Such predictions are provided to clients, technology providers and blog readers in the spirit of advising senior and line-of-business executives, multi-industry cross-functional supply chain management and supporting information technology teams a sensing of what to expect in the coming year, Our goal is to depict how likely global, regional, economic, business and industry trends will impact and likely influence required supply chain management actions in the coming year.
In Part Two of this blog series published yesterday, we outlined our included summary and compendium of quantitative global economic and regional business outlooks that will be included in our 2021 predictions report.
In this Part Three posting we provide quantitative and qualitative perspectives related to global supply management challenges in the coming year and while resiliency strategies will remain essential in the year 2021.
Outlook- Global Supply Network Challenges Remain Significant with Resiliency Strategies Essential
Last year, our 2020 outlook called for unparalleled levels of global supply network management challenges, especially centered on components and products produced in China. After the COVID-19 coronavirus made in presence across the globe during the first part of 2020, the term unparalleled indeed turned out to be the operative condition with global-wide manufacturing impacted by worker infections, absenteeism and significant material shortages that had to be overcome. Proactive concern for the financial and operational condition of suppliers became evident and visible.
Supply network challenges in 2021 are likely to remain somewhat unpredictable depending again on the timing of global vaccine availability along with the overall ability of individual economies to bounce back. Particular emphasis will remain focused on China, its ongoing global trade policies and alliances, as well as added political developments in the coming year. The United Kingdom and specific European Union nations will be evaluating the impacts of the new Brexit trade agreement in terms of added cost or other factors. Production output, overall supply availability and distribution of vaccines globally will be very closely monitored with likely nationalistic policies adding to supply implications.
In the coming year, how individual governments actually categorize or legislate what are deemed to be essential supply network and production capabilities will be an important determinant for global supply chain network changes. Incoming U.S. President Joe Biden has already indicated a desire to invoke the U.S. Defense Production Act to boost production levels of coronavirus vaccines. The action would likely address the boosting of supplies of personal protective equipment, virus testing capacity and the raw materials for the vaccines that are to be produced to insure adequate supply. We predict that some other nations will likely invoke similar actions and that may lead to added supply network challenges or conflicts for certain key raw materials.
Resiliency in sourcing and in back-up contingency planning will remain a key capability of difference in the year 2021. Sourcing for lowest cost will be subsumed by sourcing driven by a combination of cost, supply network risk and other resiliency factors related to transportation and ongoing geo-political tensions. That will increase the importance of existing or new regional trade alliances and supply network practices and protections.
Global Supply Management Forecasts
The World Bank Commodity Markets Outlook published in October 2020 reenforced that COVID-19 delivered a significant shock to global commodity markets during 2020 but the impact varied for different categories of commodities. That was in contrast to the 2008-2009 global wide recession when a broad array of commodities experienced large and persistent declines.
In the all-important global supply management category of energy, prices incurred a steep fall of nearly 60 percent between January and April of 2020, because of precipitous drops in demand but rebounded somewhat in the second half of the year. This recovery was attributed to concerted sharp supply reductions from OPEC nations. Toward the end of 2020, crude oil prices reportedly remained at one-third lower than their pre-pandemic levels and were projected to average $41 per barrel in 2020. The October forecast indicates a rebound in energy prices during 2021 to an average level of $44 per barrel. According to the outlook, demand as reflected by oil consumption was expected to remain below 2019 levels until 2023 with a gradual easing of output restrictions among OPEC producers during this period.
The report indicated that metal prices in 2020 recovered more rapidly than expected because of China’s quick recovery in manufacturing and construction demands. China itself accounts for upwards of half of global demand for various metals. The October World Bank forecast indicated modest price increases in 2021 boosted by the recovery of the global economy and continued stimulus within China. However, in December of 2020, metals prices were souring as speculative investors were piling into futures markets. Prices for copper had risen to an eight-year high, while aluminum and zinc prices increased 15 percent since September 2020. Market speculators seemed more concerned with potential added supply disruptions and thus the run-up in futures.
Similarly the World Bank forecasted that agricultural prices were expected to rise slightly in 2021 following a forecasted 3 percent increase in 2020. The report noted that the pandemic created bottlenecks in food availability and border closures. We might add the notions of pantry loading that swamped food supply networks leading up to the peaks of country focused virus infections. One significant unknown is the emergence of the La Nina weather pattern which usually incurs cooler than normal ocean temperatures in the Pacific Ocean, leading to dryer and more extreme weather in other parts of the globe. J.P. Morgan indicated in a November 2020 report that this weather pattern evolved quicker and with stronger intensity and categorized this as the “primary supply-side wild card” for agricultural markets entering 2021.
Raw material prices reportedly slightly declined in 2020 and were forecasted to increase 1.6 percent in 2021.
Global Geo-Political Tensions Remain
As the year 2020 winded down, global-wide geo-political tensions remained high in specific areas. The U.S. Presidential Election in November resulted in the election of Joe Biden as President of the United States and Kamala Harris as Vice President. This development has led to political pundits to predict that rather than the prior Trump Administration’s unilateral and direct confrontational strategies related to trade policies, the Biden Administration will presumably take a less confrontational, more multi-lateral approach involving a collective group of partner countries.
U.S. and China Trade War
During 2020, trade tensions among the two largest economic nations reached an all-time high. That prompted China’s leaders to become more aggressive in economic planning and to identify advanced information and other leading-edge technology areas as the path to long-term economic growth and prosperity. The Economist noted in a November 2020 editorial: “The new battlefield today is information technology: semiconductors, data, 5G mobile networks, internet standards, artificial intelligence (AI) and quantum computing.” The implication of a new cold war centered around leadership not only in evolving advanced technologies and China’s inherent domestic supply network capabilities. This includes advanced semiconductor design and production technologies, as well as more domestically owned contract manufacturers.
As we pen these predictions, initial implications are that the Biden Administration will retain the existing level of tariffs as a leverage to further negotiations with China’s leaders.
The year 2020 provided the initial signs of a “de-coupling” of high-tech supply networks and we believe that more of such developments will occur in the year 2021. Many are terming the sourcing implications of this de-coupling as a primary driver of the “China+1” strategy, namely considerations for alternative sourcing of high-tech supply or production to one other country besides China.
Beyond high-tech supply networks are notions of building more global supply network resiliency with alternative sourcing more pegged to major regional markets supported.
A further concerns revolves around increasing tensions among China and neighboring entities Taiwan, Hong Kong and Japan. As China makes more aggressive strides to advance its in-country semiconductor, IT and advanced manufacturing capabilities, there will be increased pressure on Taiwan in sharing manufacturing innovation capabilities. In November, Apple contract manufacturer Wistron agreed to sell its mainland China factory to Luxshare, a up and coming contract services manufacturer favored by China’s leaders. Global high tech OEM customers such as Apple and others are already influencing Taiwan managed contract manufacturers to develop alternative high-volume manufacturing in other areas of Asia to include Vietnam and India, as well as in Europe and the United States. The government of Japan also stepped up its efforts to lure high-tech producers back to its country with added economic stimulus.
Industry supply chain management professionals will need to keep a keen eye on their buying and sourcing strategies related to China. On the one hand, the country could remain a lucrative market for business growth. On the other hand, the lessons of COVID-19 in assuring more resilient business and supply chain continuity in certain industry supply networks, especially those related to medical products and services, high-tech devices automotive and other areas will become more apparent.
The Eurozone and Brexit
As we publish this outlook in the final week of December 2020, and four years after Great Britain’s approved referendum to separate, the United Kingdom and the European Union finally reached the basis of a trade deal regarding the UK’s exit from the EU. Just prior to this agreement, there was significant disruptions involving all ports, terminals and airports either exiting or entering the United Kingdom and there was a real possibility of a no-deal “hard” Brexit.
An announced, more virulent strain of the novel COVID-19 coronavirus, reportedly as much as 50-70 percent more virulent, added to the disruption as EU and other global nations quickly restricted travel to and from the UK.
With little time allocated for preparations, UK and EU supply networks will have to be prepared for an additional, hopefully brief period of transport disruptions while governments and businesses make the necessary transition to new processes for material goods and services movement. Indications are an era involving new customs declarations, import licenses and inspection costs. An estimated 43 percent of UK exports are destined to the EU and among these two trading blocks, upwards of $900 billion of two-way trade flows exist. The British government estimated that there will be a requirement for 215 million extra customs declarations annually while many businesses have yet to be informed as to other implications that could be part of this new trade agreement. By some estimates, added administrative processes could amount to $23 billion annually for British businesses, and €14 billion for EU businesses.
Particular industries such as automotive and commercial aerospace who rely in just-in-time inventory movement across the two trading entities will be especially concerned with the short and longer-term impacts.
German Chancellor Angela Merkel has likened the impact of Brexit to that of Great Britain joining the ranks of China and the United States as a potential trade competitor to the EU. How this trade partnership fares in its first year will be closely watched by all stakeholders.
Regional Trade Alliances
We predict that more substance and initial influence will come from the ongoing development of key regional alliances.
Among Asian nations, the two major trade alliances: Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the newly approved Regional Comprehensive Economic Partnership (RCEP), which China elected to join, will vie for overall regional influence in the coming year. We anticipate some conflicts to occur. A further consideration is which of these alliances will either India, the United States or the United Kingdom elect to join. China is likely to attempt to be a key influencer of trade practices for the region, as well as logistics and transportation practices. If the U.S. elects to join either, there will likely be added demands for intellectual property protections, environmental and labor standards.
For the Americas region, the United States, Mexico and Canada Trade Agreement (USMCA) will likely come under the influence of the incoming Biden Administration. That stated, we predict that this alliance will garner additional influence in the region and smooth over differences that were created during the Trump Administration.
For the Eurozone area, the impacts or added developments related to the UK and the U.S. being separate trading nations with the EU as well as other major global regions will take center stage.
The notions of multi-industry supply chain efforts directed at added supply network sourcing resiliency or nearshoring will be influenced by various evaluations of the above regional trade structures over the longer-term horizon.
This concludes Part Three of our Supply Chain Matters focused 2021 predictions series. Our next milestone will be the announcement of the general availability of our Ferrari Consulting and Research Group detailed 2021 predictions research advisories which will include these outlooks as well as ten specific predictions for the coming year. We anticipate availability to be by the second week in January.
As industry and global supply chain management teams complete their milestones and deliverables for what has been a significant challenging year, the focus now turns to an upcoming year of renewal and a lot of meaningful work to get accomplished.
We extend to al of our Supply Chain Matters readers, sponsors and research clients our best wishes for a productive and rewarding New Year.
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