of a recession remain low — indeed S&P Global Ratings see 2020 as featuring "unexciting steady-state growth in many advanced economies." However, that should be set against the backdrop of a 2.1% year-over-year drop in global exports in the 12 months to Nov. 30, 2019.
Pharma harvest from phase 1 deal may be transshipments
There has been a surge in interest from global pharmaceutical companies in China's single buyer program. The program, which sources generic drugs, has seen a 53% year-over-year drop in offered prices. It may provide a vehicle for China to meet part of its purchasing commitments made to the U.S. under the "phase one" trade deal.
U.S. pharma exports to China reached $4.1 billion in the 12 months to Nov. 30, 2019, after rising 49.2% year over year. That growth would need to accelerate to 63.2% for each of 2020 and 2021 for pharma to contribute its proportionate share of China's commitment to raise its imports from the U.S. by $200 billion.
With China's total imports having reached $35.1 billion in the 12 months to Nov. 30, 2019, after growth of 19.5% there is certainly room for more supplies, which historically have included shipments by Bristol-Myers Squibb Co. and Roche Holding AG.
While displacement of supplies from Europe to China is a risk, most pharma companies are global and so could — in theory — transship via the U.S. to help China meet its commitments.
Dollar General, Greif may bag bargains as China bans single-use plastics
China's government will outlaw the use of single-use plastics over the next five years, potentially driving a surge in exports as producers of plastic bags, among other products, look for new markets. The U.S., which has yet to implement a national policy, may be one target.
U.S. imports of plastic bags fell 27.4% year over year in the 12 months to Nov. 30, 2019, to $830 million. That reflects the imposition of tariffs which will remain in place under the "phase one" trade deal. Total demand remains robust, shown by a 6.4% rise in shipments from Canada and Mexico.
Discount retailers are among the biggest importers of plastic bags to the U.S. and also have the toughest supply chain choices to make. Seaborne shipments associated with Dollar General Corp. show its imports of plastic bags may have fallen by 32.0% year over year in 2019, while Dollarama Inc.'s likely surged higher. Elsewhere packaging specialist Greif Inc. — which will also need to manage its plastics supply chain — may have seen a 12.7% rise in shipments.
New normal means same problems as Los Angeles loses out from tariffs
Container shipping through the port of Los Angeles dropped 17.3% year over year in December, including a 20.3% slump in imports. The latter was mainly down to a tariff-related collapse in shipments from China, which represented 62.8% of imports to the port in 2019 and fell by 5.6% for the year overall.
Despite the "phase one" trade deal between the U.S. and China, most tariffs on imports from China will remain. The Trump administration may also use tariffs in dealing with other countries, leading Port of Los Angeles Executive Director Gene Seroka to state that "the use of trade taxes to advance policy may now be the new normal."
A widened use of tariffs may be a particular threat to Los Angeles given shipments from ports in Asia ex-China represented 30.7% of the total and actually fell by 2.5% year over year in 2019. A rare bright spot though has been a surge in shipments from Japan and South Korea — including a 70.2% jump in shipments linked to Toyota Motor Corp. and 47.6% in those associated with Kubota Corp. — as shipping services by Hapag-Lloyd AG and ONE resume.
S&P Global Market Intelligence, Trucost and S&P Global Ratings are owned by S&P Global Inc.
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.
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