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Beyond COVID-19, trade war worries resume – May 2020 in 10 reports

Global 1074 Most Read 47

As the COVID-19 pandemic appears to start to wane and industrial economies reopen, our readers’ attention is starting to turn towards the next challenges facing global supply chains. Based on the most-read Panjiva Research last month, the focus has turned to the prospects of a renewed U.S.-China trade war.

Evidence from March shows that China has fallen $21 billion behind the run-rate required to meet its phase 1 purchasing commitments. Potential moves by the Trump administration to walk away from the phase 1 trade deal and redeploy tariffs could draw China to implement the long-awaited “unreliable entities list” with the potential for damage to U.S. logistics firms.

National security trade reviews also made a comeback with the U.S. set to investigate power transformers and mobile cranes.

COVID-19 nonetheless remained a focus with U.S. import data showing the cost of medical protectionism in other countries while globally we considered the costs of food protectionism. Corporate reactions in the apparel industry are starting to evolve from inventory management to production mix.

In the logistics industry out data showed the impact of an increase in less-than-container load shipping as well as the challenges facing profit margins for the container-lines.

#1 Phase 1 falls $21B behind schedule as U.S.-China relations worsen (May 5)

Relations between the U.S. and China appear to be worsening amid a spat over the origins and handling of the coronavirus pandemic. President Trump has already raised the prospect of increased tariffs which would breach the phase 1 trade deal.

At the same time though China’s imports from the U.S. have been in decline, dropping 23.5% year over year in March in total, which may breach the purchase commitments made in the deal. There was a 16.2% year over year slide in U.S. exports of the 548 products covered by the pact in March versus 2019 as well as a 14.4% slide versus 2017, the baseline year for the agreement.

Of the three big product groups only energy shipments increased with a 76.9% surge compared to a year earlier due to a 454% rise in refined oil and the first LNG shipments since June 2019.

Exports of farm goods fell by 13.7% and may be difficult to maintain given closures of U.S. meatpacking factories. Shipments of manufactured goods slumped 20.4% lower including a 62.4% slide in pharmaceutical shipments, perhaps as medical treatment priorities shifted.

Taken together there were $5.24 billion of exports of the 548 products in March versus a run-rate of $11.9 billion needed per month to meet the deal’s terms. China is now $21.2 billion behind schedule in 2020 so far.

NOT EVEN HALFWAY TO TARGET ON A MONTHLY BASIS

Chart segments U.S. exports to China of products covered by phase 1 trade deal. Target bars based on commitments made in phase 1 trade deal for full year 2020 and 2021 divided by 12. Source: Panjiva

#2 China’s unreliable entities list could put U.S. logistics providers at risk (May 20)

Rhetoric between China and the U.S. is worsening. The Chinese government has threatened to put an “unreliable entities list” in place to target companies that “fail to comply with market rules, deviate from the spirit of the contract” and other criteria.

The list may be deployed against U.S. companies as part of a restart of the trade war between the two countries. Services, rather than goods, are more likely to be targeted and may include logistics firms.

Most U.S. logistics firms don’t split revenues by country, leaving China as a proportion of U.S. seaborne imports as one proxy for exposure. C.H. Robinson was the most exposed among the four quoted U.S. freight forwarders with 60.2% of U.S.-inbound shipments coming from China in 2019. That was followed by UPS at 57.1%, FedEx at 54.2% and Expeditors at just 44.7%.

The ratio for all fell in the first four months of 2020 due to COVID-19 related disruptions. U.S. importers using the four forwarders may face disruptions in the low likelihood of the entities list being implemented.

The largest user of C.H. Robinson’s services, based on U.S. seaborne imports linked to the firm in 2019, was Spin Master. Expeditors’ largest user was Fila, while FedEx’s largest users included Wistron and UPS’s included Ergotron.

CYCLICAL IMPORTERS FACE REGULATORY RISKS AS PEAK SEASON ARRIVES

Chart segments U.S. seaborne imports from China by consignee on a monthly and three-month average basis. Source: Panjiva

#3 Trump ready to deploy tariffs in COVID-19 extension to trade war with China (May 4)

Tensions between the U.S. and China have increased due in part to disagreements regarding the coronavirus pandemic. President Trump has stated that potential U.S. economic sanctions against China could include tariffs.

There are three broad options with regards to tariffs relating to section 301 duties, the foundation of the trade war between the U.S. and China: roll back recent tariff cuts; increase existing tariff rates and; widen coverage to include products not yet covered. The latter, known as list 4B products, mostly cover consumer goods including phones, laptops, toys and apparel.

While the least likely option, covering them would yield the largest impact. A 15% customs duty rate could raise $22.3 billion of tariffs annually from U.S. importers paying the tax on their shipments from China. U.S. imports of list 4B products only fell by 3.4% year over year in the 12 months to Feb. 29 compared to 15.6% for list 4A where 15% tariffs were applied in September 2019.

The prospect of tariffs may lead to a surge in shipments of list 4B products, as occurred for list 4A last summer. A drop in consumer demand linked to COVID-19 driven economic weakness may limit such a surge this year. There may therefore be a focus on luxury items including phones and laptops rather than apparel or toys.

U.S. seaborne imports of laptop computers from China already fell by 62.7% year over year in March and by a further 50.7% in the first half of April. That’s been due to manufacturing interruptions in China. A surge in imports from Vietnam and elsewhere couldn’t offset that decline. The slide in March included a drop in imports linked to Dell and HP Inc. of 65.6% and 78.9% respectively.

Should tariffs become more likely, computer importers face the unenviable task of trying to meet remaining work-from-home demand, restocking requirements, the usual seasonal uplift in the autumn and a pull-forward due to tariffs all at the same time.

CORONAVIRUS DISRUPTS LAPTOP SUPPLIES MORE THAN TARIFFS

Chart segments U.S. seaborne imports of laptop computers by origin. Source: Panjiva

#4 Coronavirus medical import deep dive shows testing, PPE imports improving (May 5)

The U.S. International Trade Commission has published a Congressional report looking at import duties paid on shipments of medical supplies needed to tackle the coronavirus pandemic. The study identifies 112 products of which 38 have tariffs applied.

Panjiva’s analysis shows that imports of products that are subject to duties dropped by 4.3% year over year in March whereas shipments not subject to duties climbed by 23.3%. The products can be divided into eight categories and three clusters of protection, diagnostics and treatment. The best performing category in March was testing kits where imports surged 40.8% higher year over year and increased by 108.0% sequentially.

Panjiva’s U.S. seaborne import data shows imports may have included shipments by Abbott Labs and Roche. Shipments of personal protective equipment meanwhile climbed by 1.2% year over year in March and by 4.4% sequentially after a prolonged downturn.

Seaborne shipments of PPE may have surged 3.2x higher sequentially in April including shipments linked to Owens & Minor and Hartalega among others. This report includes top-line import data for all 112 products and will be expanded upon in forthcoming research.

TESTING KIT IMPORTS SURGED IN MARCH, DISINFECTANTS FELL

Chart segments U.S. imports of 112 medical supply products by usage category. Source: Panjiva

#5 Food supply disruptions during COVID-19 – three issues to watch (May 13)

The global food supply chain runs smoothly most of the time, ensuring the right products get to the right places in a timely manner. The COVID-19 pandemic has caused disruptions – this report considers three issues.

First, food protectionism has emerged though it is not as bad as that seen in medical supplies.  The World Bank has identified 40 measures restricting food exports since the start of the year, though around half have already been withdrawn. Grain export restrictions in Ukraine and the Eurasian Economic Union could disrupt 17.2% of global grain supplies based on 2018 data, though only a subset of products are affected so far. Grain stockpiling by China may price poorer countries out of the market.

Second, physical disruptions to supply chains are becoming widespread. Meatpacking has been particularly affected due to the labor-intensive processes involved. Brazil’s beef exports have been robust despite plant closures with a 0.4% rise in March compared to a year earlier, though shipments by JBS and Minerva have slumped. Shortages of farm hands, fertilizer flows and logistics infrastructure are also challenges.

Finally, regulatory risks are acting as a force multiplier for COVID-19 disruptions. The U.S.-China trade deal should lead to prioritized flows from the U.S. to China, but those have yet to occur for many products. U.S. seaborne pork exports have continued to expand with a 189.8% rise in April compared to a year earlier.

There’s been a divergence in the performance of exporters with WH Group’s exports having slipped 8.7% while Tyson’s surged 45.6% higher. A collapse of the phase 1 trade deal could lead to further disruptions.

JBS, TYSON EXPORTS STILL EXPANDING AS CHINESE DEMAND SURGES

Chart segments U.S. pork exports by exporter on a monthly and three-month average basis. Source: Panjiva

#6 H+M’s COVID-19 response may be less forceful than Uniqlo, Primark (May 11)

Hennes & Mauritz reported a 57% year over year drop in sales in the March 1 to May 6 period due to store closures linked to COVID-19, including a 71% slide in U.S. sales. The firm’s “rapid and forceful measures” include a reduction in purchasing.

While U.S. seaborne imports linked to H&M fell by 16.2% year over year in March, they increased by 1.0% in April raising the risk of increased inventories. The growth in U.S. imports was the result of a surge in shipments from India while those from China and Bangladesh fell.

H&M’s competitors have slashed their shipments. Imports linked to Fast Retailing’s Uniqlo fell by 43.7% year over year in April and Primark’s dropped by 36.9%.

UNIQLO, PRIMARK SLASH IMPORTS MORE AGGRESSIVELY THAN H+M

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

#7 COVID-19 boosts drop-shipping, fractional trade means U.S. wins on a technicality (May 12)

The number of U.S. seaborne import shipments surged 13.0% higher year over year in April. That may be counter-intuitive given the economic disruptions caused by the COVID-19 pandemic. However, it’s due to a 343% surge in the number of smaller, less-than-container load (LCL) shipments coming from China.

A rise in LCLs is likely due to increased direct-to-consumer e-commerce, also known as drop-shipping, as well as reduced manufacturing capacity in China for smaller manufacturers despite widespread reopenings of factories.

Containerized shipments from China still only fell by 7.7% year over year in April while imports from Asia ex-China climbed. Shipments from the EU only fell by 1.9% despite a widespread lockdown there.

Consumer goods continued to drive the decline in containerized shipping with apparel imports down by 23.8% and furniture off by a more modest 5.4%. The industrial picture was mixed with steel having fallen by 8.1% while chemicals actually increased by 6.7%, marking the first rise in 13 months.

CHEMICALS REBOUND BUT STEEL, MACHINERY SHOW TRUE INDUSTRIAL PICTURE

Chart segments U.S. seaborne imports by product (defined by HS-4 classification). Source: Panjiva

#8 Worst is yet to come for volumes, fuel costs a salve – S&P Global Platts Container Update, April 2020 (May 4)

Containerized freight markets continue to face significant uncertainty regarding the outlook for demand as well as carrier capacity management as a result of the coronavirus pandemic. There’s been over 400 cancelled containerline sailings this year with more to come. S&P Global Platts report some carrier sources as stating May and June will be the worst months in terms of demand.

Yet, the cancelled sailings offset lower demand which has meant container rates were stable in the past month with Asia-to-U.S. west coast rates down by just 3.2% sequentially in April versus March. The situation on Asia-to-North Europe rates has been tougher due to later lockdowns with rates having fallen by 9.4% over the same period.

The only saving grace has been a continued slide in bunker fuel costs with a 25.0% slide in the past month extending a 41.5% fall in March. As a consequence of the fuel cost decline the average bunker-excluded rate, a proxy for container-lines’ profitability, actually increased by 13% in the month of April on average compared to the month of March. This research is based on a report written by George Griffiths of S&P Global Platts, augmented with commentary from Panjiva Research.

RATES HOLDING UP AS FUEL COSTS SINK

Chart compares bunker fuel costs for North Asia to East Coast North America to container rates excluding those costs.  Calculations based on S&P Global Platts data. Source: Panjiva

#9 Trump’s Make in America plan may help set-top box, lighting sectors (May 20)

The administration of President Donald Trump may be planning a wide range of tax breaks and subsidies for firms that move manufacturing back to the United States. Without details it is difficult to determine who may benefit, though a four part screen can provide a starting point using: proportion of imports from China; manufacturing that is not labor intensive; tariffs haven’t yet changed supply mix; and a scale of imports over $1 billion.

Panjiva’s analysis using tariff codes reveals eight areas across toys, electronics and electricals that may be logical candidates – this report details the supply mix and key importers for all eight. Among those, two stand out.

The share of U.S. imports of TV set-top boxes has increased to 71.8% of the total in 2019 from 51.7% in 2016. Despite that increase, total imports have fallen with shipments linked to Arris and Roku down by 32.9% and 34.0% year over year respectively in the 12 months to April 30, while those associated with Dish increased by 1.9%.

Second are imports of LED bulbs and control systems. China represented 74.9% of the total in 2019 from 42.4% in 2016. Again there has been a slide in imports in total with shipments linked to Signify and GE down by 42.1% and 51.1% respectively in Q1 while Ledvance’s jumped 58.2%.

LEDVANCE LIGHTS UP AS GE, SIGNIFY DIM

Chart segments change in U.S. seaborne imports of LED lighting from China by consignee. Source: Panjiva

#10 Schneider Electric, ABB face national security tariffs, may need to transform supplies (May 7)

The U.S. Commerce Department has begun a national security trade review of imports of power transformers, cores and regulators under the section 232 program. U.S. imports of large power transformers climbed 33.8% year over year in Q1. While Canada and Mexico are part of the USMCA free trade area they may not be exempt from the review with shipments from Mexico having risen by 24.2% year over year.

Imports of transformers from China, likely the focus of the investigation, already fell in relation to earlier section 301 trade war tariffs. Transformer core imports also primarily come from Canada and Mexico with imports up by 29.4% and 165% respectively in Q1. Major importers will have to decide whether to alter their supply chains ahead of the review’s completion, which could take around 270 days, or accept higher import costs.

Shipments linked to Power Electronics surged 181.2% year over year in Q1, while those linked to Schneider Electric and ABB already fell by 64.8% and 10.1% respectively. All three saw a marked drop in April, possibly reflecting COVID-19 related disruptions rather than tariff worries.

POWER ELECTRONICS LIGHTS UP, SCHNEIDER AND ABB SLIP

Chart segments imports of transformers by selected companies on a monthly and three month basis. Source: Panjiva

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