08.08.2024Katarzyna ZborawskaGeneral Economic & Global Supply Chain Conditions
The inflationary pressures have been declining, with global inflation forecasted to decline steadily, from 6.8 per cent in 2023 to 5.9 per cent in 2024 and 4.5 per cent in 2025, based on the IMF Outlook from April. This should positively impact the easing of the monetary policy worldwide. The baseline forecast is for the world economy to continue growing at 3.2 per cent during 2024 and 2025, at the same pace as in 2023. The eurozone is projected to grow 0.8% and 1.5% in 2024 and 2025, respectively.
The GEP Global Supply Chain Volatility Index, an indicator that focuses on the level of activity across the global supply chains, suggests an increase of activity across the global supply chains. The data is collected based on a monthly survey of 27,000 businesses and tracks shortages, transportation costs, inventories, backlogs and demand. The latest data suggest an upturn trend of activity across the global supply chains. The indicator rose in April to -0.18, from -0.32 in March, which suggests that global supply chains are operating at close to full capacity. The increased activity is a direct result of stronger demand, which has been picking up in the last months.
The Asian market is at the pole position of this trend, whilst the manufacturing sector in Europe is underperforming in reference to other parts of the globe. Nevertheless, April’s sentiment increase (the index fell to -0.55, from -0.62) suggests the continent’s industrial downturn continued to ease. Historically, slow recoveries often last longer than more volatile supply/demand spikes, as the observable in the post-covid times. What’s, however, most important is that the trend remains positive.
GEP Consulting states that “after four years of supply shocks, inflation, stockpiling, and uncertainty, global supply chains are now operating in a Goldilocks zone, a steady state of full capacity, not expanding or contracting too quickly, which is excellent news for global suppliers and business”
Sentiment on the component markets
Similarly to what the GEO Index suggests, based on the ECIA Electronic Component Sales Trend (ECST) survey results in April, the sales sentiment regarding electronic components continued the upward trend. The index shows the highest score since the beginning of 2022.
The sentiment looks positive and shows optimism among the players of the electronic components supply chain. According to ECIA, additionally, there is an exceptionally strong improvement in sentiment among direct manufacturer representatives. This is encouraging for the general economic outlook in the industry in the upcoming months, as the trend is visibly turning.
Lytica, an electronics component data analytics and risk intelligence, suggests similar behaviour for the electronics industry in their April’s report. Based on their data, on average the lead times and pricing remain stable with a slightly decreasing trend, however, this varies from commodity to commodity. The availability levels remain on high levels.
Strong demand for DRAM & Flash memory has resulted in a jump in reports of increasing lead times, causing a general semiconductor upward lead time trend. Passives show slight increasing lead time pressure, but maintain to be dominated by reports of stability. In summary, the ECIA states that declining lead times have shrunk to 6% while increasing lead time to 10%.
Based on the report, a significant portion of end customers are still struggling with too much inventory, while chip manufacturers and distributors are still dealing with inventory accumulated in the post-COVID period. Even though many customers are trying to negotiate better prices, they are not necessarily able to get them. This means that there is still strong hesitation for component makers to pass on cost reductions. This is much different in comparison to the previous economic downturns.
In terms of possible cost reduction opportunities, we hear rumours about possible pricing decreases to be announced by STMicroelectronics. This will hopefully allow for significant reductions. We additionally observe price increases from specific manufacturers, such as Analog or Maxim. The average upward change is on the level of ~10%.
It is also observable that suppliers are becoming more rigid when it comes to delaying or cancelling orders (cancellation window). This is thus becoming much more harder to delay or cancel materials in the supply chain. These policies are also further visible on the manufacturer side. Silicon Labs announced that from June the manufacturer will only fulfil orders in line with the official lead time. For new and existing orders, for which the Customers will request delivery dates shorter than the official lead time, additional charges will apply. The minimum charge for speeding up will be equal to 3K USD, or 10% of the order value.
Likewise, the ECIA Survey, the IPC’s Current Sentiment of the Global Electronics Manufacturing Supply Chain report indicates a positive sentiment growth for the third consecutive month. Based on the survey participants, the labour cost pressures remain at steady and growing levels (more than half reporting rising labour costs), while only 43% of the participants report rising material costs. The availability at the component markets is reported as good and steady.
When asked about the outlook for the next 6 months, the European players forecast a decline in backlogs, higher levels of orders and shipments, as well as increased business activity in general. Labour costs are expected to remain on steady and rising levels, while there are expectations for slightly higher material price pressures. These shall however remain rather steady. This may primarily be associated with the rising commodity prices. Due to expectations of higher business activity and growth of demand, lower availability of the inventory at the component vendors is expected.
Freight costs
After a steady 2023, the global transportation costs have risen steeply at the beginning of 2024, and although a declining trend is visible the rates remain significantly higher than in Q4 2023. The main reasons for this is related to conflicts zones and piracy, that cause ships to take on longer routes, and avoiding the Red Sea. Freight will probably remain at a higher level also due to the rise in oil prices. Below, please take a look at the Freightos Baltic Index (FBX Global) that show the container rates in time.
Second half of 2024 – Predictions
After a post-pandemic boom, the global economy has slowed down. As expected, the high-interest environment has strongly limited global economic growth. However, with the inflation pressure declining, planning ease of monetary policies and positive sentiments based on the market surveys presented above, we can expect that the overall economic situation will be improving in the second half of 2024.
Based on the Institute of Supply Chain Management (ISM), twelve out of 18 manufacturing industries expect revenue, while nine industries expect employment growth in 2024. The ISM forecasts that the recovery will continue in the further months, albeit somewhat softer than originally expected.
Furthermore, Based on the data from the World Semiconductor Trade Statistics (WSTS), and International Data Corporation (IDC), the lookout for the electronic components market in 2024 looks very optimistic. While WSTS predicts a growth of 13.1% this year, the IDC reports that the semiconductor industry can even reach a 20.2% growth rate. The forecasts are based on optimism about China’s planned market recovery in the second half of 2024, U.S. market resilience, and the expected rebound in consumer demand. This shall hopefully push the industrial markets at the end of 2024.
The situation in the material markets is expected to remain steady and stable. We believe we have landed in the “new normal” era, where the volatility of the market has diminished to the levels not seen during the last years of disruption and this level shall be maintained. The availability shall remain good on the majority of the components. We do not expect the situation in the material markets to improve more.
Global tensions still remain a big risk factor, however have no significant impact as for today. The ongoing war in Ukraine, tensions in the Middle East, as well as the China-US trade war may escalate in unknown directions.
Major Events
The industry has expected that as a consequence of the Hualien earthquake in Taiwan in April, the impact on chip and memory prices will be significant. Nevertheless, the impact on the market has been barely visible, contrary to previous natural disasters.
Murata on the other hand has informed about resuming the production in the Anamizu plant, following the earthquake on the Noto Peninsula. The problems with the availability of the Murata components have been somehow visible to us with longer lead times visible.
