Daily Update: Supply Chain Resilience Has a Price
Today is Tuesday, February 27, 2024, and here’s your curated selection of essential intelligence on financial markets and the global economy from S&P Global. Subscribe to be notified of each new Daily Update.
During the COVID-19 pandemic era supply chain disruptions, an analysis of quarterly earnings conference calls found that mentions of “supply chains” as a topic increased. This reflected a growing concern among companies that supply chains were affecting all aspects of their business, from market share to creditworthiness. During this period, many companies reevaluated their approach to supply chains — increasing supplier diversity, nearshoring critical components, holding higher inventories and investing in technological improvements.
As supply chains woes have eased, some companies have taken a step back. Earnings conference calls in the third quarter of 2023 found a remarkable drop in the frequency of mentions of supply chains. The long-term supply chain issues remain, but price competition and margin compression are the order of the day.
In anticipation of S&P Global’s TPM Conference, taking place March 3-6 in Long Beach, California, a group of researchers at S&P Global have launched the latest report in the Look Forward series, this time focusing on the state of supply chains in 2024. Because supply chains are critical to the global economy, the Daily Update will focus on different aspects of this report throughout the week. Today’s update will look at “Footing the bill: Paying for resilience.”
During the years 2020–2022, S&P Global Ratings took negative rating actions on over 200 corporate issuers due to supply chain events and bottlenecks. Companies that manufacture consumer products were particularly prone to negative rating actions during those years. Many companies reacted to these pressures by diversifying their suppliers or bringing manufacturing closer to home, but there was a price associated with these actions. Gross operating profit margins for manufacturing firms globally are expected to fall to 10.4% of sales in 2024 from 10.7% of sales in 2022. In 2022, capital expenditures were equal to gross operating profits. This year, capital expenditures are anticipated to exceed gross operating profits by 5%. The squeeze is on for many companies.
During the pandemic disruptions, many companies tried to avoid empty shelves or idled manufacturing by increasing their inventories. This represented a departure from a “just in time” inventory model to a “just in case” model. However, data from the S&P Global Purchasing Managers' Index indicates that most companies are returning to their pre-pandemic stocking strategies.
Diversifying has also fallen out of favor. Panjiva data shows that supplier diversity increased sharply from 2019 to 2021. But recent data indicates that supplier diversity may be down 8% versus 2019 levels. While supplier diversity creates resilience, concentrating your purchases with a smaller number of suppliers reduces price due to economies of scale. The auto industry is an interesting exception where supplier diversity has increased, but that may be due to the need to manufacture electric vehicles and internal combustion engine vehicles at the same time.
Technology investments can also improve supply chain resilience. Electronic logging, digital bills of lading and AI can all eliminate risk and improve tracking. But supply chains remain fiendishly complex, and so-called revolutionary technologies such as blockchain and autonomous vehicles have proven disappointing in practice.
Any attempt to increase the resilience of supply chains will require trade-offs — diversity versus price, proximity versus labor strife, and infrastructure versus policy. The danger is that supplier decisions are made in the short term, while resilience is revealed in the long term.
Today is Tuesday, February 27, 2024, and here is today's essential intelligence.
Written by Nathan Hunt.
Economy
UK Economy Gains Further Growth Momentum In February, But Price Pressures Also Rise
Early PMI data point to the UK economy gaining growth momentum in February, dispelling recession worries. However, price pressures have intensified. It's particularly encouraging to see that the upturn in growth has been accompanied by improved order books and a surge in optimism about year-ahead prospects to the highest for two years, in turn encouraging a second month of increased employment.
—Read the report from S&P Global Market Intelligence
Capital Markets
Private Equity's Presence Grows In US, EU Defense Sectors Save For 2023 Blip
Private equity investments in the US and European defense sectors in 2023 were at their lowest level since 2018, though longer-term trends show private funds are driving more deals in the defense contractor industry. Peter Manos, a managing partner at defense-focused private equity firm Arlington Capital Partners, portrayed 2023 as a blip, noting that a strong outlook for investment is drawing more private equity firms, including generalist investors, into the defense sector.
—Read the article from S&P Global Market Intelligence
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Global Trade
Asia's Love For Non-OPEC+ Crudes Set To Deepen As Output Expands
Asia may further diversify its crude supply basket, as non-OPEC+ producers boost output in 2024, but rising freight costs and turbulence in some shipping routes pose challenges to regional inflows, analysts told S&P Global Commodity Insights. With the tug-of-war for Middle Eastern crudes expected to continue due to the ongoing Russia-Ukraine war, many Asian buyers are already exploring alternate supplies from the United States, Brazil, Canada and Guyana — countries which are witnessing a higher production trend.
—Read the article from S&P Global Commodity Insights
Sustainability
Voluntary Renewable Energy Certificates Set To Double State Targets Past 2030
The number of voluntary renewable energy certificates (RECs) overtakes the compliance amount in 2024 in S&P Global Market Intelligence’s latest US REC market outlook. This underscores the potency of the nonpolicy market mechanisms now driving the US generation fleet's switch away from fossil fuels — a transition that for years hinged on renewable portfolio standards. That said, as unmandated green energy is not influenced by set alternative compliance payments, the push and pull between consumers and power suppliers yields much lower average REC prices, weighing on the voluntary segment's share of total dollars in the US REC market.
—Read the article from S&P Global Market Intelligence
Energy & Commodities
IM February 2024 — Drilling Metrics Rebound For A Strong Start To 2024
After a slow end to 2023, January started 2024 with a bang, seeing a significant boost across all drilling metrics. Drilling increased among all project stages in January, with late-stage increasing 44% to 121 projects, minesite up 40% to 49 and early-stage up 10% to 110. Both projects drilled and drillholes also saw month-over-month increases in January, but those metrics were down year over year, falling 29% and 51%, respectively, compared to January 2023.
—Read the article from S&P Global Market Intelligence
Technology & Media
Listen: MediaTalk | Season 2, Ep.1: Broadcast's Big Year
In this episode, MediaTalk Host Mike Reynolds speaks to S&P Global Market Intelligence Kagan Principal Analyst Justin Nielson about his outlook for the broadcast industry in 2024. The conversation touches on everything from cord-cutting to advertising, including expected impacts from the presidential election cycle and the Paris Summer Olympics. Speaking of sports, Justin weighs in on the sports-oriented joint venture between Disney, Fox and Warner Brothers Discovery and its potential impact on the media ecosystem. The pair also discuss how broadcasters are embracing artificial intelligence and the prospects for Next Gen TV.
—Read the article from S&P Global Market Intelligence
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