All indicators suggest that the shipment delays, port jams and sky-high freight costs that rocked global trade in the years following the coronavirus pandemic have now eased, but as Felix Thompson finds out, fresh challenges await supply chain managers this year, and next.
Previously considered anomalies, supply chain disruptions have become a common characteristic of global trade.
This shift came into sharp relief in 2021 amid the aftermath of the Covid-19 pandemic. An upswing in demand for consumer goods caused shipping prices to rocket by over 500% on major routes like Shanghai to Rotterdam, while lockdown measures at ports and temporary shutdowns at production facilities aggravated already strained supply chains.
Hopes for a smooth recovery were dashed when Russia invaded Ukraine, adding geopolitical tension to an already volatile situation. While supply chains have since regained some stability, they remain largely unsettled, teetering precariously on the brink of further potential upheaval amid rampant inflation and worsening macroeconomic conditions.
For corporates, these challenges necessitate an urgent re-evaluation of supply chain management strategies. Chris Rogers, head of supply chain research at S&P Global Market Intelligence, outlines to GTR the key developments supply chain managers should consider in the coming 12 months.
GTR: How have global supply chains fared this year? Is there some level of post-pandemic normality returning to supply chains?
Rogers: In simple terms, the question is whether we are experiencing a return to previous trade patterns and levels, or a return to trend growth. I think we are returning to some semblance of normality in as much as the level and pattern of shipments during the first part of the year have returned to historical norms. The S&P purchasing managers index also aligns more closely with past patterns.
However, this return to normal is largely influenced by a decrease in demand. Factors like consumers already having made significant purchases in the last few years; the cost-of-living crisis and inflation causing people to buy fewer goods; and higher interest rates leading companies to be more circumspect about manufacturing and investing in new facilities all contribute to this reduced demand. Our projection is that global trade activity will start to recover later this year, but at a very slow growth rate.
GTR: Despite a semblance of normality returning, supply chain managers are also having to grapple with the Ukraine crisis. What impact do you think the EU’s latest sanctions package against Russia will have on the way they operate their businesses?
Rogers: The 11th package is about ensuring the effectiveness of previously announced sanctions, without any sanction leakages. For instance, there has been a shift in shipments of dishwashers and washing machines, wherein exports of these goods from the EU to Russia plummeted when sanctions were introduced, but sales to countries neighbouring Russia went up. Now, that might just be coincidental, or it may suggest some level of sanctions. We don’t know for sure as the data only reveals what it shows.
The significance of dishwashers and washing machines is two-fold: firstly, they are high-end consumer goods that Russia does not produce itself, and secondly, they contain electronic components, such as semiconductors, that could potentially serve alternative purposes within the context of war efforts.
GTR: China’s economy has opened up since Covid measures were eased earlier in the year. How has its trade sector performed since then and what is the outlook for China trade for the rest of the year and into 2024?
Rogers: If we examine year-to-date data up to May 31, exports from mainland China have remained essentially unchanged, down only 0.1% year-over-year (YoY). This can be attributed to a 3 to 4% drop in exports of electrical and electronic products, largely driven by a decline in exports of computers and mobile phones. Specifically, mobile phones exports are down by about 11% YoY in this period. That’s part of a wider malaise we are seeing in the electronics industry, with Chinese exports of computer chips also down by nearly 20% in the first five months of the year.
But the offsetting item is a rebound in the automotive industry as factories have opened up and demand has strengthened. Data from China’s General Administration of Customs show that export volumes surged 76% YoY in the January to April period, to nearly 1.5 million vehicles.
On the import side, we’ve seen a YoY decline of around 6% in the first five months of the year. That’s partly down to commodity flows falling in the wake of higher prices for oil, gas and coal. There has also been a marked decline in the imports of components used in manufacturing consumer electronics goods.
On the positive side of the ledger, imports of agricultural products have grown.
In terms of the outlook for China’s trade activity, combining imports and exports, we’re expecting a return to growth by the end of the year of about 2% in real terms, adjusted for inflation, and in 2024, we’re only looking at a growth of about 3%, adjusted for inflation.
A slow recovery is the name of the game.
GTR: You mentioned there’s been a substantial drop in semiconductors exports specifically. What are the reasons behind this fall, and how do you see this playing out in the longer term?
Rogers: The drop in exports of chips stems from short and long-term trends. People are buying fewer computers and phones than they were previously, whether these electronic goods are made in China, Vietnam, or Taiwan. That downturn has dragged down the aggregate demand for basic memory or processer chips.
Over the longer term, there is the whole process of reshoring, and the US and European countries are imposing export restrictions, designed to stop China from importing or making high-end chips. The Netherlands, for instance, has blocked sales to China by Dutch manufacturer ASML, which makes advanced semiconductor machinery. This longer-term trend will take some time to play out and I doubt there will be a huge shift in trade statistics as a result. While advanced chips are important, they’re not a significant part of the total value of flows of chips. For every shipment with tens of thousands of advanced graphics processors, there are hundreds of millions of regular semiconductors being sold and traded.
GTR: The EU has adopted legislation to tackle deforestation in its supply chains and is introducing a carbon border adjustment mechanism (CBAM), which will charge a levy on European firms importing energy-intensive goods. Which sectors and regions could be most affected by these pieces of legislation?
Rogers: Regarding deforestation, this development has been a long time coming and there are no big surprises. The products covered, including cocoa, beef and lumber among others, are sourced in the tropics. The food and building materials industries will have to make significant investments in their supply chain transparency and maybe shift their sourcing strategies as a result.
The EU’s CBAM is one that’s going to have a fairly widespread impact. I’m particularly interested in its effects on steel and aluminium products. The possibility of a carbon tariff linked to emissions means companies will have to carefully consider their sourcing decisions for these items. European steel importers, for instance, will have to weigh the emissions profiles of major producers like China and Turkey.
Furthermore, implications go beyond the direct import of steel and aluminium; they also extend to the products that they’re used in. Virtually everything has some form of metal component, including laptops, cars, home furnishings and buildings. The potential reach of CBAM into all these different supply chains is pretty significant.
However, it’s worth noting that while the reporting requirements for CBAM start in October, the actual cost impact will take a couple more years to be fully felt. This is the year companies need to get their act together in terms of understanding their deep supply chains because there will be direct costs associated with that.
In addition to CBAM, other EU regulations, such as the corporate sustainability directive, have come into effect, and negotiations are underway for an EU-US steel deal with a focus on the environmental profile of steel as well.
GTR: In a recent S&P Global analysis of the supply chain outlook for the third quarter of 2023, published in June, you forecast an increase in companies declaring long-term supply chain strategies in the second half of this year. What will these strategies entail?
Rogers: Now that supply chains have mostly calmed down, management teams will have time to focus on their longer-term sourcing strategies. We already mentioned the EU’s deforestation and CBAM initiatives, so corporates will have to look at the environmental characteristics of their suppliers and potentially switch to cleaner suppliers.
We expect supply chain digitisation to be another key area of investment. A recent survey by S&P Global’s 451 Research showed that 42% of firms already have comprehensive supply chain visibility systems in place, while another 33% are in the discovery, or proof-of-concept stage. Rather than making big and long-term bets for switching supply chains, many corporates may opt to invest in digital technologies and improve visibility into their supply chains to manage risk.
A central issue is that reordering supply chains takes a long time and can be difficult to implement in a lower cash-flow, higher interest rate environment. This is particularly the case for inventory management and multi-sourcing, which both add cost. Geopolitical concerns could be another driver of supply chain strategy announcements. There is plenty of evidence that reshoring is already taking place. Import data show that Chinese suppliers accounted for 67% of printers imported into the US in 2013; this figure fell to 23% in 2022. There have been similar patterns for power tools, home appliances and personal computers.
