2020 Outlook: The Year It All (Might) Go Wrong – Black Swan Risks — Panjiva
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2020 Outlook: The Year It All (Might) Go Wrong – Black Swan Risks

Ags - Grains/Beans 210 China 2205 Cons. Discr. - Apparel 292 Cons. Discr. - Durables 212 Cons. Discr. - Retailing 225 Corp - Shipping 704 European Union 520 India 362 Iran 28 Mode - Seaborne 1438 North Korea 41 Outlook 61 Pakistan 18 Philippines 49 Taiwan 132 Trade Balance 784 U.S. 3973

Panjiva’s annual Outlook series always includes an assessment of “Black Swan” risks – low probability, high significant events that could significantly disrupt global supply chains. Historically these have focused on physical interdiction risks – indeed this year’s bevy of eight risks include five that relate to physical risk. However, there is also a bank of three this year that are financial in nature, starting with the forthcoming U.S. elections.

Contested U.S. election result

The polarization of U.S. elections in the past four years alongside the close result in 2016 has led many political commentators – including Eurasia among others – to raise concerns regarding a contested election result. 

The immediate impact on supply chains should be minimal as the election aftermath coincides with the offpeak shipping season. Panjiva‘s U.S. seaborne import data shows that shipments during 1Q have been 12.8% lower than the rest of the year over the past five years. 

Yet, protracted uncertainty regarding trade and other policy outlooks could rapidly lead to investment decisions by major corporations being put on hold, dragging on activity more broadly and shipments of capital goods specifically.

The outcome of the elections may not have a significant impact on U.S. trade policy however – as discussed in Panjiva’s Jan. 16 research both President Trump and Democratic party candidates have hawkish views with regards to China.

ELECTION TIME FOLLOWED BY QUIET TIME FOR SHIPPING

Chart segments U.S. seaborne imports by month.  Source: Panjiva 

China cracks down on Hong Kong

Protests in Hong Kong throughout 2019 have raised the risk that China could directly intervene in the city’s governance in a military manner. There have already been signs that the U.S. Senate would look to rapidly remove Hong Kong’s independent status and resulting trade terms. Aside from short-term physical risks that could also disrupt the economics of supply chains that utilize Hong Kong as a manufacturing hub.

Panjiva’s data identifies over 36k consignees involved in Hong Kong to U.S. shipping in 2019. The largest by volume was Walmart with 28,000 TEUs shipped across a variety of toys and apparel. Others include Newell’s Graco with 17,000 TEUs of kids car seats, Sharkninja with 11,700 TEUs of vacuum cleaners, Fila 3,500 TEUs of footwear and Mattel with 7,600 TEUs of toys.

IMPORTS FROM HONG KONG CUT BACK AS PROTESTS RAGE

Chart segments U.S. seaborne imports from Hong Kong by consignee.  Source: Panjiva 

Asia conflict risks

The challenges surrounding China’s assertion of shipping rights in the South China Sea – the so-called – is still relevant. China’s military has approached fishing boats once again in international waters, The Times reports, despite an attempted denouement with the Philippines. The density of shipping in the area raises the risk of a rapid escalation of maritime warfare. 

Similarly, increasingly hawkish rhetoric from the Taiwanese government after the elections could significantly increase shipping risks in the area. The U.S. may be less assertive given the recent signing of the U.S.-China phase 1 trade deal, though that shouldn’t be relied upon as a preventative for escalation. 

There’s the potential for talks between North Korea and its near-neighbors as well as the U.S. to address denuclearization, according to Axios, but prior experience suggests there could be a rapid reversal in relations.

China largely controls the situation from an economic perspective and appears to be sticking to UN sanctions requirements. China’s exports to North Korea fell by 18.6% in the 12 months to Nov. 30 compared to 2015 to reach $2.40 billion, Panjiva’s analysis of official data shows. Imports meanwhile dropped by 91.8% over the same period to $204 million. The latter will be where any Chinese leverage lies – particularly while financing a $2.20 billion trade deficit goes unanswered.

SANCTIONS REMAIN IN EFFECT – HOW IS THE SURPLUS FINANCED?

Chart segments Chinese trade with North Korea by direction on a monthly and 12-month average basis. Calculations include China General Customs Administration data.  Source: Panjiva 

Closure of the straits of Hormuz and commerce with Iran

Shipping disruptions also abound in the middle east. A black swan risk that got distinctly greyer in 2019 is the risk of conflict in the Arabian gulf. The situation is evolving rapidly with the JCPOA nuclear deal between Iran, the U.S. and EU being in tatters. 

From a functional perspective an increased threat of a closure of the Straits of Hormuz may be sufficient to disrupt shipping if insurance companies withdraw coverage. The use of military escorts for shipping in the region can of course lead to accidental escalations.

A second order effect from worsening relations between Iran, the U.S. and EU is the need for other countries that want to continue trade with Iran needing to use alternative payment mechanisms. The U.S. may take action against those systems in 2020 as part of the Trump administration’s “maximum pressure” campaign.

One of the largest exporters to Iran remains India, whose exports to Iran reached $4.1 billion in 12 months to Sept. 30. Shipments were dominated by rice and sugar with leading exporters including Supple Tek ($1.21 billion), KRBL with $174 million and GRM Overseas with $160 million also rice.

Sticking with the region, disruptions to the Suez Canal shouldn’t be ruled out if the conflict in Yemen – including intermediaries of Saudi Arabia and Iran – spreads into shipping lanes again, as was the case in January 2018 when a series of mines became unmoored.

RICE EXPORTERS EXPOSED TO MAXIMUM PRESSURE EXTENSION

Chart segments Indian exports to Iran by shipper and product (HS-4) in the 12 months to Sept. 30, denominated in dollars.  Source: Panjiva 

India-Pakistan relations worsen to conflict

Relations between India and Pakistan already deteriorated following Indian action to remove autonomy of Jammu and Kashmir, as reported by Reuters in October. Similarly there was action by India in 2019 to significantly raise tariffs on imports from Pakistan. There’s already a risk of conflict between the two nations with both parties being nuclear powers.

The aphorism that countries that trade together don’t go to war can be applied in reverse here given the paucity of trade volumes between the neighbors.

Panjiva’s data shows Pakistan’s exports to India fell throughout the past two years – India represented just 0.7% of Pakistan’s exports from 1.6% in 2018. The lost revenues in exports to India appear to have been taken up by China which now represented 9.0% of Pakistan’s exports in the 12 months to Sept. 30 versus 7.7% in 2018.

Disruptions to Pakistan’s exports caused by conflict could have an impact on supply chains running to the EU and U.S. which represented 37.9% and 19.1% of exports in the past 12 months. Products shipped are focused on textiles and apparel, which represented 77.8% of exports in the 12 months to Sept. 30 and were led by Walmart, Adidas and The Gap.

INDIAN IMPORTERS HAVE LITTLE EXPOSURE TO CONFLICT WITH PAKISTAN

Chart segments Pakistani exports by destination.  Source: Panjiva 

Pirates, drones and terrorism, oh my

The potential impact of drones on supply chains was shown by attacks on Saudi oilfields in 2019. Piracy or terrorism – whether using high tech tools or traditional forms – could disrupt supply chains going forward, leading to a potential hike in insurance rates or diversion away from shipping pinch points. 

There was an increase in such activity in 2019. Panjiva’s analysis of RECAAP data shows there was a 14.5% increase in piracy and robbery attacked on shipping in Asia in 2019. That’s been focused on the Straits of Malacca and Singapore (SOMS) which are increasingly of concern after representing 29 pf 71 events in 2019. It is worth bearing in mind however that attacks are still well down on 2015 when there were 2.7x as many events including 94 in SOMS.

SOMS RISKS RISE FOR SHIPPERS

Chart segments incidents of piracy and armed robbery in Asia by region. Calculations based on RECAAP data.  Source: Panjiva 

Climate change bites the balance sheet

Awareness of the need to act on climate change took a step ahead in 2019, including a rapid acceleration of greenhouse gas emissions regulations. So far moves have been limited to potential inclusion of the shipping industry in the EU ETS. A more concerted global effort – such as that used for sulfur emissions but with a more rapid implementation – could rapidly increase costs for the shipping industry. 

Panjiva’s sister company, Trucost, estimates that the carbon emissions intensity (tier 1 and 2) of the maritime shipping industry was 1,280 tons / million dollars of revenue in 2018. That included Maersk and Hapag-Lloyd that were somewhat lower at 1,040 tons.

Put another way every $10 per ton of carbon pricing equivalent to around 1.3% of industry revenues. That doesn’t sound big until one considers that the shipping industry’s EBITDA margin in the 12 months to 3Q 2019 was only 11%. If carbon pricing isn’t passed through there could be a significant drag to shipping industry profitability.

SHIPPING EMISSIONS INTENSITY TOOK A DIP IN 2018

Chart compares carbon intensity of revenues by company. Calculations based on S&P Global Trucost data.  Source: Panjiva 

The “R” word

Finally, the global economy has managed to avoid a full recession, while S&P Global Ratings expect 2020 to feature “unexciting steady-state growth in many advanced economies” though “the balance of risks remains on the downside“.

That’s come against the backdrop of a marked slowdown in international trade. The fragility of global trade conditions is shown by a 2.1% year over year drop in exports globally in the 12 months to Nov. 30, Panjiva’s analysis of S&P Global Market Intelligence. While there’s been a 7.5% rebound in Chinese exports in December that may be down to temporary effects – such as comparing to a tariff-linked lull a year earlier and the earlier lunar new year.

EXPORT DOWNTURN WIDESPREAD IN 2019

Chart compares export growth by origin. Calculations based on S&P Global Market Intelligence data.  Source: Panjiva 

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