EnPanjiva Research took part in a webinar on April 7 with our colleagues from S&P Global Ratings, LCD Research and 451 Research. A full recording of the webinar as well as presentations given is available on demand here.
The Panjiva section of the webinar focused on our Q2 2020 Outlook, while this report provides answers to a series of questions asked during the webinar relating to supply chains.
We started the presentation with a poll: “Which of the following will cause the most damage to company earnings in the coming quarter?” The largest response by far was “loss of demand from customers” which accounted for 65.3% of responses. The other two responses were close with “closure of suppliers” and “disruption to logistics” were roughly even at 19.1% and 15.3% of responses each.
Source: Panjiva
Q: How will concerns about China in the supply chain in the same way impact its long term growth potential? Will this impact outsourcing decisions to Asia?
In a similar way to the U.S.-China trade war, the COVID-19 outbreak will likely lead companies to further accelerate their plans to diversify their supply chains. This isn’t about China per se, but rather an ongoing push – as elucidated by Stitch Fix – to optimize costs. If anything the difference going forward will be an increased focus on resilience as much as cost of sourcing.
The short-term impact of disruptions to U.S. sourcing can be seen in the drop in China as a share of U.S. seaborne shipping to 33.5% of the total in Q1 2020 from 38.5% a year earlier. That’s been replaced by an increase in sourcing from Asia ex-China to 33.6% from 30.1%. There is a longer-term trend evident though with China sourcing having dropped from 41.9% of the total in Q1 2016.
Source: Panjiva
Q: How do you view the impact of “buy US” playing out after the recovery begins? Will we go back to purchases as normal or more domestic?
The Trump administration may launch a series of strategic industry reviews rather as it did with defense procurement in 2018. It would not be a surprise to see medical supplies being first in the list, with tariffs being used as a driver to encourage a shift of supplies to the U.S. The challenge there will be setting tariffs high enough to encourage a change in sourcing behavior while not radically increasing costs for customers.
Q: Will this change supply chain delivery methodologies, will jobs be replaced?
There’s been a long-term trend towards reduced employment in the freight industry over the past five years. As flagged in Panjiva’s 2020 Outlook for the logistics sector though this has struggled to make much headway due to union protections. Investments in infrastructure are also not an overnight decision, so as is the case for sourcing options noted above any impact from COVID-19 may be an acceleration not a radical change in direction.
Q: What supply chain impacts are you seeing for the renewable energy industry?
Spending on domestic solar installations in the U.S. may fall as a result of reduced consumer incomes while utility scale projects may be put on hold to protect staff. Upstream though, lockdowns of non-essential activity in critical manufacturing countries including Malaysia, which represented 39.8% of U.S. solar power equipment imports in 2019, may disrupt supply chains.
Q: Do you believe protectionism will descend into the US placing tariffs on Canadian oil imports?
The COVID-19 outbreak has acted as a force multiplier for the disagreements over output cuts present within OPEC+. While the Trump administration may have considered tariffs against imports from Saudi Arabia, as flagged in Panjiva’s March 19 report, the application of tariffs against Canada would likely breach the terms of NAFTA / USMCA. Furthermore they may add significant complications for refiners that are optimized for heavy / sour grades – they’ve already lost access to Venezuelan supplies.
Q: Do you think the USMCA implementation will be delayed due to the COVID-19 outbreak?
There’s certainly been requests from the Mexican government to slow the implementation of USMCA specifically in relation to the automotive sector. That industry already faces a significant downturn in demand, while USMCA’s new rules-of-origin could add unhelpful complications to planning. The Trump administration will, however, want USMCA formally on the books ahead of the elections given it is a signature policy win for the government.
Panjiva’s analysis shows there’s been a widespread downturn in trade across the Americas in the past four quarters – including a 1.3% year over year dip in exports from the U.S. in February. As a result, any kind of extra economic reflation potentially coming from increased trade activity as USMCA uncertainty passes would be welcomed.
Source: Panjiva
