Navigating supply chain resilience amid rising geopolitical risk

US supply chain activity includes containerized freight imports that have shown robust growth in the first quarter of 2024, increasing by 15% year-over-year despite ongoing supply chain disruptions at key points such as the Red Sea, Panama Canal, and the Port of Baltimore.

The growth has been driven by several industrial sectors, including materials such as steel and paper. Consumer goods, personal care products, consumer electronics and apparel shipments have also contributed to the increased volumes. As a result, contracted shipping rates for the upcoming year have seen a potential rise of up to 17%, although spot rates have moderated from their previous highs.

However, it is important to exercise caution due to the comparison with a year ago when imports were depressed by inventory destocking in the retail sector. Over the past five years, shipments have expanded at a compound annual rate of 3.5%.

Looking ahead, S&P Global Market Intelligence forecasts a slowdown in the growth of US containerized freight imports. Growth is projected to moderate to 7% in the second quarter of 2024, further slowing to 3% by the fourth quarter, and entering 2025 with a growth rate of 1%. This deceleration is primarily attributed to a slowdown in industrial supply chain products such as chemicals, metals, and machinery. The apparel sector is also expected to underperform, with no growth anticipated in the second quarter of 2025 and a decline expected later in the year, reflecting ongoing efforts to optimize inventory efficiency following the post-destocking recovery.

The supply chain outlook for trade activity from major US trading partners presents a mixed picture. While mainland China's manufacturing new export orders have shown growth, Mexico's export orders have retreated below expansionary levels. Canada and the EU have seen improvements but remain in contractionary territory for export orders overall.

Uncertainties surrounding the timing of the peak shipping season in 2024 are notable, driven by various factors, including physical disruptions, political dynamics and labor issues. This uncertainty poses challenges for cargo owners and logistics operators alike, potentially prompting earlier-than-normal shipments to mitigate delivery risks.

The temporary closure of the Port of Baltimore, while primarily a regional challenge, could lead to more US supply chain issues, including increased shipments into nearby ports such as Philadelphia, Norfolk and Newark. Even as Baltimore reopens in May, the ongoing risk of East Coast strikes and continued disruptions in the Red Sea may influence cargo owners to adjust shipping strategies, including potential diversions to West Coast ports.

Looking further ahead, US political developments, particularly the outcome of upcoming elections, could impact trade policy, potentially leading to new tariffs on imports from mainland China in early 2025. Importers may respond by adjusting sourcing patterns, preemptively shipping goods, or passing tariff costs to consumers.

Historical shipping patterns suggest that previous tariff implementations have influenced shipping behaviors, with surges in late fourth quarters preceding tariff deadlines. For instance, tariffs imposed in mid-2018 prompted an early peak in shipments that year, while subsequent tariff extensions in 2019 similarly affected shipment volumes.

In conclusion, while US containerized freight imports have shown strong growth in early 2024, ongoing disruptions and evolving trade policies underscore the need for flexibility and proactive management within global supply chains.

Critical minerals supply chain outlook in Asia-Pacific

Several governments in the Asia-Pacific region are implementing strategies aimed at securing stable access to critical minerals crucial for the energy transition and industrial activities.

The definition of critical minerals varies among jurisdictions but generally includes minerals essential for industrial processes, particularly those not readily available domestically. Governments are increasingly prioritizing these minerals as part of their economic and industrial development strategies.

In February 2024, Australia expanded its critical minerals list to include nickel, reflecting its strategic focus on securing these resources. South Korea and India also launched critical minerals strategies in 2023, underscoring their efforts to bolster domestic supplies. Mongolia is in the process of amending its Minerals Law to include a list of minerals deemed of strategic importance for the first time.

In the Asia-Pacific region, the formulation and execution of critical minerals strategies are guided by several common factors. These include the assessment of domestic mineral reserves to gauge availability and extraction feasibility. Technological expertise in mining and mineral processing also plays a pivotal role in enabling efficient and sustainable resource use. Environmental considerations are paramount, with countries balancing resource exploitation against conservation imperatives. Additionally, geopolitical partnerships and alliances influence strategic decisions, fostering international cooperation in mineral exploration, technology sharing, and investment. Together, these factors shape policies aimed at ensuring secure and sustainable access to critical minerals across the region.

These supply chain strategies will utilize regulatory measures such as subsidy programs and tax incentives, alongside informal restrictions on investment, to protect and enhance domestic production of critical minerals.

Investment proposals in the critical minerals industry from mainland China are expected to face heightened scrutiny in US-aligned Asia-Pacific nations such as Australia, India, Japan and South Korea, potentially leading to blocks on national security grounds. Consequently, China may leverage its dominant position in rare earths and other mineral extraction and processing by using threats of targeted export restrictions and licensing requirements to discourage compliance with US or allied regulations perceived as targeting China.

In response, US partners aiming to reduce dependence on mainland China for critical minerals will prioritize initiatives like reshoring, focusing on investment in downstream production and manufacturing. Countries such as Australia, with established expertise in mining technologies, and South Korea, known for its advanced manufacturing and assembly industries, are likely to lead efforts in developing capabilities for processing critical minerals.

Cooperation aimed at establishing shorter and more secure supply chains for critical minerals is expected to intensify, driven by initiatives like friendshoring, or reshoring to friendly geographies. In the Asia-Pacific region, friendshoring efforts will be motivated by investments from the mining sector in exchange for access to critical minerals. Developed economies in the Asia-Pacific, including Australia, China, India, Japan and South Korea, will increasingly seek access to critical minerals by funding overseas mining and processing infrastructure. This approach aligns with the strategies of resource-rich nations like Indonesia, Malaysia, and Mongolia, which are focused on enhancing their processing capabilities while moving up the value chain.

Friendshoring initiatives will facilitate commercial agreements and foreign investments through bilateral partnerships among like-minded regional partners and "mini"-lateral collaborations, such as the US-led Minerals Security Partnership and the Quad. This cooperation will also involve commercial interests, including public-private and private-private investments, and agreements across various stages of the critical minerals supply chain. This trend is already in motion, with cooperation likely to be strongest for minerals deemed critical by multiple Asia-Pacific countries' strategies.

Resource-rich and producer countries are poised to utilize resource nationalist policies to capitalize on competition for critical minerals access, which could amplify regulatory uncertainty.

This supply chain strategy entails adjusting national economic and industrial development agendas to accommodate the escalating demand for critical minerals. Countries abundant in mineral resources but lacking technological expertise, infrastructure and capital — such as Indonesia, Malaysia and Mongolia — are expected to attract investment from both Chinese and US-aligned firms. Their industrial policies may involve ad hoc amendments to mining laws and new regulations favoring local stakeholders. These could include increased state ownership in mining projects, higher royalty demands and measures to maximize revenue along the value chain. Expectations also include expanded export controls, tax adjustments and modifications to state contracts, likely intensifying business unpredictability in the mining sector.

However, reshoring and friendshoring initiatives for critical minerals are anticipated to be arduous and expensive endeavors. Developing downstream production capabilities necessitates substantial investments in mining technology and workforce training, requiring sustained high-value commitments. Shifts in existing supply chain arrangements are expected to be gradual, with continued reliance on current suppliers, especially for processed minerals.

Moreover, critical minerals mining and refining are inherently environmentally intensive activities. Estimates suggest that rare earth mining can generate up to 2,000 metric tons of waste for every metric ton of material extracted. The substantial environmental costs are expected to impede efforts to expand production capacity, potentially encountering opposition and delays from local communities and environmental organizations. Recent events, such as protests prompting the suspension of a rare earth exploration project in western Mongolia in September 2023, underscore the risks associated with community resistance.

Critical minerals reshoring and friendshoring initiatives are expected to restrict growth opportunities in developing economies like Indonesia, Malaysia, and Mongolia. Despite these countries being receptive to investments aimed at developing their critical minerals industries from both mainland China and US-aligned countries, the potential benefits from enhanced trade relations and increased foreign direct investment (FDI) are likely to be curtailed by protectionist regulations and various formal and informal constraints.

The European Union’s Deforestation-Free Regulation (EUDR), which took effect June 29, sets a new standard for environmental accountability in global trade. This regulation requires companies to perform mandatory deforestation and forest degradation due diligence on their global suppliers. Targeting commodities such as cattle, soy, cocoa, and palm oil, the EUDR imposes severe penalties for noncompliance, including fines of at least 4% of annual turnover, confiscation of goods and temporary bans from EU procurement and tenders.

Key components of the EUDR:

Due diligence frameworks: Companies must establish annual supply chain due diligence frameworks to screen their suppliers, ensuring that products entering the EU market have not caused deforestation. These frameworks must be submitted to the respective member states for verification.

Comprehensive commodity coverage: The regulation applies to cattle, cocoa, coffee, palm oil, rubber, soy, wood (timber), and their derivatives. It also includes products made with or fed by these commodities, such as beef, charcoal, chocolate, leather, and printed paper products.

Compliance deadlines: Large companies have 18 months to comply with the EUDR requirements, with a deadline of Dec. 30, 2024. Small and medium-sized enterprises (SMEs) are given up to 24 months, until June 30, 2025.

Broader scope and implications:

Beyond deforestation, the EUDR mandates that supply chain due diligence statements include information confirming compliance with land use, labor, and human rights laws in supplier countries, including the rights of local indigenous communities. This comprehensive approach ensures that the regulation promotes ethical sourcing practices globally.

Impact on key markets:

• Asia: Major palm oil producers such as Indonesia and Malaysia will need to adhere to stricter sustainability and human rights standards to maintain their market access in the EU.
• Latin America: The agribusiness sectors in Brazil and Argentina, particularly those involved in cattle and soy production, will face increased pressure to adopt sustainable practices.
• Africa: Cocoa exporters from countries such as Côte d’Ivoire and Ghana will need to ensure their products meet the EUDR’s stringent requirements. This delves into the far-reaching effects of the EUDR on companies placing products in the EU and key sourcing markets in Latin America, Asia-Pacific, and sub-Saharan Africa. By demanding greater transparency and ethical practices, the EUDR aims to foster a more sustainable and responsible global trade environment, setting a new benchmark for future regulations.

As the EUDR takes effect, companies importing EUDR-related products into the EU can expect heightened regulatory scrutiny, particularly from customs authorities. This increased oversight is expected to continue for at least a year and beyond, with noncompliance leading to substantial fines.

The EUDR is integral to achieving the EU’s broader environmental objectives, including the European Green Deal and Paris Agreement commitments. During the EUDR’s April debate, Austrian Member of the European Parliament Alexander Bernhuber emphasized the necessity for member states to enforce the regulation rigorously. Bernhuber said it is essential for implementing “strict controls and strict sanctions” to ensure compliance by countries, regions, and individual companies.

This regulation underscores the EU’s commitment to enforcing sustainability and environmental protection standards, making compliance crucial for companies wishing to trade within the EU market.

The EUDR reflects a robust political will to combat deforestation, driven by the EU’s significant role in global deforestation. Between 2008 and 2017, EU consumption of deforestation-linked products was responsible for an estimated 19% of global tropical deforestation. The EUDR’s stringent noncompliance penalties underscore the EU’s commitment to effective enforcement.

Key penalties and enforcement measures:

• Fines: Noncompliance can result in hefty fines of up to 4% of a company’s total annual turnover within the EU.
• Additional sanctions: Other penalties include confiscation of revenue from noncompliant transactions, exclusion from public procurement and funding for up to 12 months, and ineligibility for grants and concessions for the same period.
• Enforcement mechanisms: The EUDR mandates the establishment of a systematic information exchange mechanism among member states, customs authorities, and the European Commission. Companies must present due diligence statement certifications to customs authorities, who have the authority to confiscate noncompliant products

The EUDR will significantly affect companies importing EUDR-regulated products into the EU. Preparedness levels vary among businesses. According to the 2022 S&P Global Corporate Sustainability Assessment (CSA), 34.2% of the largest companies in the S&P Europe 350 index have set targets to reduce, offset, or eliminate deforestation within their operations or supply chains. Specific sectors are also showing progress, with 35.1% of food product companies and 33.3% of paper and forest-related product companies setting similar deforestation reduction targets.

As the EUDR enforces stricter environmental standards, companies will need to enhance their compliance efforts to align with these regulations, reflecting a significant shift toward greater sustainability and accountability in global supply chains.

The EUDR is poised to increase operational costs for both European and non-European firms, while also potentially encountering resistance from supplying countries. Under the EUDR, the level of due diligence required will vary based on the deforestation risk assigned to exporting countries by the European Commission, which will use a three-tier risk classification system. Low-risk countries will face simplified procedures, while standard and high-risk countries will need to provide more detailed supply chain due diligence, including satellite imagery and geospatial data.

The European Commission estimates that compliance costs could range from $170 million to $2.5 billion annually. These expenses may be absorbed by reducing profit margins along the supply chain or passing them on to final consumers in EU member states. As firms adjust to these new requirements, the financial and operational impacts will need to be carefully managed, and resistance from high-risk supplying countries could further complicate compliance efforts.

The European Union is set to offer substantial support to countries committed to combating deforestation, as highlighted in the EUDR. The regulation mandates that member states provide both technical and financial assistance to "least developed countries," aligning with broader EU commitments under the Paris Agreement and the European Green Deal. Notably, during the 26th UN Climate Change Conference (COP26) in 2021, European Commission President Ursula von der Leyen pledged €1 billion to the Global Forest Finance Pledge over five years.

While the EU aims to assist some supplying countries, many major deforestation-producing nations are unlikely to introduce new anti-deforestation legislation in the near term, focusing instead on enforcing existing commitments. Countries like Côte d’Ivoire see the EUDR as an opportunity to seek increased EU financial support, having already implemented a GPS tracking system for cocoa beans and introduced electronic tracking cards for farmers. Ghana has also launched a mandatory national traceability system to align with EUDR requirements.

However, challenges persist. The World Resources Institute reported a 10% increase in global deforestation in 2022, reaching 4.1 million hectares, which further complicates the task at hand. Weak enforcement capabilities, limited international funding and poor track records — exemplified by Brazil’s struggle to meet its deforestation targets despite pledges — raise concerns about the ability of producing countries to meet EUDR standards. Countries failing to meet EUDR expectations may be classified as high-risk, affecting their trade dynamics with the EU.