Supply Chain Risk 18April2016

This week has been packed with natural disasters:  Earthquakes in Japan&Ecuador, flooding in China and heat waves in Malaysia. Below are updates and analysis on these events as well as an update on lesser publicized issues like Economic Chicken in Crude Oil the crude oil market, low PC Market shipments,  and  El Nino/La Nino probability.  But first, some useless trivia...

Useless Water Cooler Trivia: Did you know that the first hurricane of the 2016 season occurred in January? (landfall in Azores, 900 miles west of Portugal) It is only the second January hurricane on record, the first occurring in 1938. This is unusual, because hurricane season doesn't open until June 1. Now that you've got everyone's eyes glassing over, be sure to mention that this may be a sign that the 2016 hurricane season could be "more active than normal". That will put you over the top! 

Earthquakes: We had a couple of earthquakes this week... and as always, our hearts and thoughts go to those impacted. When touching base with your suppliers, please be sensitive to their situation and ask how you may be able to help.

• Japan Earthquake: A 6.2 magnitude earthquake struck southern Japan a few miles east of Mashiki, Kumamoto...  followed by a 7.0 earthquake and tsunami warning. A quick look at the area impacted, I see that my personal chemical supply chain shows a slim potential impact (see map above), however, Elementum reports impact to the automobile, electronics and smartphone supply chains. Depending on your market, there could be sever impacts.
• Ecuador Earthquake: A 7.7 magnitude earthquake struck Ecuador over the weekend.
  Areas impacted:
  Guayas, Manabi, Santo Domingo, Los Rios, Esmeraldas and Galapagos provinces.
  Key Exports: 
   -Crude Oil: Second largest exporter in South America
   -Ag Products:   Palm Oil, Sugar, and others
  Bottom Line: As far as impact to my personal chemical supply chain: I do not have suppliers in Ecuador, and expect impact to be minimal.  Because of surpluses of crude oil, palm oil and sugar, I expect my material risk to be low as well.

China: There's reports of flooding by small and medium sized rivers in southern China, specifically in the Hunan, Jiangxi and Guangdong provinces, and the Guangxi Zhuang Autonomous Region (see my personal supply chain map above). While there are some chemical manufacturers in the area (see map above), other industries impacted  include agriculture, textile/apparel, high-tech, and life sciences. Touch base.

Malaysia:
Drought: El Nino droughts are causing low water pressure (and interruption of supply) in the districts of Temerloh, Lipis and Pekan. This is concerning because in 2014, a drought in the area created back orders on the clean room apparel manufacturing in the area, specifically gloves. Malaysia has about 6o% of the global glove market followed by Thailand 16%, China 7%, and Indonesia at 5%.
Heat Wave: To add insult to injury, a heat wave in the area is shutting down schools as well. This is impacting local rubber plantations/manufacturing as well. I guess you could call this a "Swelter in Place" order.

Crude Oil:

-OPEC Meeting: On Sunday, OPEC and other oil producing countries met to discuss freezing oil output so as to stabilize the price. No agreement was reached, in part because every country had different ideas and needs. Below are some highlights:
-Iran skipped the meetings (last minute decision) because their strategy is to ramp up production to regain market share after the lifting of sanctions
-Saudi Arabia wants to keep production levels high... some say they are playing a game of economic chicken with the US (those are exact words)
-Ecuador, Nigeria and Venezuela have been the hardest hit and are being forced to think about economic diversification
Bottom Line: Saudi Arabia, OPEC's leader, insisted that all  OPEC members (including Iran) be present at the meeting to negotiate the freeze. When Iran didn't show up, it was a deal breaker. There were reports of a heated debate between Russia and Saudi Arabia on the communication saying that no deal was reached. So everyone agreed that they needed to consult more with others... Next meeting is June 2nd.

-Bankruptcy: Another oil company, Energy XXI, filed for Chapter 11 bankruptcy with the restructuring expected to eliminate ~$2.8B worth of debt from its balance sheet. Approximately 1/3 of the publicly traded oil companies (175 out of 500) are at risk. 

-Rig Counts: Baker Hughes
    US 440,  down from 954 (54%) prior year
    Canada 40, down from 80 (50%) prior year
    International 985, down from 1251 (21%) prior year

PC Shipments Stats: (Via Gartner)
Global shipments down 9.6%.
US shipments down 6.6%.
First time since 2007 that shipments dropped below 65M. 
Reason: economic slow down in China, and popularity of smartphones. 

Exit El Nino, Enter La Nina:
50% Probability: Japan and Australia have joined the US is stating that the chance of a La Nina in 2016 is about 50%. This is when it gets interesting, because corn, soybeans, wheat, sugar, cotton and coffee (click for down stream impacts) prices can be volatile.