12.12.2024Katarzyna ZborawskaGeneral Economic & Global Supply Chain Conditions
As reported by Eurostat, the inflation pressures have continued to weaken, with the annual inflation in the EU falling down to 2.1% in September from 2.4% in August. It’s worth noting that a year ago, the inflation rate was at the level of 4,9%. Following this trend, and as anticipated in the previous report, we have observed actions taken by both the Fed and EBC. The EBC has already made two moderate interest rate cuts of 25bp in August and October, while The Fed has unexpectedly slashed the rate by a bold 50 bp in one go in September. Based on communication from the Central Banks, this trend shall continue until the first half of 2025; both in the EU and especially in the US, where JP Morgan expects another 50 bp cut in November – mainly due to lowering inflation and further concerns about growth.
The economists anticipate that rate cuts will stimulate spending in the stagnating European economy. The IMF predicts a rebound in the eurozone economy within the next year (expected GDP growth from 0.9% in 2024 to 1,5% in 2025), mainly due to much higher growth expectations in Germany. Despite higher interest rates, the US economy has been performing very well in 2024. A moderate slowdown is expected in 2025, however, the US economy is still anticipated to grow faster than the eurozone in 2025 (US: 1.9% vs EU: 1,5%). Overall, the IMF predicts the growth in 2025 to remain at similar levels as in 2024.
The investors foresee the scenario of a soft landing in the global economy and a gradual, though slower than initially anticipated, economic recovery in Europe over the coming quarters. In consequence, the stock markets remain rather positive. If the scenario of the soft landing occurs in reality, we shall indeed see a gradual recovery in Europe in 2025; especially considering the easing monetary policy.
The GEP Global Supply Chain Volatility Index* continuously shows underutilized capacity, even though the short-term signals of higher activity, which we communicated in the previous report.
If we analyse the Index data per region, it is visible that the signs remain negative across all key continents: North America, China and Europe – driven by deterioration in global demand. Both China and North America express weaker procurement for the third straight month, while the index for Europe hit a nine-month low, signalling deepening negative sentiments; predominantly led by Germany and the automotive sector. This would suggest that we are somewhere at the bottom levels.
Jagadish Turimella, GEP President adds "With the potential of a widening war in the Middle East impacting oil, and the possibility of more tariffs and trade barriers in the new year, manufacturers should prioritize agility and resilience in their procurement and supply chains."
Electronics component markets: Sentiments
In line with the GEP index results, the ECIA’s (Electronic Components Industry Association) September Survey Results return similar observations. The positive market sentiment expressed by participants in the electronics component market only lasted two months prior the average fell below 100 in September, a drop of nearly 10 points. The main signal is that the positive momentum has been lost and the market is struggling to build a continuous growth pattern.
Although the drop is observable, the survey results suggest that the level of 98.4 reported in September remains relatively positive and in the longer term, the trend implies a degree of optimism within the industry as we move towards 2025. Further to that, SupplyFrame reports visible progress in the electronics supply globally - inventory levels seem to normalize, and the demand-supply is balanced across most commodities; keeping in mind that the demand still remains low.
Electronics distributors experienced a substantial decline in 2024, following a period of abnormal sales during the pandemic period. The slowdown caused the distributors to focus on normalizing the inventory levels, and in consequence, they became much stricter when it comes to postponing or cancelling orders. The component producers are also aligning their capacities to adjust to the still-muted demand.
Today, the component manufacturers' book-to-bill ratio is on a level of approximately 1:1.
As mentioned above, the lead times remain stable (excluding DRAM), which has been sustained for a number of consecutive months.
The prices continue to remain stable, which is predominantly caused by two factors. On one hand, we observe a significantly lower demand, while on the other we still have the effect of higher inflation and rising costs in general.
Given the AI boom - storage and memory remain exceptions. NAND and DRAM flash memory prices are rising, while high-bandwidth memory DRAM faces severe shortages (NVIDIA rely on them).
Component manufacturers foresee growth in the last quarter of 2024 and anticipate that it will further expand in the first half of 2025. If we look globally, market researchers indicate rising demand for smartphones, which are expected to grow circa 5% to 6% in 2025, following a decline for two consecutive years. Furthermore, the demand for PC’s have been rising for the last two quarters. The AI trend and boom for data centres add another viable factor.
The data centres alone represent around 20% of semiconductor demand this year. We observed a significant growth in semiconductor sales as reported by the Semiconductor Industry Association (SIA) in October. Global semiconductor sales level achieved $53.1 billion in August 2024, which represents an increase of 20.6% compared to August 2023. This represents a growth for the fifth consecutive month.
Commodity Markets
The majority of key precious and industrial metals have been gaining a strong momentum. Summary of a few key critical positions:
• Copper: Copper prices have been falling for the last few months. However, the price level remains over 1000US / per tonne and generally high levels (similar to the levels seen in 2021). We observe some tendencies for increasing the PCB prices by the manufacturers, however, this is balanced with a general economic slowdown.
• Silver: Silver prices have been continuously growing within the last period of time, reaching the highest levels in over 10 years.
• Gold: In the era of high inflation, gold is usually an asset perceived by the market as a steady investment. Its value has risen once again and is at an all-time high level.
Freight
After a huge spike in recent months, we observe the freight costs to decrease significantly – as defined by the Global Freightos Baltic Index in October. Even though the easing, this behaviour shows an abnormal level of volatility. With the Chinese New Year, the typical Christmas peak season approaching, we shall observe a tight period, and rates shall remain at high levels during the last quarter of the year.
Shipping through the Red Sea (which accounted for 12% of all global trade) has plummeted by two-thirds. Due to the Houthi rebel attacks on vessels, the majority of shipping firms (including Maersk) have shifted to travel around the Cape of Good Hope – adding 10 days to the trip, as well as additional expenses.
While prices have eased in recent months, factors such as inflation, rising fuel prices and labour constraints are keeping transportation costs higher than pre-pandemic pricing.
Global Tensions and Uncertainty
In the era of slower economic growth and normalized material markets, the biggest risks for the global supply chains, by far, lie in the growing global tensions.
Based on the World Uncertainty Index (WUI), global uncertainty has surged to a record high, which is mostly driven by the US-China trade tensions, as well as conflicts in the Middle East and the war in Ukraine. Needless to say – we live in very uncertain times.
The aforementioned conflicts, rising global tensions, threats between major economies, as well as protectionism policies have begun a chain of events that may spiral into a bigger threat. Needless to say, based on many strategists we are on the verge of WWIII, or as some say – it has already begun. Not to seek far away, Matt Dimon, the CEO of JP Morgan Chase, the world’s biggest bank states: "World War III has already begun. You already have battles on the ground being coordinated in multiple countries,".
Please, keep in mind that Ukraine produces ~70% of the world’s supply of neon used in the laser that etch circuits. Russia, on the other hand, produces over a third of the world’s supply of palladium that is used, among other things, for plating connectors and contacts.
Apart from the situation in the Suez Canal, the global conflicts do not have an observable impact on supply chains in Europe at the moment, but judging by the level of uncertainty we face, cautious when planning should be considered, as the increasing tensions can quickly cause serious supply chain disruptions.
General Outlook for Q1 2025
The majority of economists assume a soft landing of the economy and a slow return of growth in 2025, specifically in Europe. While this is supported by lowering interest rates in the major economies, inflationary pressures still remain a significant risk, and with lower interest rates, the threat is that inflation may get out of hand.
We believe that lead times shall remain stable in the upcoming months, at least for the next two quarters. We do not foresee any dramatic changes in the availability of the components (memories remain a concern).
Although the pricing is stable, we do expect typical yearly material increases in January. These shall be moderate, but the inflationary pressures still remain a factor to be taken into account.
Chinese New Year
The upcoming Chinese New Year (The Year of the Snake) falls on the 29th of January 2025. The consequences shall be less severe than the ones experienced within the pandemic period, however, Chinese New Year means an approximately two-week factory closure, and an additional two weeks after the holiday.
*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.
