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Retailers to pass Trump's tariffs on; Lenovo may shift to Mexico from China

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.

Retailers aim to make consumers pay for Trump's tariffs
The recent worsening of the U.S.-China trade war has raised a range of concerns in the retail sector regarding the outlook for commercial operations and supply chains. The proportion of retailers mentioning trade policy in their earnings calls was 25.4% in the period since April 1. That is higher than the 20.3% of 6,705 companies analyzed across all sectors.

Home Depot Inc. — which sourced 85.7% of its U.S. seaborne imports from China in the 12 months to April 30 — has indicated that new tariffs will add "an incremental $1 billion" to costs, according to Edward Decker, executive vice president for merchandising. Best Buy Co. Inc. CEO Hubert Joly, meanwhile, has stated the tariffs "will result in price increases" as it seeks to offset costs on the 84.8% of its seaborne imports that come from China.

Target Corp. CEO Brian Cornell also stated that tariffs will "lead to higher prices on everyday products." The firm has the highest hill to climb with 94.0% of its imports coming from China, although around a quarter of its shipments are toys where tariffs likely won't be applied. Target has also started reducing its imports of furniture and electrical items in response to earlier tariff hikes.

(Panjiva Research - Retail)

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Lenovo may follow competitors with China-to-Mexico switch
Lenovo Group Ltd. may shift production to the U.S. or Mexico from China in response to China's tariffs. CEO Yang Yuanqing has indicated both Mexico and the U.S. can "increase production capacity if our rivals move production to places where tariffs do not apply." While a relocation decision for manufacturing has not been made, Lenovo has already reduced its U.S. imports from China by 15.5% year over year in the four months to April 30, while increasing its shipments from Mexico by 10.4%.

The biggest challenge would be switching U.S. imports of computers from China, which accounted for 46.4% of shipments from China in the 12 months to April 30 and which had increased 13.7% year over year in the three months to April 30. Shipments of monitors have already been reduced.

(Panjiva Research - Tech. Hardware)

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Nokian to inflate prospects in shifting tire market
Finnish tire-maker Nokian Renkaat Oyj has announced plans to open a manufacturing facility in the U.S. to produce all-season tires. This move is likely driven by the rapid reduction in Chinese seaborne imports, which shrunk 27.2% year over year in the first quarter after antidumping duties were applied.

Suppliers from other countries have jumped in to fill the void. Nokian faces competition from HANKOOK Corp. Inc., up 5.7% year over year, while European manufacturers Pirelli & C. SpA and Compagnie Générale des Établissements Michelin increased their shipments by 17.6% and 10.2%, respectively. Benefits for Nokian include a rapid increase in tire shipments, which have already risen 17.2% in year-over-year growth, as well as savings from lead time and inventory reductions resulting from "in-market" production.

(Panjiva Research - Autos)

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Scrapping of tariffs may help US scrap steel exports
U.S. scrap steel exports have reversed a 15.4% year-over-year expansion in 2018 with a 12.4% drop in the first quarter of 2019 as a result of the Trump administration's tariff policies. Exports to China fell 93.8% in the first quarter as a result of retaliation against section 301 tariffs, as well as government policies to cut imports of waste products. Shipments to Mexico fell 35.8% due to retaliation against U.S. steel tariffs. The latter have now been removed as part of the U.S.-Mexico-Canada Agreement ratification process. Leading importers of scrap in Mexico include Nacional de Acero SA de CV, which accounted for 31.6% of shipments in the 12 months to March 31, and Ternium SA's local subsidiary which represented 24.9% of the total.

(Panjiva Research - Metals & Mining)

Magenta Canary of China tariff drag may leave retailers with shipping needs
Ocean Network Express has announced the cancellation of its May 26 sailing from China and South Korea to the port of Tacoma, operated jointly with Hapag-Lloyd AG and Yang Ming Marine Transport Corp. as the PN1 service. While an isolated example so far, the decision may reflect the anticipated impact of higher tariffs on Chinese exports, which could cut demand for the magenta-liveried container-line's services. The sailing has historically arrived at the start of peak season with arrivals in June and July representing 9.8% and 8.3% of the annual total, respectively, in 2018. The largest users of the routing in the past 12 months are retailers including Target, IKEA AB and Amazon.com Inc.

(Panjiva Research - Logistics)

ONE's first in Seattle after shaking off chaotic 2018
Container handling through eight of the largest U.S. seaports rose 2.2% year over year in April, led by a surge in shipments through Houston. Most ports saw a decline in exports, including a 12.7% drop at Long Beach and a 8.5% decline through Charleston. As a result, total export handling fell 3.6% versus a 6.2% increase in import volumes.

Long Beach was the only top-10 port to see a drop in imports with a 12.4% year-over-year slump and may see disruptions following the sale of terminal assets thereby Orient Overseas. Seattle-Tacoma saw the fastest import growth at 25.6% year over year. Performance there was led by Ocean Network Express, which grew 65.6% when compared to the disastrous April bookings situation it faced in the same month of 2018. In turn, ONE also likely took market share from CMA CGM SA and COSCO SHIPPING Holdings Co. Ltd., which both suffered lower shipments.

(Panjiva Research - Logistics)

US trade deficit likely buoyed by ocean freight imbalance in April
The U.S. advance trade deficit for April, scheduled to be published on May 30, may show a marked year-over-year increase. Panjiva's analysis of sea freight data shows exports from eight major ports fell 3.6% year over year, while imports climbed 4.5% across all ports. While export price inflation outstripped import price deflation, that still yields a "signal" for a 3.3% drop in exports and 3.4% rise in imports when adding shipments to inflation. Given that the value of imports is 1.5x that of exports, there will need to be a marked swing in air- and land-freight to avoid a second month of year-over-year rise in the trade deficit.

(Panjiva Research - Policy)

Programming note: The Panjiva Daily will take a break on Monday, May 27, for the Memorial Day holiday. In the meantime, you can catch up on the past week in tomorrow's Supply Chain Edge, as well as keep up with all our research at panjiva.com/research.

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.

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. S&P Global Market Intelligence is not responsible if those links are unavailable later.