Maritime and Trade Talk | Episode 18: Right Place, Right Time - Q3'23 Trade and Supply Chain Outlook

Chris Rogers

Well, hello, everybody. My name is Chris Rogers. I'm part of the Global Insights and Analytics Group at S&P Global Market Intelligence. I'm Head of Supply Chain Research. We're going to talk you through the key issues facing trade and global supply chains during the rest of this year, and we're going to talk about some of our forecasts as well.

Before we get to that, I want to introduce my colleague today, Agnieszka Maciejewska. She's the Economics Manager for Global Trade Forecasting at S&P Global Market Intelligence. Agnieszka is going to be talking through our new trade forecast today, while I'll be running through our views on supply chain decision-making and trade policy.

Okay. So most of you are pretty much of the belief that most of the supply chain disruptions are out of the way, and we certainly agree with you. The debottlenecking process in most industries is pretty much done already. We've seen a collapse in container shipping rates. They're not the only number that matters in global trade, but it's very much the number that got a lot of focus, both in the press and from our customers over the past 3 years.

Now I think one important point to note is that supplier delivery times have picked up quite significantly. We're seeing supply delivery times really, they're fastest now since before the pandemic. At the same time, we're seeing a shift around in stocks of goods and purchases. We definitely saw an expansion in inventories in 2022 as demand for a lot of goods started to slow down. There was a rapid adjustment at the end of last year, particularly as retailers started trying to discount and cut their inventories, and that's picked up again more recently. This very much looks like a set of figures that are telling us that the system is now kind of running normally, most of the figures are within that kind of central neutral bound of around 50 rather than the big divergences that we've seen in the past.

The other bit of normality or otherwise is around the seasonality of goods. Obviously, a lot of international trade happens to face calendar issues, whether it's the Lunar New Year holidays in Asia at the beginning of the year or the peak shopping season in the Western market later in the year. And those tend to drive these kind of seasonal patterns where, normally, you'd see a peak in shipments in kind of July, August, September time and then a drop off later in the year, the data for March that chose a similar pattern that we've now returned back to pre-pandemic levels. Now that would suggest early part of the year downturn and levels back to where they were before that we're back to some sort of normal. However, we'd reserve judgment on whether seasonality is back to normal until we get later in the year.

Clearly, not all supply chains are back to normal yet. The electronic supply chains are still very much in flux. I think one thing that's important to bear in mind is that there isn't just one type of chip and there isn't just one type of user. And what we've seen over the past 3 years is a shift in the demand patterns, whereby there was a lot more demand from PCs and smartphones, a lot less demand initially from autos and industrials. What we've seen in the past 6 months is that swapping around. So we've seen a collapse in demand from cellphones and computing, particularly personal computing, and an acceleration in demand from autos and also industrials, to a lesser extent, data centers as well.

Now the challenge here is that the chip makers have got to switch from producing for one sector to another. And some of the commentary we've seen recently from the firms, from the manufacturers themselves have indicated that, actually, this slowdown is expected to continue through much of the rest of this year. So that's good news if you're trying to debottleneck. It's not good news, obviously, if you're an electronics assembler. Among the challenges that the electronics assembly companies have had to face are the factory closure patterns during the pandemic, particularly in late last year, and that's brought the whole topic of reassuring back to the floor. The big question is not just have supply chains debottlenecks, the question is what is the state of trade at the moment? And what are we seeing into the rest of this year and into next year in terms of activity?

So Agnieszka, you've been waiting very patiently. Do you want to tell us a bit about your forecasts?

Agnieszka Maciejewska

Thank you, Chris. So the effects of COVID-19 and the rising geopolitical tensions were the main factors impacting the trade in 2022, and this is likely to be the case in 2023 as well. Well, the interest rate hikes and advanced economy -- in advanced economies have also revealed the weaknesses in banking systems, and that could lead to financial instability.

But previously, for 2023, we forecasted the growth to be for the whole year about 0%. And now the outlook is less negative, almost 0.5% for the whole year. The main factors that changed our outlook was the relaxation of COVID-19 pandemic controls in China and the elevation of forecasts for trade between China, India, Brazil and Russia.

And our further outlook in data forecasting is 2.2% growth in trade volume, which is in line with the S&P Global GDP forecast at around 2.8% for 2024. Of course, there are still significant uncertainties like geopolitical tensions, food supply shocks and financial instability that could change the predictions dramatically.

Chris Rogers

Thanks very much, Agnieszka. So supply chains are looking normal. Global trade is going to slow down for a bit before it starts to accelerate again, and we get back to kind of maybe a more normalized growth pattern. That will begin hopefully to leave companies, corporate decision-makers in supply chain to decide about their long-term strategies and not just like kind of reacting to what's been going on in terms of very abnormal period of the past 2 years.

Now if we look at inventory strategies, firstly, those are still very much in flux, as I mentioned earlier on. Now total U.S. retail sales for inventory are still well below their historic levels, but that's largely due to the automotive sector. And whilst the auto sector has recovered from its lows, and we saw Tesla have now actually started cutting their prices in part to build market share, in part to reduce their existing inventories, if we look at other sectors, they're pretty much back to normal and particularly furniture and appliances.

We've published a research report looking at the situation for toolmakers, so power drills and vacuum cleaners and those sort of things and the retailers that sell them. And what we found with that is that there was obviously a big drop in inventories, there's then been a recovery, but the companies are all committed to them trimming back their inventories to prior levels.

Now why do we care about that? Well, we care about that because we want to know whether supply chains are moving from the just-in-time orthodoxy of the past to a more just in case, more conservative approach for the future.

Now in the case of these kind of consumer durable sectors, clearly, it's too early to be sure. We're still in the midst of this kind of -- or the latter part of this rebalancing process, but it would suggest that just in time may be still the model for the future. I think that's particularly important right now because just in case it's expensive, if you want to keep more inventories on hand or you want to pay your supplier to keep some flexibility in what they can send to you, that's going to cost money. And whether you believe we're going to get a full economic recession or not, whether we're just seeing a slowdown in corporate activity or whether higher interest rates just make holding inventory way more expensive than it used to be, this isn't a great time to necessarily be saying, "Well, we face some problems recently. We might keep facing them. So let's throw money at the problem." So I think on this kind of inventory strategy, we're still very much in flux and we're going to have to wait a little while longer before we see what the long-term position actually is.

Let's talk briefly about policy risk. On the conflict in Ukraine, our country risk team expect fighting to continue over the next 6 months and actually to reach a stalemate by the end of the year. Clearly, what we need to watch out for at this stage is secondary sanctions, and key to that is whether any countries choose to rearm Russia. I don't really want to get into the specifics there, but we've seen plenty of press on that.

We are seeing, I think, also a clear bifurcation of countries willing to export to and purchase from Russia. And so for the EU, U.S., Japan and South Korea, we've seen a year-over-year drop of around 50% in the case of the EU to over 80% in the case of the U.S. Exports from China, Turkey and Brazil, and we could put India on as well, I guess, have increased. So they've increased their exports. Clearly, product by product, we haven't seen kind of a one-for-one switch. And in total, we haven't seen an absolute switch either. But it is to make the point that we have seen very definitely in the data this emergence of a multipolar world in terms of dealing with Russia. It's also worth noting that Turkey's position is evolving in terms of their willingness to transit goods from the rest of the world into Russia.

The final thing that we will be watching for the rest of this year is the EU Carbon Border Adjustment Mechanism. CBAM, or CBAM, I still haven't decided how to pronounce it is all about trying to ensure that we don't see manufacturers who don't want to meet them widening and deepening EU carbon rules move to other countries. So CBAM effectively will work as a tariff on products that have a high carbon content. One that I'm most interested in is aluminum and steel, where they're in so many different projects -- excuse me, products that we could see some quite wide-ranging implications for way supply chains work. Clearly, the CO2 intensity of different countries matters. That is what will drive whether there is a C-band tariff to pay or not.

In terms of the imports of goods, so steel and aluminum to the EU, we can see that Mainland China has the highest share around just under 20% of the share of EU imports of the products covered by CBAM. It also has one of the highest CO2 intensity. So that's CO2 for total energy supplies. Clearly, we don't yet have all the details of how C-band is going to be implemented. But what we do know is that as of October this year, companies will start to have to report their data, and this will become, I think, a much more visible trade policy issue later in the year.

So that's where we're at in terms of kind of the key messages we want to put forward, in terms of supply chain debottlenecking is on the way and more or less nearly there. Trade is slowing, but will recover and policy risk is ever present.

A question for you, Agnieszka. What's driven your upgrades to the forecast for the Russia, China, Brazil, India group?

Agnieszka Maciejewska

Yes, Chris. So it was the outcome of the last year of 2022, mainly because China exports to Russia. Note that in the second half of 2022, around 20% growth. India imports from Russia. Note that in the second half of 2022, 300% growth in trade volume of imports. It was remarkable. Of course, great majority of this was mineral fuels, but also commodities like fertilizers.

And speaking of fertilizers, Brazil. Brazil historically is importing 70% of the fertilizers from Russia and Belarus. So it was difficult to replace it with other suppliers. They were trying with Canada. But in the second half of 2022, the drop that happened at the beginning of the last year disappeared and the imports of fertilizers grew again.

Therefore, our forecast for 2023, which was downgraded at the beginning when the conflict happened with all the trades were limited, was upgraded again more significantly for countries like India. It was even more upgraded than the forecast prior to the conflict situation.

Chris Rogers

Good. Thank you for that. And then kind of a follow-on, I guess, for the forecast more broadly. Just from an inflation perspective, obviously, you mentioned fertilizers and food. Is this mostly when you adjust your forecast -- or when the forecast -- excuse me, when the numbers for inflation are adjusted, is that mostly just a food element? Or are there other elements in there as well?

Agnieszka Maciejewska

Well, yes, yes, there are other elements. But the food inflation in majority of countries is higher than basic inflation. So the food inflation is drawing our forecast. And the situation like, again, caused by conflict between Russia and Ukraine with the impossibility of exporting crops from Ukraine hit hard with the inflation effect countries like Egypt or Lebanon. So the crops inflation went crazy in there. And it was caused by impossibility of delivering the crops because Ukrainian ports were closed.

Right now, we have a forecast, of course, for exports from Ukraine through the sea, the crops to those countries, but the forecast is at the 10% of the pre-conflict levels. So the inflation pressures would still remain. We do also our monitoring situation of an overland export through countries like Poland, but there is a difficult logistic situation like it can get through the overland, but then being loaded into ports. There is no infrastructure yet.

So coming back to the inflation. Inflation pressures, according to S&P Global, inflation should be lower next year a little bit. But I think that the -- due to the food supply, those pressures would maintain in the countries, especially dependent from countries like Ukraine, which are affected by shock and conflicts right now.

Chris Rogers

Okay. Good. In terms of what do we mean by collapsing container rates. So there's a lot of different ways to track this. And our colleagues in S&P Global Commodity Insights follow this very closely, and they have a benchmark for shipping rates. We also look at the Shanghai shipping exchange data as a measure for China outbound -- Mainland China outbound rates. That can be quite useful because, obviously, some of the most volatile parts of the international shipping business that we've seen have been the purchases or the shipments of consumer goods into North America and West Europe from Mainland China and elsewhere in Southeast Asia.

Now what we've seen from those rates is that they're now down by around 3/4 from their peaks last year. So obviously, it come down quite a long way. And that more or less puts them back at 2019 levels on that basis. The question, of course, is where do they go next, and that's a far from simple question in part because you have to balance where spot rates are going and where contract rates are going. If we look at that Shanghai shipping exchange number, it's worth bearing in mind that we're still around 1/3 above where we were in 2016, which was a time when we had depressed shipping demand, overcapacity and a lot of challenges facing the industry that eventually led to the financial failure of one of the big shipping lines.

The question is whether we're in a different situation now. Is there a discipline amongst the shipping firms to cut capacity? There's a lot of different factors there. One is around slow sailing. So we've had new environmental regulations. Those -- the IMO 2023 regulations may lead some shipping companies to slow their boats down. A slower boat is a less polluting boat ironically. So that's one element, and that could effectively remove capacity from the system. Another is whether as the new boats that come into the market, larger boats, more efficient, more environmentally friendly, boats as they come in is whether the shipping lines choose to scrap the older capacity in order to take overall a more balanced supply and demand outlook.

One of the factors watched by our colleagues over in Commodity Insights is that we have seen something of a rebound in rates recently just in the past at the start of the second quarter, which may be because of the sign of capacity discipline from the major shipping lines. I guess, though, from a more fundamental perspective, Agnieszka, I guess, having our forecast for container shipping activity within our global trade suite might help inform that decision, I guess.

Agnieszka Maciejewska

Yes. Yes, I do believe so. We do forecast the containerized trade volumes in containerized dams in TEUs. We could see the drop in our global containerized trade in quarter 4 2022, and this is in our predictions continuing in the first quarter. We can see the rebound in the second half of the year. We'll be monitoring the situation. Next release of the forecast is scheduled for June. So most up-to-date data are coming and affecting our forecast. But -- this is all coming together, fingers crossed, for optimistic end of the year.

Chris Rogers

Yes, absolutely. Okay. Moving over to politics and trade policy. What is the future for free trade deals? I would say trade policy in broad terms has a lot of different threads at the moment: One, kind of big trade deals; two, incremental trade deals; and three, what's going on at the WTO, the World Trade Organization.

If we look at the big deals, a lot of the action at the moment is around the CPTPP trade deal and the extent to which that expands. We published research looking at the entry of the United Kingdom into the CPTPP. I'm not sure when the U.K. became a Pacific Island, but it does provide an opportunity for the U.K. to be more involved in Asian supply chains and for Asian nations to have another foothold in the European area.

Now in reality, you don't want to always overstate the value of those big trade deals or their expansion, largely because more often than not countries already have some sort of bilateral deal. So in the case of the U.K., it already had trade relations with most of the CPTPP countries, except for Malaysia.

The second part of the kind of incremental unorthodox deals. In that regard, the U.S.-sponsored Indo-Pacific economic framework, which isn't so much a trade deal but more of a kind of series of agreements that would appear countries, can opt in to or opt out of. It's very much driven by an attempt by the U.S. to lead on certain standards, whether that's digital trade, labor standards, environmental standards. Those are all areas that matter very much to the Biden administration's domestic agenda as well as their international agenda about rivalry between the U.S. and China. This is another field where, on the one hand, you have the IPEF. And on the other hand, you have the regional comprehensive economic partnership that deal led by Mainland China and the ASEAN countries. And unknown in all of this is whether that's CPTPP would be expanded to include Mainland China or other countries who've expressed interest, including South Korea. So lots of developments there.

On the World Trade Organization, as you may be aware, they act very much as the world's trade policy policeman meant to judge on disputes between different countries. At the moment, that dispute settlement process isn't functioning properly for all kinds of reasons, but it doesn't look like we're going to get much resolution there, at least until the end of this year. And so that is kind of frozen in place at the moment.

Agnieszka, you mentioned during your discussion about forecasts that there are geopolitical risks to be concerned about. What are the big levers there for you looking into the rest of this year and beyond?

Agnieszka Maciejewska

Well, surprisingly, as we are speaking about the trade forecast, the most, I would say, dangers for our forecasting process, geopolitical shocks would be conflict, something that is disrupting the trade heavily like making the trade or exports physically impossible, like closing ports in some countries. So this is the biggest disruption. I do not anticipate it right now because it is hard to anticipate jobs like this. And it is making the forecasting even harder. But what we are monitoring and what is very important for us is, of course, all the sanctions of the tariff for years, everything that is limiting the trade. So this is a consequence of the more long-term milder, but this is very, very important for forecasting.

On the bright side, the free trade organizations, we are also looking at this and observing how much there can be a benefit for trade between the associated countries. So this is not a shock. I would cause it like a positive cause rather than a shock, but it is influencing our forecast.

Chris Rogers

Okay. Thank you for that. A broad question and probably something that we're going to keep answering in research, which sectors are most likely to experience reshoring, particularly away from China?

I would say to talk about reshoring about away from Mainland China is a bit of a misnomer. Companies aren't necessarily pro or anti Mainland China. They're looking to minimize their risk, minimize their cost, maximize their profit and their shareholder value. And so we often talk more about ex-shoring or multi-shoring strategies. And certainly, as we move away from the pandemic era, return to normalized supply chains, companies are increasingly reviewing and looking to implement multi-shoring strategies, whether that's to get closer to the market that you want to operate in, like Mexico, or whether it's just to simply be more diverse and more resilient.

Those are all expensive areas. And so it's perhaps not a surprise that we see the industries that are more likely to see reshoring be those that are higher margin or more profitable industries where you will have the financial capability to do that. So high tech is an obvious area in that. Autos is another area where supply chains are continually in flux. Capital goods, particularly complex capital goods, industrial machinery, robotics and so on are areas where we may see more of that reshoring going on.

Areas where we're not seeing so much in the way of reshoring are those that may be simpler products where Mainland China has an established advantage through a combination of manufacturing prowess and labor cost. We're going to be published in research soon, for example, looking at kitchenwares, which is a relatively simple product area, but is one where Mainland China has actually built its market share over time rather than seeing a decline in market share. And there's a lot of different reasons for that. So I guess the rough answer there is watch this space and read our research.

So with all of that, we have covered a lot today. All that's left is to say thank you, Agnieszka. And thank you all for taking the time today, and we look forward to joining us again soon.

Agnieszka Maciejewska

Thank you.

Chris Rogers

Thanks a lot.