EnPanjiva’s 2021 Outlook series considers the prospect for trade policy, logistics and industrial supply chain operations largely on the basis of the extension of existing trends and themes with a high likelihood of coming to pass. There are other risks that are not a part of our core expectations which nonetheless could have a high impact. This report considers four such risks including: a significant mutation in the pandemic; increasingly hawkish geopolitical actions from the Chinese government; a series of interruptions in access to key shipping chokeholds and; a return of North Korean belligerence in the face of the Biden administration. For each risk we consider the potential outcome and ways supply chains can mitigate risk.
SARS-COV-3
What is the risk: Viruses inevitably mutate. The emergence of the B.1.1.7 variant in the U.K. in December 2020 resulted in the rapid closure of border crossings to freight as well as passengers, causing a rapid-fire reiteration of the supply chain disruptions caused in the initial stages of the COVID-19 pandemic. Should the virus mutate significantly enough to render current vaccines ineffective, significant industrial lockdowns may return.
What might happen: While it is unlikely that the widespread shutdowns of industry seen in early 2020 will be repeated globally, the closure of individual countries can still have a major impact on specific industries and manufacturing.
The U.S. automotive industry proved particularly susceptible to the late-and-deep closure of Mexican manufacturing. Panjiva’s data showed that Mexican exports of automotive components to the U.S. dropped by 87.8% in May 2020. They did not return to growth until September, before falling again in October and rising by just 7.9% in November despite the need for restocking and improving U.S. auto sales. The widest volatility in shipments (measured as the average monthly absolute value of year-over-year change in shipments since April) was experienced by Nissan and General Motors.
Mitigating the risk: Traditional onshoring strategies can deal with the geographic basis risk seen in 2020, though diversification of sourcing across several geographies can help mitigate risks too. Both come with additional long-term costs that may exceed the temporary expenses from supply chain shocks.
Source: Panjiva
China becomes more hawkish
What is the risk: China has become more assertive in its domestic and international policies in 2020 including new legislation in Hong Kong and escalating tensions with Australia. More of the same with regards to Taiwan, territorial claims in the South China Seas, data exchange through the Great Firewall and economic actions against countries that side with the U.S. and / or prove critical of Chinese government policy.
What might happen: The most serious, but lowest likelihood, come in relation to Taiwan and the South China Sea in the event that, either deliberately or accidentally, military action is taken by China or one of its rivals. The Biden administration’s stance vis-a-vis Taiwan will prove critical. In the near term that could greatly disrupt shipping and supply chains in the region though the kinetic phase of conflict could prove short. The longer term fallout for supply chains may be felt more in economic policy reprisals than in physical asset destruction / disruption.
Aside from China and Taiwan, conflict within the South China Sea could prove highly disruptive for exports from Vietnam, Thailand, Cambodia, Malaysia, and Indonesia. Panjiva’s data shows the largest export product lines out of those five countries to the rest of the world ex China and Taiwan include commodities such as palm oil and refined oil, manufactured goods including apparel and solar panels and medical supplies including rubber gloves.
With regards to the latter Malaysia accounted for 43.9% of U.S. seaborne imports of rubber gloves in 2020, including shipments by Hartalega and Kossan Rubber. Much of the recent growth has come from China though which accounted for 33.4% of the total.
How to cope: Stockpiling of “South China Sea dependent” products is a given should the risk of military action in the region rise. Securing alternative supplies at a reasonable cost may not be an option given the comparative advantage of the region in some products in terms of raw materials and labor cost. Contractual arrangements for alternative shipping routes – for example air freight avoiding the SCS or overland to other “safe” marine ports may be necessary.
Source: Panjiva
One limpet mine too many in one of two places
What is the risk: Aside from the South China Sea there are also pinch points in the strait of Bab-el-Mandeb to the Suez Canal and the Straits of Hormuz into the Arabian Sea. Both are subject to geopolitical tensions in the Middle East including the proxy war in Yemen and Iranian relations with the U.S. and the rest of the world.
What might happen: The presence of limpet mines on vessels offshore Yemen has been an inconvenience so far but could become a major impediment to shipping should an explosion occur. Action by the shipping insurance firms is key here. Recent actions by Iran in regards to South Korean shipping are a low key example of the dependence of shipping on Iran’s goodwill in accessing the region. Relations between the U.S. and Iran under the Biden administration could worsen if the JCPOA isn’t returned into force and if Iran continues to bolster its nuclear materials production.
How to cope: There have been several examples of interruptions to Hormuz-linked shipping in the past 30 years though so far none have led to an outright closure. For the energy and derived products industries there are currently few alternatives from a logistics perspective, though alternative sourcing of products from non-Gulf countries is an option. Shipping through the Suez Canal meanwhile can be diverted through southerly routes though that increases costs and raises piracy risks too.
North Korea tests a new President
What is the risk: An extended period of on-again, off-again tensions between the Trump and Kim administration’s raises questions as to how North Korea may behave once President-elect Biden enters office. The direct risks to industrial supply chains may be minimal though the potential for escalation in a newly-armed nuclear power shouldn’t be understated. There’s also a clear connection between U.S.-China relations and the position of the DPRK.
What might happen: China retains the economic key to North Korea’s long-term behavior. Panjiva’s analysis of official data shows that Chinese trade with North Korea has dropped by 47.1% year over year in the 12 months to Sept. 30. A marked step-down in Q1’20 coincides both the reduced economic activity linked to the pandemic and the phase 1 trade deal between the U.S. and China. So far sanctions do not appear to have cowed the DPRK despite the presence of a $49 million per month average trade deficit versus China year-to-date. Yet, Chairman Kim has reportedly stated that the DPRK’s latest five year plan has largely failed “in almost all areas to a great extent“. Nonetheless, a return to nuclear testing and development could still cast a pall over relations between the U.S. and China as well as security in the region.
How to cope: Supply chain transparency remains vital in ensuring that sourcing from China does not include products or components that have been manufactured in North Korea given U.S. sanctions are unlikely to be reduced in the near term. Historically these have included coal, iron ore and apparel. In a worst case scenario sourcing from South Korea, particularly in the Seoul region and also for shipping from South Korea, could face interruptions requiring alternative sourcing arrangements or a build up of inventories if there are signs that relations with the DPRK are worsening.
Source: Panjiva
