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Q1 2020 Retail Sourcing Report

January 9, 2020

TradeBeyond

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The Retail Sourcing Report provides research and analysis aimed at informing global sourcing and buying decisions for retailers, brands and other sourcing and supply chain professionals. Each issue includes a snapshot of key information and trends impacting global sourcing, such as economic conditions in sourcing countries, container shipping trends, currency exchange and commodity rates. We also cover hot topics ourselves and include insight from analysts and other experts.

Purchasing Manager’s Index (PMI)

To help understand industry and economic conditions in a country, the PMI Index tracks variables such as output, new orders, stock levels, employment and prices across private companies in the manufacturing, construction, retail and service sectors. Over 30 countries and regions participate in various PMI surveys.

A reading below 50 indicates contraction from the previous month, while a reading above 50 indicates growth. This update looks at a selection of emerging economies and key sourcing countries, providing indicators for recent months based on data provided by IHS Markit, NIKKEI, CAIXIN and other sources.

Q1 2020 News & Analysis:

Global manufacturing remained weak at the end of 2019, signaling a tougher 2020. Growth in production was marginal, with some exceptions such as India, Vietnam and Myanmar. The PMI indicators suggest waning business confidence and consumer spending which led to cutbacks in purchasing of input materials, reductions in inventory and weaker employment. The US manufacturing economy was one exception, growing despite concern over geopolitical tension. While China continued to suffer the effects of the trade war, it had a solid Q4, perhaps due to the pre-Chinese New Year peak period.

 


Sources: IHS Markit Economics, Nikkei, Caixin

 

Currency Exchange Rates

Following are exchange rates and indicators for major currencies commonly factored into global sourcing costing estimations. Most analysts agree that the USD will see a decline in 2020 as global growth concerns and geopolitical tension ease. If the US Federal Reserve maintains or cuts interest rates this could also weaken the USD. The EUR is expected to make gains against the USD and trade in the range of $1.16 from the current $1.10. If the troubled EU economy picks up, this should also push weakness in the USD. The easing of tension between the US and China has brought stability to the Chinese currency, which has made gains against the USD and the EUR, despite Chinese government policy aimed at limiting RMB appreciation.

EUR / USD (Jan 2019 – Jan 2020)

The EUR gained marginally on the USD in the last few months. The forecast for the EUR hinges on the outcome of threatened US tariffs on EU goods and on how Brexit plays out. If the EU economy continues to stagnate the EU will likely bring in stimulus measures.

 

EUR / CNY (Jan 2019 – Jan 2020)

The CNY appreciated marginally against the EUR in the past quarter, with indicators suggesting the Chinese currency will continue to strengthen through 2020 despite government policy aimed at keeping the CNY undervalued.

 

USD / CNY (Jan 2019 – Jan 2020)

The Chinese Yuan appreciated moderately against the USD in Q4 and into Q1 2020. Indicators suggest that with trade tension between China and the US easing, the Chinese Yuan will continue to appreciate through 2020 as the USD gives back gains it has made in recent years.

Sources: XE.com, News/Analyst Reports

 

Global Commodity Rates

Q1 2020 News & Analysis: The US/China trade war continued to impact production inputs with commodity prices including oil, rubber and metals falling through Q3 and into Q4. China, as the biggest purchaser of most global commodities, especially industrial commodities such as metals and oil, is buying and producing less, which is being felt across commodity markets. Some optimism is apparent in the market as the US and China seemed closer to a tentative deal, however political turmoil in the US is impeding a swift resolution. Commodity markets should see ongoing fluctuations through 2020 as geopolitical issues play out.

 

Crude Oil

Oil prices have been trending higher since a US airstrike in Baghdad sparked supply concerns if tensions escalate. US production has been strong with oil prices near the $70 mark in early January. While OPEC successfully tightened supply, pushing prices up, they may have to reverse this strategy if tensions escalate between Iran and the US.

Oil prices have been trending higher since a US air strike in Baghdad sparked supply concerns if tensions escalate. US production has been strong with oil prices near the $70 mark in early January. While OPEC successfully tightened supply, pushing prices up, they may have to reverse this strategy if tensions escalate between Iran and the US.

 

Metals

Metals prices are expected to perform well through 2020 given the easing of tensions in the China/US trade war. With the US economy humming along strongly there is also strong demand for metals in infrastructure projects. The potential for Trump to be reelected should also boost prices. China also continues to expand infrastructure projects as part of it’s Belt and Road initiative which will drive continued demand for metals.

 

Cotton

Easing of the US/China trade dispute has alleviated some of the downward pressure on cotton prices. Apparel shipments to the US from China were down 30% year on year. China’s demand for cotton fiber also declined through Q4, partly explained by weaker domestic demand, but also due to a slowdown in export demand because of tariffs and a weaker global economy. Domestic fiber prices were also more attractive than imported cotton fiber. As global cotton stocks decreased by 2% to 18.3 million tons, with more stock held outside of China for the first time in years, 2020 might see more volatility in cotton prices.

Source: Cotton Inc, News Reports

 

Focus Topics

Sourcing Trends in 2020: What to Expect

 

Shifting Production

We will continue to see shifts in production away from China, a trend that was happening before the heightened tension with China, especially for apparel and textiles. Asian countries such as Vietnam, Bangladesh, Cambodia and Myanmar will continue to absorb apparel and increasingly electronics production. Latin American countries including Brazil, Columbia and Mexico which are closer to North American markets will also continue to pick up production moving out of China. Certainly this shift brings risk and uncertainty as there are costs in shifting production and establishing new efficient supply chains and building manufacturing capacity.

Manufacturing Disruption

Rising labor costs, shifts in production, labor shortages and digital supply chains are set to further disrupt manufacturing through 2020. Artificial intelligence, cloud computing, advanced analytics, automation, robotics and additive manufacturing will all continue to impact global manufacturing through 2020, providing manufacturers with greater insight, flexibility and transparency but also with some uncertainty. These innovations allow manufacturers to shift production more easily, maintain lower levels of inventory, have more flexible fulfillment options and forecast more effectively. Businesses that are not keeping pace with innovation will struggle to remain competitive in this new landscape where visibility and automation will become the norm.

Retail Evolution

As ecommerce continues to grow the retail landscape continues to change with long-established brands disappearing and new brands appearing overnight. Adoption of technology in the form of supply chain insight and visibility, forecasting, analytics and customer insights will determine competitiveness in the retail landscape. Businesses that have not adapted to this environment risk becoming obsolete. Another shift we are seeing, especially in China, is a slowdown in consumerism, with younger Chinese consumers saving rather than spending as they face economic uncertainty and fewer job prospects for the first time. With many European countries bordering on recession and the US at risk of a slowdown, retailers will need to adapt to a more competitive environment.

Global Trade Tension

The US and China are set to sign an initial trade deal on January 15 at the White House, with a second phase deal to be signed later. Although the deal leaves most tariffs in place, it does provide some relief for businesses impacted by rising tariffs and more importantly reestablishes some stability for the global business environment. While an easing in the China/US trade war and a tentative deal is good news, we can expect to see more tension and volatility. US PMI data highlighted contraction in the US economy for December with manufacturing expected to remain soft in the first Quarter. Coupled with a strong dollar, US exports are expensive, and Trump’s promise of reviving American manufacturing is not looking good. Trade tensions also extend beyond China and the US to the US and Europe, where Trump has threatened tariffs.

Geopolitical Risk

Following a US drone strike in early January which killed prominent Iranian general, Qasem Soleimani, tensions have heated between the US and Iran, with Iran threatening reprisals. This action brings the risk of major escalation with Iran, which has already opted out of its agreement to limit nuclear weapons development. Politically it has pushed hardliners in both Iran and Iraq as well as other Middle East countries closer and economically it puts pressure on oil supply and prices which had enjoyed a balance after OPEC had successfully reduced supply to stabilize prices. Short of engaging in all-out war, the likelihood is that Iran will disrupt oil supply, engage in cyberwar and support terror organizations such as Hezbollah and others in targeting the US.

European Instability

The Brexit has caused a lot of tension which now appears to be settling as Boris Johnson has consolidated his hold in the UK. The outcome and impact of the Brexit is still unclear though. The new deadline for the UK to leave the EU is January 31, pending approval by Parliament. Most likely the UK will receive an extension to the transition period which will give it time to work out trade relationships and other details with the EU. This means that the UK will face ongoing volatility through 2020 until a trade deal can be finalized. The reality is also that trade deals can take years to negotiate and this will mean that businesses will be cautious about investing and hiring. Boris Johnson has said he is looking for a trade deal like the one the EU signed with Canada, which could see significant trade barriers between the two.

Watch Out for Q2 2020!

The Retail Sourcing Report aims to keep you ahead of the curve by providing facts, insight and analysis on issues impacting retail global sourcing. We produce this free report for individuals at retailers, brands and companies involved in global sourcing and supply chain management. Check back next quarter for the full Q2 2020 update.

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