Supply Chain Q2’24 Outlook: It’s not just about shipping

Supply chains face constant disruptions like the Baltimore bridge collapse. Despite challenges, logistics adapt, seen in rerouting around the Red Sea disruptions. Political risks and regulatory uncertainties persist, impacting global trade. Investments in resilience, reshoring, and tech adoption rise amid declining inventories and supplier diversification.

Supply chains face constant disruptions like the Baltimore bridge collapse. Despite challenges, logistics adapt, seen in rerouting around the Red Sea disruptions. Political risks and regulatory uncertainties persist, impacting global trade. Investments in resilience, reshoring, and tech adoption rise amid declining inventories and supplier diversification.

Logistics networks hold pattern in a new normal

A sign that logistics networks have “healed” around the latest fracture can be seen in most firms not experiencing delays, but rather expecting an inflationary effect. The reduced risk of delays can be seen in the S&P Global Purchasing Managers’ Index for manufacturing supplier delivery times, which were better in March than in the fourth quarter in the Eurozone.

It may be too soon to judge the final impact of the canal disruptions

In the 2015 to 2019 period, Chinese exports of peak-season products (including toys) typically scaled up in July before peaking in August and September. In 2023, the peak was reached in July, though that partly reflects a rapid destocking process in European and US retail sectors. At a minimum, shipping decisions that rely on logistics via the Cape of Good Hope need to be taken and implemented two weeks earlier owing to the additional shipping times.

There’s likely to be continued inland cargo disruptions

The corollary of strikes — higher wages via union-employer settlements — is also likely to weigh on supply chains via higher cost inflation, eating into funds for resilience building. The recent settlement in Japan is an example. S&P Global Market Intelligence forecasts Japan 2.1% in 2024 from 1.3% in 2023. Other Asia picking up including China (7.2% from 5.8%) and India (7.3% from 6.6%). In US and Europe slowing but only to long-term averages from 2026.

Political risks gather in the second half of 2024

A central theme of our supply chain outlook for 2024 is the steady increase in political risk for supply chains, expressed via global geopolitics, national elections and local regulations, which generate outlook uncertainty for supply chain decision-makers. There’s also the prospect for elevated sanctions in connection to Russia’s war in Ukraine, including by countries that have yet to do so. South Korea’s limits on battery exports come after they reached $17 million in 2023.

Indirect imports, including auto parts, could be at tariff risk

Suppliers from China are already deeply embedded in Mexico, with China accounting for 12.5% of total Mexican auto parts imports in 2023 from 9.4% in 2020. The share from the US fell to 50.5% from 55.3% over the same period. It’s worth noting that the share of Mexican imports from the EU also increased, while the growth of electric vehicle production will naturally have favored Chinese suppliers given their dominance in batteries and motors.

Risks to EU-China relations heading into mid-year

A conclusion in the European Commission’s review of imports of electric vehicles from China is due in July with a final decision in November. Press reports suggest that retroactive tariffs may be applied. A negative finding, and application of tariffs, by the EU could draw a proportional response from the Chinese government. China’s automakers are starting to preempt a change in rules with some Chinese manufacturers starting production in European countries.

Supply chain regulations continue to adapt in environment, healthcare

In the US, the “Drug Supply Chain Security Act” is due to come fully into force in Nov. 27, 2024 after nearly a decade of implementation delays. US imports of active pharmaceutical ingredients fell by 10% year over year in 2023. That was the first drop since 2017, led by a 42% slide in imports from China and 19% from India.

Shipments remain dominated by EU with 68.5% of US imports, while China fell to 11.3% from 17.5% and India to 5.3%

Supply chain activity picks up in time for peak season

Global trade activity, adjusted for inflation, returned to growth in the first quarter of 2024. That’s expected to accelerate through the year to reach 2.6% by the fourth quarter and 1.8% for the year. The recovery is driven in large part by the electronics sector, with 5.6% growth for 2024 compared with a 6.3% contraction in 2023. At the other end of the scale, the textiles and apparel sector is expected to slip by 1.6% and not recover even on a quarterly basis despite an ongoing period of destocking

Supply chain resilience strategies treat resilience as a luxury good

The S&P Global PMI for finished goods inventories indicates that the decline in inventories has continued in early 2024 across most major sectors. The exceptions were autos and chemicals though both saw a slower expansion in February than January. The inventory decline in consumer goods, machinery and construction have accelerated.

Reshoring offers the opportunity to cut costs while also mitigating risk

There’s widespread evidence of reshoring driven by a variety of factors, including tariffs. Importers from China lost at least five percentage points of market of US imports covered by tariffs implemented during the Trump administration. Major areas of gains for ASEAN countries including luggage and telecoms equipment. Chinese firms have several options including sales outside of North America as well as moving production to other countries themselves for onward shipment to the US — while carrying the risk of tariff applications being moved as noted above for autos.
Source: S&P Global Market Intelligence https://www.spglobal.com/marketintelligence/en/news-insights/blog/supply-chain-q2-24-outlook-it-s-not-just-about-shipping