Rising risk to global supply chains from Asia Pacific

Chartered Institute of Procurement & Supply (CIPS) index showed the risk to global supply chains increased for a third consecutive quarter in Q4 2015, with notable rise in risk in the Asia Pacific region, due to concerns over global slowdown, led by China's domestic economy and liquidity concerns around Australia's core industries. Uncertainty, the slump in Chinese demand for industrial commodities and the delay in debt payments by Chinese industrials companies, plus shifts in energy policies have all put Australian suppliers under strain, resulting in a tapering down of production. Suppliers in the region are also faced with uncertainty over the effects of El Nino, particularly Australian agricultural production and New Zealand's dairy production market, which could have a knock-on effect on global milk prices.

Global supply chains suffered from growing risk in Q4 2015, led by the slowdown in China’s economy, according to the latest CIPS Risk Index, powered by Dun & Bradstreet. Locally, risk exposure for businesses has reached peak levels with Asia Pacific now accounting for 34% of global supply chain risk.

The CIPS Risk Index, produced by the Chartered Institute of Procurement & Supply (CIPS) tracks the impact of economic and political developments on the stability of global supply chains. The latest report has seen supply chain risk increase for the third consecutive quarter as fears of a global economic slowdown, led by the domestic Chinese market and ever-mounting fears over the liquidity of Australia’s core industries, continue to mount. Supply chain risk in Asia Pacific for Q4 2015 has increased to 26.68.

The slump in Chinese demand for industrial commodities, especially steel and coal, has put a strain on Australian suppliers. The heavy industries located in the north of China are proving to be a stubbornly weak link for global supply chains. Commodity suppliers in Australia are tapering down production in response to both China’s economic slowdown and the shift of energy policy away from coal.

However, it is the uncertainty which is hitting many producers the hardest. Chinese state lenders have propped up industrial production with cheap credit, a practice which has undermined their ability to pay suppliers on time. Combined with a global commodity price slump, Australian iron ore and coal producers are under particular strain to understand the pressures further up their supply chain.

The El Niño Effect

Meanwhile the El Niño effect (a band of warm ocean water which occasionally hits the Pacific) threatens dairy output in New Zealand and agricultural production in Australia. The effect is also having an uncertain impact on suppliers in the region, beyond primary producers. The resulting drier weather may yet hit agricultural production in Australia, but it is New Zealand’s milk exports which could have the biggest knock-on effect.

New Zealand produces a third of global dairy exports and even a small reduction in output could affect global milk prices. The impact on New Zealand itself is significantly wider. Following New Zealand’s GDP growth, performance for 2015 depressed by a drought earlier in the year, a slow recovery in milk prices could result in a 10% decline in land prices and an 8% rise in non-performing loans. Combined with a fall in NZ employment figures in Q3 the country is experiencing challenges.

Growing risk in Asia Pacific has also nudged global supply chain risk up for the second quarter in a row, standing at 79.3 in Q4 2015, almost twice the pre-financial crisis high of just 40.7 at the end of 2002.

Mark Lamb, General Manager of the Chartered Institute of Procurement & Supply (CIPS) Asia Pac:

“The latest CIPS Risk Index, powered by Dun & Bradstreet, is a reminder that the prosperity of Australian and New Zealand businesses often depends on forces which are out of their control. The situation is particularly daunting for NZ with challenges coming from all directions.

“Chinese credit risk, global commodity prices and even unforeseen weather changes all filter through supply chains and onto Australian and New Zealand balance sheets.

“Only by thoroughly interrogating supply chains can businesses prepare for and mitigate the impact of these forces upon them. And they should do it now.”

Oana Aristide, Interim Leader, Country Risk Services, Dun & Bradstreet

‘’Supply risks in Australia are on the increase as the country experiences the flip side of reliance on China and commodities.’’