Social media is lighting up more and more every day with comments about Covid-19 and supply chain woes, it's becoming tricky to sort the wheat from the chaff, but here goes...
Stressed out? Fancy a possibly-too-soon coronavirus meme?
Imugr link
BloombergQuint (a key India based business feed) says on its twitter account (I can't link to it under reddit moderator rules, search for the name on twitter if you want the original source) that the Indian Finance Ministry advises that disruption of supply chain due to Coronavirus would be considered as a case of natural calamity, i.e. Force Majeure - I mentioned the risk of this a day or two ago. This means "...that invoking this clause frees both parties in a contract from contractual obligations and liabilities." Example in normal English if you're not a lawyer: if you ordered a large shipment from China for delivery next month and now no longer need it due to a collapse in your sales, you could refuse the shipment and also not have to pay any resulting penalty fees that you and the supplier might have agreed upon.
The Wall Street Journal says "corporate executives are largely working blind because the coronavirus could cause supply-chain disruptions that are unlike anything we have seen in the past 70 years."
Link. It then attempts to explain the problem of the bullwhip effect - as tier 1 suppliers see a collapse in consumer demand, they create an even bigger collapse in demand from their tier 2 suppliers for fear of holding onto stock they cannot sell. The tier 2 suppliers create an ever bigger collapse in demand from their tier 3 suppliers. The WSJ doesn't do a great job of explaining it in my opinion - if you're not familiar with the concept of the bullwhip effect, watch this 87 second video here:
Youtube Link, requires sound.
Supply chain security can be a problem during black swan events if your product is in high demand; as an example of this the BBC reports that armed robbers (with knives) in Hong Kong stole hundreds of rolls of toilet paper worth $218 USD.
Link. Police have arrested two men and recovered some of the rolls.
CNBC video: an analyst from IDC China has told CNBC that smartphone and smart computer exports may drop by as much as 30% during Q1 2020 due to the virus outbreak.
Link
Toys - A few days ago I flagged an article that LOL! Dolls (a popular toy at present) are experiencing supply chain issues due to the virus. The LA Times has dug further (
link) and got a quote from the maker's CEO Isaac Larian who says the situation is “a disaster, frankly,”. Production of his company’s toys has dropped 60% compared with this period last year. To get by, he said, he is filling only partial toy orders — “if a retailer wants 100,000 pieces, we’re giving them 15,000 or 20,000.” It adds that rival Mattel is also indicating they have supply chain issues - but gives no further details on their position.
Seafreight - 46% of sailings from China to NW Europe are being cancelled by container ship operators reports Splash247 (
Link) which concentrates on maritime freight news, clarifying that 33 sailings have been cancelled in the past four weeks with another 17 sailings expected to be cancelled ("blanked" to use industry terminology) in the next four weeks. As a result of cancellations on this route and others, the coronavirus will reduce container cargo volumes at Chinese ports – including Hong Kong – by more than 6m teu in the first quarter of 2020. “Assuming the virus outbreak gets under control, Chinese factories resume full production in March-April, and may even run at higher output initially to make up for lost production. This will happen at the same time as the amount of vessels returning to Asia with empty boxes is at a very low level due to the current blank sailings potentially triggering equipment shortages (and associated rate hikes) for Asian exports,” said Lars Jensen, a leading container shipping analyst.
Airfreight - China's aviation market has gone from being the 3rd largest in the world to the 25th largest due to all the cancellations which makes it smaller than Portugal (
Link). “No event that we remember has had such a devastating effect on capacity as coronavirus,” John Grant, senior analyst at OAG, wrote in a report. “In many ways it highlights the importance of the Chinese market to aviation and the rapid globalization of air services as new markets and travelers emerge.”
Also airfreight - the considerable cancellation all-round of flights in and out of China has significantly reduced available air cargo capacity as as result. To resolve this problem, some forwarders are creating sea-air bridges reports aircargoworld (
Link). Example: fly from JFK (New York) to ICN (Seoul), then put it in a bonded warehouse before sending it on to China via sea.
Your supply chain can't exist without us: With some analysts and industry leaders reporting that many businesses will have a wake up call from the Coronavirus and look to diversify their supply chain to reduce dependency on China, the Chinese communist party is fighting back. "China is 'irreplaceable' in the global supply chain" reports their mouthpiece newspaper Global Times (
Link). The article blames US attempts to isolate China from the rest of the world through tariffs and claims beating Chinese quality and price is extremely difficult. "Many textile factories have moved to Vietnam and Indonesia to open production lines, but half of them have already returned because it is simply impossible to make high-quality, profitable products there due to a lack of resources," said an official on condition of anonymity in Shaoxing, East China's Zhejiang Province, a major textile production base, which supplies fashion brands in Europe and elsewhere. "Our customers come to us because no one else can make such high-quality, affordable products like ours." Make of that what you will.
Impact on the average Chinese citizen: The economist says (
Link) that consumption has dropped significantly in many parts of the Chinese economy. Coal consumption is down by more than 1/3, property sales are down 90%, Starbucks has shut more than half of its 4,000 outlets, its tourists are staying at home (Chinese tourists spend $250bn USD around the world each year). Whilst Apple, JLR and the pharmaceutical industry may be currently grabbing the supply chain headlines, the economist points China churns out a third of the world’s chemicals, half of its LCD screens and two-thirds of its polyester - it adds that firms that think they're insulated from China may be in for an unpleasant surprise. Meanwhile, Vietnam has now quarantined 10,000 people.
Traffic congestion in China - whilst the seaports are grinding to a halt due to severe unavailability of domestic trucking to keep things moving in and out, the private car users definitely aren't experiencing as many traffic jams with traffic volumes in major cities having significantly declined. Datatrek has pulled data from TomTom and says (
Link) that congestion in Shanghai (a city notorious for jams) is down from 54-59% to 9%-12%. The stand out data at the bottom of the article is for Shenzhen which is a major industrial hub; traffic congestion is considerably down vs normal. Simply put, a lot of people are staying at home.
And yet stock markets keep going higher... Not for much longer according to Mohamed El-Erian, a high profile analyst for Allianz. In an interview with Spiegel in Germany (
link, it's in German), he argues this virus has serious implications for the global economy and that the markets are assuming the central banks will step in to bail people out. He's arguing that people should be more concerned (and de facto therefore arguing that stocks are overpriced). Goldman Sachs echoes the call on a CNBC article (
Link), with strategist Peter Oppenheimer writing in a note: “We believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high."
Polymer technology giant Trelleborg (
link) says it has restarted operations at the majority of its Chinese manufacturing plants (although it has 2 in Wuhan, presumably these are still closed). It employs 1,600 people in China and notes that quarantine requirements and and local restrictions are making the situation complicated and thus views the supply chain situation as a "moving target". The group manufactures agricultural and industrial tires, sealing solutions, fenders, automotive boots, printing blankets and antivibration systems across its Chinese operations. The group had revenues of $3.46 bn USD in its last accounts.
L'Oreal also says things are OK with its supply chain too - it makes a point of trying to manufacture in local countries. L'Oreal Global chairman and CEO John-Paul Agon told Fox Business (
link) that "We manufacture in a country what we sell in the country, so what we manufacture in China is only for China or mostly for China, and the rest is just for the countries in Asia." He also pointed out that after the SARS outbreak was over, there was a surge in demand and he expects the same after this virus.
Industrial software and technology hardware supply chain: Trimble (revenue over $3bn USD) makes products for OEMs addressing agriculture, construction, transportation, geospatial services, mining, oil and gas, transportation and more. They say that China supply chain issues are likely to begin impacting them in the next few weeks because the only tend to hold two weeks worth of inventory. The company expects a 3% hit to Q1 revenue as a result of the supplier disruptions (
link)
CNBC: Two Iranians have died after testing positive for Coronavirus in the central city of Qom; the patients were in isolation. Hopefully these are the only two cases, because Iranian healthcare is less advanced but Qom is a key hub for both oil and gas production in Iran with a nearby refinery as well as several key pipelines going through the area.
Link
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