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2018 Outlook: 8 Issues to Watch in Global Supply Chains

Outlook - Industries 17 Outlook - Policy 15 Research Recaps 25

We’ve published eight preview reports in the past two weeks looking at what 2018 might hold for the global supply chain. This summary provides an overview and links to all the reports, while you can find a 60 page pdf version of the analysis by clicking here.


The Alphabet of Global Trade Deals

An alphabet soup of multilateral trade deals are in progress as 2018 begins, partly in response to a U.S. desire to pursue bilateral arrangements. Many of these overlap and conflict, and may therefore struggle to make progress. The RCEP deal, centered on China and ASEAN, is the largest but has been delayed by the CPTPP which is based around Japan. That should make progress but may struggle as Canada and Mexico also try to navigate NAFTA with differing aims – 40% of Mexico’s exports to Canada are autos, by only 12% to other CPTPP nations.

Mexico is also trying to reach a deal with the EU, which in turn is trying to complete deals with Mercosur and India. Oh, and there’s Brexit to contend with. The most hope lies in Africa, where the CFTA could make a meaningful difference to the economies of the region. 

MEXICO NEEDS TO DRIVE A HARDER BARGAIN

Chart segments Mexican exports to Canada and other CPTPP states by product (HS-4). Source: Panjiva



NAFTA – January or Bust

The sixth round of NAFTA negotiations on January 23 will be one of the major trade events for the year. Without significant progress President Trump may be tempted to terminate the deal. Autos will remain at the heart of the negotiations, with the sector accounting for 69% of the U.S. trade deficit with Canada and Mexico combined. Progress on rules-of-origin are arguably the most important issue in global trade right now as a consequence.

THE AUTO SUPPLY CHAIN IS THE SINGLE BIGGEST CAUSE OF THE U.S. TRADE DEFICIT

Chart segments U.S. trade deficit (imports less exports) into key automotive products, energy and all others. Source: Panjiva


President Trump’s Seven Options For Action

President Trump launched many reviews and made many threats in the trade sphere in 2017, and 2018 is the year that decisions will have to be taken. The most important is the section 301 review of China, which will allow the President to make good on his National Security Strategy. The KORUS trade deal, like NAFTA, needs to make progress on autos.

A slew of trade cases in steel, aluminum, solar power and washing machines also allow the President to show action. The latter will test whether he is willing to make consumers pay for not “buying American” – the tariffs involved could add 10% to retail prices.

CARE NEEDED IN TARGETING CHINA TO AVOID HITTING CONSUMERS

Chart segments Chinese exports in the past 12 months to the U.S. by product. Source: Panjiva


Watch Out for More Consolidation in Logistics

Consolidation is a fact-of-life in the highly fragmented shipping industry, with deals valued a total $32 billion in 2017 (26% above a year earlier). 2018 is likely to see more of the same given the apparent ease with which Maersk’s and COSCO Shipping’s deals received regulatory approval.

Yet, it is the freight forwarder sector that is in more need of consolidation – the top 20 NVOs have a market share of U.S.-inbound seaborne freight of 16% vs. 93% among the container-lines. Regional consolidation would make most sense with European operators like DSV or Panalpina tieing up with Asia-specialists. The tanker sector may see further defensive mergers should profitability remain weak.

ASIA-EUROPE GAPS TO BE FILLED BY FREIGHT FORWARDER CONSOLIDATION

Chart segments U.S. inbound seaborne freight by NVOCC and port of lading location. Source: Panjiva




Discipline and Mergers Needed to Ensure Shipping Profits Recover

Profitability across the shipping industry (including container-lines, forwarders and tankers) is expected to increase in 2018 to 12.5% on an EBITDA margin basis from 11.4% in 2017. That requires discipline across the board in terms of pricing and competition for market share. In container-lines passing through higher fuel costs is the first litmus test, and renovating (but not overly expanding) fleets the second.

For freight forwarders the lower tax rates for U.S.-based corporates such as UPS and Expeditors could spark more competition. The tanker operators meanwhile have a capacity problem that may not go away until later in 2018.

SHIPPING REBOUND WITHIN REACH

Chart compares EBITDA margin (earnings before interest, tax, depreciation and amortization) by shipping sub-sector. Calculations based on company financial statements and average analysts’ forecasts gathered from Bloomberg on Jan 3 2018. Source: Panjiva

 

Three Marine Modal Battles to Watch 2018 may be the year that the brewing modal battle between marine and rail shipping out of China really kicks off. Shipments by rail already increased 106% in 2017 through October vs. a year earlier for China-to-Europe routes. By contrast Mexico-U.S. routes saw a 12% decline. Elsewhere the Panama and Suez Canals will likely continue their scrap for market share, while the promise of heavy investments by shippers in refrigerated capacity has yet to bear significant fruit.

A NEW ORIENT EXPRESS, FOR FREIGHT

Chart segments exports from China by rail according to destination market. Source: Panjiva


Disruption Matters From Blockchain to Port-o-Mation and Cybersecurity

Technological change in the supply chain support industry is gathering pace. Emergent trends from 2017 will need significant technology investments to reach fruition in 2018. Blockchain technologies will have to prove they can deliver real efficiencies for bills of lading, insurance and end-to-end product provenance applications. A big challenge is capacity. There are 1.1 million TEUs of containerized freight handled daily across just 10 countries, while Ethereum’s total capacity is 1.2 million transactions per day.

The use of exchanges to bring more transparency for shipping users, while port automation should bring increased capacity and faster delivery times. The spectre of cyber-security remains ever-present after hacks disrupted Maersk and Fedex operations in 2017 – an industry-wide approach is needed. Finally, preparations for 2020’s environmental limits will require significant investment from shippers.

VOLATILITY FROM VULNERABILITY

Chart segments U.S. inbound, seaborne container handling at ports where APM Terminals own assets and where records indicate involvement of Maersk. Data compares week commencing dates shown for 2017 (blue) and 2016 (orange). Source: Panjiva


5 Black Swan Risks for Global Supply Chains

As outlined already global supply chains face a morass of regulatory, political, physical and financial challenges in 2018. Yet, there are also low probability / high significant risks to be faced. Conflict in the South China Sea, resulting from “9-dash” land claims, could disrupt $164 billion of Chinese exports – making it unlikely to shoot first. Conflict in the Middle East is more likely, and would lead to higher oil prices, lower shipping profits and an opportunity for U.S. oil suppliers.

A U.S.-Mexico border wall combined with an exit from Mexico would force a significant diversion from land- to sea-freight for the automotive industry. East coast port strikes in reaction to port automation could lead to a rerun of California’s 2015 strikes (which cut handling in January 2015 by 22%). Finally, a collapse in container-line profitability could trigger a new wave of consolidation, possibly including all members of a major alliance merging (e.g. Maersk with 2M or Hapag-Lloyd with ONE).

WHO HAS MOST TO LOSE FROM A SOUTH CHINA SEA CONFLICT?

Chart segments Chinese exports to countries that require shipping access via the South China Sea by product (HS-4) for the past 12 months. Source: Panjiva

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