Supply chain Covid-19 update 25th February
Global infections exceed 80k - CNN reports that officially we now have 80k infections with 2,698 deaths so far adding that whilst the WHO isn't calling it a pandemic yet "now is the time to prepare". Their live blog Link also carries a story from the US FDA directly contradicting the axios.com story I flagged yesterday; CNN quotes a FDA spokeswoman as saying no drugs suppliers expect a shortage of supplies.
Stockmarkets have recorded significant drops - Australia -1.5%, Shanghai composite -2.5%, UK FTSE 100 -3.3%, US Dow -3.6%, Italy -6%. All told, equity values dropped by $1.5 trillion (T intended, that's not a typo) around the world according to 9news.com.au whilst the BBC reports that gold is already up 10% since the beginning of 2020 (Link) and Link.
"Worse than the bush fires" - the Australian treasurer has been quoted in a press conference as saying that the economic impact on Australia will be worse than the fires which ravaged the country in December and January but that it was too soon to provide an estimate. Link
On to supply chain specific news:
Transpacific air passenger demand still very low - CNN (same link as before) says United has extended its suspension of flights to four destinations in China until 24th April adding that demand to travel to China is near zero whilst demand on other transpacific routes is down 75%.
Demand for air freight grows - whilst capacity is restrained due to passenger flight cancellations, atlas (a cargo only airline) says it's seeing a significant jump in demand (Link). In a trading statement to investors their CFO said "We're starting to really see the tremendous demand and the increase in yields and the factories to get back to work this week". Cancelled flights are now over 200,000. The domestic truck shortage in China is causing ongoing issues such that some air carriers require proof that onward transport has been arranged before they will fly the cargo into China.
More sea freight cancellations - Loadstar reports (Link) Maersk has cancelled more sailings due to a collapse in demand. Moody's adds in the same article that port calls to Shanghai and Yangshang are 17% lower in week 7 vs. this time last year. The cancelled sailings plus storms in N Europe have thrown many ships seriously off their timetables which may cause further supply chain issues next month. Analysts expect disruption for several months to come. Continuing the theme, the coronavirus is set to wipe a “chilling” 1.7m teu of container business (Link), according to new research from Copenhagen-based Sea-Intelligence. Using what the consultancy admits as a “very rough” average of $1,000 per teu in freight rates, the Wuhan-originated illness translates into a $1.7bn shortfall in revenues for carriers. Already the virus has more than erased the full growth seen in 2019, Sea Intelligence noted.
More clothing retailers report issues - Lululemon reports it has shut the majority of its 38 outlets in China with the rest on reduced operating hours. It says that it's e-commerce operations continue but did not clarify what supply chain problems it may or may not have. Link. In a separate article, Primark has also now warned of supply chain shortages - Link - the company says that whilst they have a good level of inventory at present, there is a risk of supply chain shortages later in the year. The company sources 40% of its product from China and is stepping up production from existing suppliers in other countries. Some of its food production factories are operating at reduced capacity because of labour and logistics constraints caused by the virus.
European Pharma supply chain security at the macro level - the French giant Sanofi has announced ( Link) plans to launch and spin off a new company which will be based in France and will create the active chemical ingredients for drugs, expanding into a market currently dominated by firms in China and India. “The industry needs to be able to make active pharmaceutical ingredients in Europe,” their CEO said. “And if you’re going to do it, let’s do it properly.”. Note: it'll take 2 years to get it up and running.
Metals supply chain shortages - OM Holdings, a $1bn revenue mining and smelting company has shut down 2 of 16 smelters in Malaysia citing a shortage of semi coke from China. The article thinks this is likely to affect their ferrosilicon and manganese alloy production in the coming months. Link. Steel exports from China are also dropping - The China communist party's Global Times newspaper reports (Link) that the virus is impacting steel exports which were already reducing; analysts now think the exports will drop by around 1.5m tonnes (8%) in the first quarter due to cancelled orders and shipment delays. One producer estimates a recovery period of six months says the Global Times.
Global inventory levels at a 7 year low - FT reports (Link) that global inventory levels have hit a 7 year low according to analysis of closely watched purchasing managers’ output indices by Pictet Asset Management. The FT explains that the GDP-weighted aggregate manufacturing inventory measure for 30 major countries fell to a three-month moving average of just 46.9 — on a scale where anything less than 50 represents declining stock levels and that was in January, even before the coronavirus outbreak began to cause disruption to supply chains. This is the lowest reading since late 2012, suggesting that manufacturers and end suppliers were particularly vulnerable to supply disruptions at that point, intensifying the impact of the unprecedented delay to the resumption of supplies from China after the traditional Lunar New Year holiday. Worst affected were inventory levels in Hong Kong and Sweden. Pictect thinks the virus will result in a 1.9% hit to Chinese GDP growth, dragging year on year growth down to 4.1%.
Hong Kong construction industry job losses - the South China Morning Post reports 50,000 workers have lost their jobs with another 80,000 having hours slashed to 1 or 2 days a week (Link). The cause is a severe reduction in building materials being brought into the city. The industry employs 250,000 people in Hong Kong.
Cambodia introduces tax breaks for virus hit companies - (Link) Cambodian Prime Minister Hun Sen promised on Monday to give six month tax breaks to garment factories hit by supply chain disruptions from the coronavirus epidemic and higher tariffs after the European Union (EU) withdrew trade preferences over human rights. He also pledged to give hotels and guesthouses a tax exemption for four months to help offset losses to the tourism sector caused by the new coronavirus strain. For severely affected factories, if production is halted the suspended workers will get 40% of their wage from the factory with the government paying another 60%.
US manufactures seek more expensive alternative suppliers - Link - Multiple industrial giants in the US are having to seek alternative suppliers reports Reuters. As an example, Morton industries is trying to find new suppliers for tooling and fixtures to shape metal. Limited domestic supply and a rush to secure supplies have sent prices up as much as 30% according to a VP at the firm, adding that they've been forced to pass the prices onto their customers. Caterpillar and Deere declined to comment for the article whilst Komatsu (another industrial giant) did not respond although half a dozen unnamed suppliers told Reuters they are working to tie up sources outside China plus are resorting to air instead of sea. A supplier to Caterpillar and Deere said that it's also experiencing higher costs that it's passing on to customers - in their case the rise is 40% - whilst CCTY Bearing says it's told customers stocks will not last beyond April and thinks other products (consumed by the giants that CCTY Bearing doesn't make) will face shortages too. In a separate article (Link), agriculture machine giant John Deere did however admit that it will spend an extra $40m on airfreight to reduce supply chain impacts according to its CFO. An ongoing cost reduction program aimed at taking out $150m spend continues but the additional air freight spend obviously won't help. It adds that it expects its inventory pile to drop through 2020.
Impact on GM - continuing the industrial giants theme, Forbes has dived deeply into GM's position (Link). They cite an article in USA Today that expects GM to be one of the worst impacted automotive companies due to its supply chain configuration - already no GM personnel are travelling in China. Issues facing GM are not just material availability and logistics infrastructure issue but the health of their workers. GM however is known to have strong supply chain risk management capabilities having learnt lessons after the 2011 tsunami and Fukushima nuclear melt down including blind spot workshops where they work to close off identified risks with the help of Resilinc, a specialist supply chain resilience solution company.
Finally, the Economist Magazine has published a withering opinion piece on the Iran election that I flagged yesterday. Link. It says claims that low turnout was due to foreign propaganda is "hogwash" and that it was primarily due to the regimes deep unpopularity. It also points out that the official death count in Iran suggests the virus is 3 times more lethal than in China so the regime is probably hiding the true scale of the breakout. Whilst education centers, cinema, shops have been closed, religious sites have not been closed. Bungling the response to the virus will do more damage to the regime’s legitimacy than Mr Trump could ever hope to, it says.