The Supply Chain Edge provides a curated weekly overview of Panjiva's research and insights covering global trade policy, the logistics sector and industrial supply chains and draws from global shipping and freight data.
Russian invasion of Ukraine adds additional strain to stretched supply chains
The fall-out from the large-scale Russian offensive in neighboring Ukraine is likely to spread into global supply chains and impact economies in Eastern Europe and beyond. The first-order effects may come from the mounting economic sanctions imposed by the U.S. and other countries on Russia, and widespread disruptions in Ukraine.
From a U.S. economic perspective, imports from Ukraine rose 28.7% year over year in the fourth quarter of 2021. Disruptions are likely to be felt across all industries, but the majority of U.S. imports from the country are in the metals category: 59.7% in 2021. This increased 61.8% year over year in the fourth quarter; February data will likely indicate a fall in growth. Companies that import metals, mostly pig iron, from Ukraine include Nucor Corp., Eusider SpA and Steel Dynamics Inc., the imports of which rose 68.1%, 66.0% and 16.0% year over year in 2021, respectively. Those sources will likely be disrupted in some way if the conflict continues.
U.S. imports from Russia are similarly concentrated as those from Ukraine, with mineral products making up 59.2% of imports by value in 2021. The next most prevalent products were metals, precious metals and chemicals, constituting 13.4%, 10.0% and 7.2% of the total, respectively. Imports of mineral products, most of which were fuels, increased 95.9% year over year in the fourth quarter of 2021. These numbers will likely drop as international sanctions take effect and consumer pressure builds against Russian products.
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Peloton restructures rides to increase efficiency, reduce cost
Peloton Interactive Inc. announced changes to its board of directors and CEO and outlined a cost reduction program after profitability fell. The firm's revenue increased 6.5% year over year in the fourth quarter of 2021, falling short of analyst expectations by 1.5%, according to data from S&P Capital IQ. This likely doesn't tell the full story, however, as inventories increased 194.8% year over year and EBITDA fell to a loss of $266.5 million. According to Panjiva data associated with the firm, fourth-quarter import volumes were down 51.8% year over year, likely reflecting overstocked warehouses. This was noted on the Feb. 8 earnings call, with CFO Jill Woodworth discussing that many savings opportunities were present in "efficiencies in procurement and manufacturing and logistics." The large increase in imports starting in July 2020 could be a reaction to the immense demand for home fitness equipment driven by lockdowns. If that is the case, this is likely an example of the so-called bullwhip effect in action, with strong demand from consumers prompting large orders that then arrive down the line, potentially when demand is not as strong.
Peloton also announced that it was abandoning plans to manufacture in North America. Woodworth continued that the company believes that wholly owned manufacturing subsidiary Tonic and third-party partners can support its growth "for the next few years," but that there is "strategic merit" in diversifying its manufacturing footprint and "developing North American capabilities over the long term." The primary sources for imports associated with Peloton in Panjiva data are mainland China, accounting for 44.5% of imports by volume in 2021, and Taiwan, representing 52.5% of imports in the same period. The mix seems to be switching toward the former, as its proportion of imports increased to 48.7% of the total in the fourth quarter, and to 77.9% in January 2022.
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Fans of guacamole, avocado toast and of Cinco de Mayo celebrations narrowly missed experiencing supply chain issues firsthand as the United States temporarily banned imports of avocados from the Mexican state of Michoacán. As well as being the main avocado-producing region in the country, it is also currently the only state there authorized to export to the U.S. The restriction was spurred by death threats made against an on-site U.S. Department of Agriculture inspector who, among other things, was verifying that the origin of avocados was Michoacán. Regional variation in size, shape and skin texture allows such identification. Panjiva data shows that the value of avocados arriving in the U.S. in 2021 was $2.8 billion, up 25.3% year over year. The country accounted for 91.6% of U.S. avocado imports, with another 6.1% coming from Peru. Mexican production also would have been harmed by an import ban. Panjiva data shows that the U.S. accounted for 80.4% of Mexican avocado exports by weight in 2021, making up most of the export industry. The second closest is Canada, accounting for 17.2% of exports in the same year.
Companies that could have been impacted by an export ban include Calavo Growers Inc., the exports of which grew dramatically in 2021, up 460.3% year over year in the final quarter of the year. This was not the case for some of the other major exporters, including Henry Avocado Corp., Rio Vista and West Pak Avocado Inc. These companies' fourth-quarter exports were all relatively static, with those of Henry and Rio Vista increasing 0.9% and 3.2% year over year, respectively, while West Pak's fell 0.2%.
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GLOBAL SUPPLY CHAIN WRAP
ASML Holding NV, a Netherlands-based company that makes semiconductor manufacturing equipment, is looking for contingency sources if supplies of neon from Ukraine are cut off due to the conflict there. The inert gas is used in the manufacture of semiconductors, which have already had much-discussed supply chain issues. Ukraine is the largest supplier of neon in the world, and the stoppage of those supplies would likely exacerbate the supply of chips, increase prices and continue the cycle of logistics disruption.
(Reuters)
Japan joins the US steel club
The United States has agreed to lift the Section 232 "national security" tariffs on steel imports from Japan in exchange for a tariff rate quota; the aluminum ones remain in force. The duties, put in place by the Trump administration, amounted to 25% of the value of imported goods; the new deal allows up to 1.25 million tonnes of Japanese steel to enter duty-free each year. This builds upon the U.S.-EU deal and illustrates a pattern of renegotiating trade arrangements with U.S. allies. Next up could be the United Kingdom. Some countries, such as South Korea and Australia, were already exempt from the duties.
Tractor Supply cleans out the barn
Not all supply chain trends are adopted by every company. The recent trend in higher inventories carries higher costs for companies that may have to tie up working capital and invest in additional storage and planning facilities. Specialty retailer Tractor Supply Co. may be working on a solution that mixes the best of both worlds, taking inventory out of stores and into centralized distribution centers. This is different from companies such as electronics retailer Best Buy Co. Inc. that have converted the stores themselves into distribution centers and likely offers different advantages. Low in-store inventories can prevent goods from getting "trapped" on shelves if demand is uneven, and international logistics can be simplified to few endpoints. Just-in-time strategies are still at risk of stockouts if demand shifts, which the company plans to address via additional planning and supply chain competency.
Eric Oak is a researcher at Panjiva, a business line of S&P Global Market Intelligence, a division of S&P Global Inc. This content does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.
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