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Supply Chain Edge: Israel-Gaza war risks for electronics and healthcare | S&P Global analysis

In new research this week, “Ports, electronics and healthcare: Supply chain impact of conflict in Israel”, we find that the supply chain impacts of the conflict in Israel and Gaza will depend on the escalation pathway.

· Logistics infrastructure at the port of Ashdod is the closest container port to Gaza, although at least one shipping line has indicated that maritime shipping is operating as normal as of Oct. 9. Air freight via Tel Aviv airport may be disrupted.

· Israel’s largest export lines include electronics, healthcare and defense supply chains, which could face operational or logistics disruptions in the event of escalated conflict.

· Israeli suppliers accounted for 14% of EU computer processor imports in the 12 months to July 31, 2023, shipped predominantly to Ireland by fabricating plants (fabs) owned by Intel Corp. and Tower Semiconductor Ltd.

· Israel also exported US$2.62 billion-worth of telecom network equipment and US$3.15 billion-worth of aerospace equipment, including unmanned aerial vehicles (UAVs), in 2022 — both led by shipments to Europe and the US.

· Exports of pharmaceuticals, worth US$2.17 billion, are particularly susceptible to logistics network disruptions. Israel’s importance to global drug supply chains has declined, however, falling to 1.1% of US imports and 0.8% of EU imports as a result in part of reshoring by Israeli pharmaceutical manufacturers.

The EU is considering a subsidy investigation of imports of wind turbines from mainland China, according to acting European Commission Competition Commission Didier Reynders. An investigation could be launched in late October, according to press reports, but could take up to a year to complete.

· The timing is somewhat curious given that mainland China has been a dominant supplier of EU imports of wind turbines for several years. In 2019, mainland China accounted for 87% of EU imports, S&P Global Market Intelligence data shows. That ratio fell to 64% in the 12 months to June 30, 2023. Meanwhile, imports from India increased to 27% of the total from 12% in 2019.

· Total EU imports of wind turbines have fallen in euro terms by 39% in the past 12 months compared with 12 months earlier.

· Most EU wind turbine manufacturers are in any event global multinationals that have structured global supply chains in response to rules-of-origin requirements that are often included in wind power equipment purchasing rules, as discussed in “Denmark +X: Danish manufacturers’ multi-shoring initiatives”.

· While mainland Chinese exporters may face reduced access to the EU if tariffs are applied, the EU only represented 19% of total mainland Chinese exports of wind turbines in the 12 months to June 30, 2023.

The EU may also launch an anti-subsidy investigation of mainland Chinese steel production as part of the forthcoming “Global Arrangement on Sustainable Steel and Aluminum” deal with the US. A summit meeting between EU and US officials on the deal is due on Oct. 20, although the deadline for a final deal may be postponed to January 2024.

· Investigations of steel and wind turbine supply chains would follow the EU’s launch of a review of electric vehicles and marks a more robust approach by the EU toward mainland China’s industrial policy, as outlined in “Time, tariffs and tracking: Fourth quarter 2023 supply chain outlook”.

The US government will extend licenses allowing SK Hynix Inc., Samsung Electronics Co. Ltd. and Taiwan Semiconductor Manufacturing Co. to export US technology-based semiconductor manufacturing equipment to mainland China. That should provide an indefinite waiver from the broader export restrictions.

· The limitations on equipment shipments, which have recently been joined by similar measures by Japan and the Netherlands, are aimed at cutting-edge nodes (computer chip complexity) rather than aiming to limit chip supply chains more broadly.

· Despite the sanctions, mainland China has remained the third-largest destination market for US exports of semiconductor manufacturing equipment, accounting for 17% of the total in the 12 months to Aug. 31, 2023, compared with 22% in the prior 12-month period, according to S&P Global Market Intelligence data .

· Exports to mainland China fell by 17% year over year in the three months to Aug. 31, 2023, while total US exports of semiconductor machinery dropped by 31% over the same period. That likely reflects the result of reduced demand for computer chips, particularly memory chips.

· The ongoing US investigation into Huawei Technologies Co. Ltd.’s newest Kirin 9000s chip may lead to a review of the rules on mature technologies, as discussed in our supply chain outlook.

· Separately, the government of Taiwan is planning to enhance its technology safeguards. Taiwan’s authorities have also pledged to engage with the US investigation into Huawei, which may lead to new trade tools being used.

In our latest United Auto Workers (UAW) strike research update , we note that the strategy of limiting the strike’s expansion when concessions are given has continued. The latest development includes General Motors Co. accepting the unionization of its electric vehicle battery production and the UAW extending its strike against Ford Motor Co.

· Workers at Volvo Group’s Mack Trucks have gone on strike after rejecting an earlier deal reached by the company and union representatives. That illustrates that strike risk can continue even when initial deals are reached. Ratification can take at least two weeks from agreement.

· Automotive sector strikes are not just a US challenge after a strike started at component maker International Automotive Components Group on Oct. 12, according to S&P Global Mobility. That followed a breakdown in negotiations.

· Volkswagen AG’s Audi unit experienced a two-day strike from Oct. 7 at its Brussels plant, S&P Global Mobility reports . Workers were protesting plans to cut long-run production plans for the electric version of the Q4 sport utility vehicle (SUV) versus that originally proposed by the company.

The autos sector is not the only one facing labor challenges. Another labor deal ratification failure can be seen in the Australian natural gas sector after workers at Chevron Corp.’s Gorgon and Wheatstone LNG facilities rejected an earlier pay deal. Strikes are set to be resumed unless a new agreement can be reached.

· There are also reports of a potential port strike in the UK linked to access to medical benefits. Over the next few months, there are also large-scale pay negotiations expected in Germany and Czechia.

Automaker Stellantis NV has finalized a US$90 million investment in Argentina Lithium & Energy Corp., giving it direct access to lithium reserves in the country, according to S&P Global Commodity Insights.

· That follows a prior strategy by Stellantis of securing direct access to raw materials for electric vehicles via investment, as discussed in “Before the battery and magnet: IRA and mineral supply chains”.

· A challenge to the firm’s strategy comes from resource nationalism, with the Argentine authorities set to apply a new tax on lithium producers, as flagged in last week’s Supply Chain Edge.

Consumer goods: 14-month downturn at an end

US seaborne imports of containerized freight increased by 1% year over year in September, Panjiva data shows. That marks the first increase since July 2022 and comes as the peak shipping season gets underway.

· Shipments of consumer discretionary goods were unchanged versus a year earlier after falling by 17% in August. Shipments of consumer electronics rose by 3%, while those of home appliances jumped 26% higher. Imports of furniture and apparel are still in decline, falling by 7% each, while those of leisure goods (including seasonal toys) dipped 2% lower.

· Consumer staples, including food and healthcare products, declined by 2% after a 7% drop in August, with a 1% rise in healthcare equipment and supplies offsetting a 13% decrease in pharmaceuticals and a 3% slide in food and beverages.

· The National Retail Federation has cut its forecasts for US seaborne goods imports during the rest of 2023, according to the Journal of Commerce, reflecting slower consumer demand and a buildup of sufficient inventories.

Danish consumer electronics group Bang & Olufsen A/S has reported the “normalization” of its global supply chain in its quarterly earnings call, noting that extraordinary component and logistic costs had cost the company more than 450 million Danish kroner (US$65 million) in the previous three years.

· The firm stated that “revenue from the automotive industry has solid growth in the period, supported by a good order backlog and easing of supply chains for car components.”

· However, the company pointed to weak consumer demand in mainland China, noting that “some of our retail partners still have excess inventory from replenishment last year.”

· The downturn in demand in mainland China can be seen in the country’s imports of speakers, headphones and amplifiers, which fell by 10% combined in the three months to Aug. 31, 2023, versus a year earlier, according to S&P Global Market Intelligence data. That was led by a 32% slide in shipments of headphones.

Apparel retailer Uniqlo, owned by Fast Retailing Co. Ltd., plans to increase its sourcing from India after rapidly expanding its sales presence in the country. Building out local sourcing will reduce risks from import duties or international supply disruptions.

· India’s attraction as a sourcing location is bolstered by the scale of its local market, as discussed in “‘Make In India’ Manufacturing Push Hinges on Logistics Investments”. More recently, growth has been focused on high-tech manufacturing rather than more labor-intensive apparel.

Inventories were an improving area for clothing company Levi Strauss & Co., growing by just 1% in the third quarter, down from 17% in the previous quarter. The firm noted that its inventory situation “is now cleaned up and we are getting back to more normalized customer fill rates”.

· The company also reported progress on its ambition to become “a direct to consumer-driven company” by expanding its vendor base to give it greater flexibility.

· There were 163 suppliers (shippers) associated with Levi Strauss & Co. in the 12 months to Sept. 30, 2023, Panjiva data for US seaborne imports shows. That was up from 141 in the prior 12-month period but still below the 218 shippers linked to the firm in 2019.

Commodities: More germanium, less natural gas

The latest global buying strategy research from S&P Global Market Intelligence estimates that commodity and goods prices will increase in five sectors in the coming 12 months, including natural gas, wages, chemicals and transportation/logistics. Of the remaining nine sectors, four are expected to decline, including steel and nonferrous metals.

A new hydrometallurgy plant in the Democratic Republic of the Congo (DRC) could supply up to 30% of the world’s germanium, as well as zinc oxide, copper and cobalt, according to plant owner Gécamines’ STL unit. The new DRC germanium plant is about to open.

· The company has an opportunity to build market share in electronics supply chains following mainland China’s recent restrictions on germanium and gallium exports, as outlined in “Limited time deal: Mainland China restricts critical mineral exports”.

· Mainland China’s exports of germanium in August were 71% of their average in January–July 2023, S&P Global Market Intelligence data shows. There is some asymmetry, with shipments to the EU standing at 96% of their average, while shipments to Japan and the US were 27% and 46%, respectively.

The Russian government has partially lifted its ban on the export of refined oil products after domestic prices fell and local demand for agricultural fuel was met, S&P Global Commodity Insights reports.

· Russia’s ban would have had a global impact, with Turkey and Brazil particularly exposed, as outlined in “Supply Chain Edge: Outlook for supply chains — time, tariffs and tracking“.

The Finnish government has said a breach to the Balticconnector gas pipeline was likely caused by sabotage by an “external source.” Natural gas supplies are reported to have been interrupted and could take “at least several months” to repair, S&P Global Market Intelligence reports.

· Further disruptions to global natural gas flows may occur as a result of the closure of the Tamar field in Israel, according to S&P Global Commodity Insights. That may reduce Egypt’s exports of LNG, 52% of which was sold in the EU in the 12 months to May 31, 2023, S&P Global Market Intelligence data shows.

· EU natural gas storage stands at 97% of capacity as of Oct. 11, well ahead of the normal mid-November peak before the winter demand season.

Aluminum producer Novelis Inc. will partner with utility Southern Co. to improve the environmental profile of its production, according to S&P Global Commodity Insights. The relationship will initially focus on renewable energy generation.

· That marks a widening of plans by US steel and aluminum producers to improve their emissions. As noted in last week’s Supply Chain Edge, that may help their market share in the face of new EU and US emissions rules and tariffs, including the forthcoming deal flagged above.

The Indian government is reported to be planning to extend its 20% export duty on shipments of parboiled rice, which is due to expire on Oct. 20. As outlined in “Rice restrictions: India’s food supply chain intervention”, restrictions including India’s wider export ban on other rice types are likely to continue until global food prices markedly reverse.

Logistics and reshoring: Mexico’s pros and cons, carbon surcharges

Two developments this week highlight the pros and cons of reshoring. First, the Mexican government has issued a decree including tax breaks for investments and staff training across 10 sectors. Deputy Finance Minister Gabriel Yorio has said in a social media post that this is to “promote investments due to the nearshoring phenomenon.”

· The sectors include electronic components (including semiconductors), autos (batteries and motors), healthcare and agriculture. For investments, the break is based on accelerated deductions from tax of 89% in 2024.

Second, cargo delays at the Mexico-US border could continue for several months, according to S&P Global Market Intelligence, depending on the rate of immigration. Elevated numbers of migrants seeking to enter the US has led to truck delays, as flagged in “Supply Chain Edge: Outlook for supply chains — time, tariffs and tracking”.

· While there are reports that the inspections causing the delays are being lifted, trucking is not the only transportation mode to face migration-related challenges. Rail freight operations have been disrupted due to migrant stowaways in September.

· Nonetheless, Ferrocarril Mexicano SA de CV (Ferromex) and Union Pacific Railroad Company Inc. have launched a new service between Mexico and the US via Eagle Pass, Texas, to Memphis, the Journal of Commerce reports.

· The disruptions have not yet made a significant difference to shipping patterns. Road transportation accounted for 73.4% of Mexican exports to the US in August 2023, Panjiva data shows, down from 74.6% in June. Rail held constant at 13.3%, while shipping by sea increased to 9.7% from 8.2%.

· Over the longer term, however, rail’s share increased to 13.3% in the three months to Aug. 31, 2023, from 12.3% a year earlier, while maritime dipped to 9.1% from 10.8%.

· The use of maritime freight is by no means guaranteed. Hapag-Lloyd AG has warned of port operation challenges at Lazaro Cardenas that have now been ongoing for several months.

· The disruptions to cross-border logistics are a cautionary reminder that reshoring to Mexico to access the US market by no means removes all execution risks for supply chains, as discussed in “Time for phase two: Mexico as a supply chain reshoring center”.

Container line CMA CGM SA has stated that the potential surcharge for increased costs associated with the EU Emissions Trading Scheme could be €25 per twenty-foot equivalent unit (TEU) on Asia-North Europe lanes and €43 per TEU on Europe-North America.

· That would be equivalent to 6% of Asia-North Europe rates, based on S&P Global Commodity Insights assessments , and 8% of Europe-North America rates.

· The effectiveness of the surcharges will depend on the container lines’ pricing power. The implementation of desulfurization rules in 2020 came at the same time as rising shipping rates, as discussed in “Time, tariffs and tracking: Fourth quarter 2023 supply chain outlook”.

· The EU will remove an exemption from antitrust rules for the container lines’ alliance arrangements. Thus far, the alliances have been used primarily to ensure efficient dispatch of vessels on agreed routes. Mediterranean Shipping Co. (MSC) and Maersk A/S’ 2M Alliance was already due to end in 2025.
Source: S&P Global Intelligence

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