HOTTER ON METALS: Coronavirus adds pressure to diversify supply chains

The novel coronavirus (2019-nCoV) is set to accelerate what the trade wars started: the diversification of global supply chains.

Both events have demonstrated just how interconnected the global economy is and have provided a wake-up call to businesses worldwide that it might be time to reduce their reliance on China as the workshop of the world.

Of course, that’s easier said than done.

China is the world’s largest consumer of commodities but also its main manufacturing hub. It’s an integral cog in the industrial machine that sends components critical to the production of consumer products, such as phones and cars, to customers across the globe. The country accounts for 35% of global manufacturing output, became the world’s largest exporter of goods in 2009, and the largest trading nation in goods in 2013.

Yet as trade tensions ate further into ever-dwindling margins over the past couple of years, international companies had looked for ways to move out of China.

Winners have included Vietnam, which had already grown its economy by importing semi-finished products from China, adding value and then exporting the finished goods on. Thailand, Cambodia and Indonesia have similar success stories.

But it’s not a process that happens overnight.

Finding new manufacturing operations takes time and money, to say little of the compliance and regulatory requirements that accompany any move. A lack of skilled labor or infrastructure can also be deterrents.

Nor is a move necessarily desired.

As the United States and Canada learned after the Section 232 tariffs on aluminium and steel were introduced, auto parts cross the border sometimes more than half a dozen times before finishing in a vehicle that ends up in a sales lot in either of the two countries. Switching up a supplier in the middle of that process is often near-impossible without disrupting the entire chain from start to finish.

The coronavirus has created additional supply chain issues that have left Chinese factories closed, operating at reduced capacity or struggling to receive and send parts.

The knock-on effect has been swift. Toyota Motors, for instance, has said that its operations in Japan might be affected by the virus since some plants in the epicenter of the outbreak in China still can’t operate or transport goods.

In a highly unusual method of exporting its products, Jaguar Land Rover flew car key fobs out of China in suitcases. Apple, meanwhile, has said it will miss its revenue outlook because of manufacturing constraints on the iPhone, which is mainly produced in China.

In the world of commodities, global mining giant Rio Tinto has said it expects short-term impacts to supply chains and potentially from services from Chinese suppliers as the country gets to grips with the crisis.

If trade wars had helped spur diversification trends, then the virus is being viewed as yet another reason why alternative suppliers might be a good idea. Unfortunately, with the virus spreading worldwide, the number of short-term alternative solutions is shrinking.

At the end of the day, a supply chain is effective when it is competitive. Moves away from China are only going to be permanent if the risk-to-reward makes financial sense. That’s a decision that businesses, including metal and mining companies, will be studying hard once the impacts of the virus subside.

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