Demand for commodities, raw materials and components at its softest in nearly a year, signaling persistent weakness in the global economy: GEP Global Supply Chain Volatility Index

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GEP Global Supply Chain Volatility Index Shows Rising Spare Capacity and Weak Demand in December 2023 - CLARK, N.J., Jan. 12, 2024

Insights

Economist

The recent increase in supply chain spare capacity across Europe, Asia and North America indicates a cooling demand for goods, which is a symptom of broader macroeconomic trends. This underutilization, especially in Asia where it has reached levels not seen since June 2020, suggests that regional economies are facing challenges in rebounding from the pandemic-induced downturn. While this could lead to a decrease in the prices of goods due to excess supply, it also signals a potential decline in manufacturing output.

The persistence of recessionary conditions in Europe, as evidenced by the cutbacks in purchasing by manufacturers, points to a protracted period of economic stagnation that could have a ripple effect on global markets. The downturn in demand for raw materials, components and commodities, if sustained, could lead to a reduction in trade volumes and affect global economic growth trajectories.

Investors and businesses should monitor these trends closely as they could impact revenue projections, cost structures and investment plans. A prolonged period of spare capacity may also lead to consolidation in certain industries, as companies with stronger balance sheets acquire those struggling to maintain profitability in a low-demand environment.

Market Research Analyst

The GEP Global Supply Chain Volatility Index's decline to -0.44 in December from -0.34 in November reflects a significant shift in the supply chain dynamics. The index serves as a proxy for the balance between supply and demand in the global manufacturing sector. With the index showing the greatest slack since July 2023, businesses may need to recalibrate their inventory and production strategies to mitigate the impact of overcapacity.

This adjustment in the supply chain could lead to a buyer's market, where companies looking to procure raw materials and intermediate goods may have increased negotiating power. This dynamic could improve profit margins for businesses able to leverage the situation, but it could also spell trouble for suppliers facing reduced order volumes and price pressures.

Furthermore, the historically low reports of item shortages and backlogs, along with below-average global transportation costs, suggest a significant departure from the supply chain constraints experienced in recent years. Companies might consider revising their supply chain risk management strategies, as the current environment presents a different set of challenges and opportunities.

Financial Analyst

The data indicating spare capacity in supply chains could have a deflationary effect on the prices of goods, which might be welcomed by central banks aiming to control inflation. However, for companies within the manufacturing sector, this could translate into lower revenue growth and pressure on profit margins. The manufacturing recession and the subsequent impact on global production levels could lead to downward revisions in earnings forecasts for companies in the affected regions, particularly in Asia and Europe.

Investors may need to reassess the valuation of companies within these sectors, taking into account the potential for a slower recovery than previously anticipated. The underutilization of supply chains could also affect the performance of logistics companies and those involved in the production of capital goods. A careful analysis of company balance sheets and their ability to weather prolonged periods of low demand will be crucial in making informed investment decisions.

It is also important to consider that while the current environment poses challenges, it may also offer opportunities for strategic acquisitions and investments in innovation, as companies look to adapt to changing market conditions and position themselves for recovery.

• Supply chain spare capacity rose in Europe, Asia and North America in December as slack reaches its greatest level since July 2023.
• Notably, excess capacity at Asia's suppliers rises to a level not seen since June 2020, suggesting a manufacturing recovery is still some way off
• Input demand dropped more sharply in North America, which had been relatively resilient, driven by producers of intermediate and capital goods
• Recessionary conditions persist in Europe, with purchasers at the region's manufacturers cutting back at a pace rarely surpassed in two decades of data

CLARK, N.J., Jan. 12, 2024 /PRNewswire/ -- The GEP Global Supply Chain Volatility Index — a leading indicator tracking demand conditions, shortages, transportation costs, inventories and backlogs based on a monthly survey of 27,000 businesses — showed global supply chain capacity going underutilized to the greatest extent since July at the end of 2023, with the index falling to -0.44 in December, from -0.34 in November. This marked the ninth successive month of spare capacity across global supply chains, with slack at producers at one of the highest levels since COVID-19 shutdowns in early 2020.  

Overall, demand for raw materials, commodities and components was at its most subdued since the start of 2023, boding ill for near-term global production levels. Our data revealed a persistence of recessionary conditions in Europe, with purchasing at the region's manufacturers falling at a pace rarely surpassed in two decades of data.

Order books for suppliers to North America and Asia, two parts of the globe that fared much more robustly than elsewhere last year, also deteriorated in December, showing fresh signs of weakness in major economies. Notably, Asian supply chains were the most underutilized in three-and-a-half years, with manufacturing industries in the region's major economies such as Japan, South Korea and Malaysia seeing a worsening. However, slack in North America's supply chains remained far less widespread than mid-2023's zenith.

In addition to soft supplier order books, the subdued current state of the global manufacturing industry was also highlighted by historically low reports of item shortages and backlogs, suggesting excess global supply levels, which will put further downward pressure on the prices of goods.

"Rising spare capacity at suppliers worldwide means that the end to the global manufacturing recession is still some way off," explained David Doran, vice president, consulting, GEP. "Moreover, orders at intermediate and capital goods manufacturers are still slowing, which indicates stronger headwinds ahead, providing companies with greater leverage to drive down prices in 2024."

DECEMBER 2023 KEY FINDINGS

• DEMAND: The downturn in demand for raw materials, components and commodities worsened in December. Purchasing cutbacks were at the strongest seen since the beginning of 2023 as orders from clients in North America and Asia slumped. Demand weakness remained its most apparent in Europe, however.
  
  
• INVENTORIES: Reports of safety stockpiling due to price or supply concerns held steady at its long-term average, showing little appetite among businesses to hold excess in their inventories.
  
  
• MATERIAL SHORTAGES: Reports of item shortages are at their lowest level since January 2020.
  
  
• LABOR SHORTAGES: The number of companies experiencing backlog accumulation due to a lack of staff fell further in December, indicating that workforce capacity is not restricting suppliers.
  
  
• TRANSPORTATION: Global transportation costs are running below their long-term average and dipped to a five-month low in December.

REGIONAL SUPPLY CHAIN VOLATILITY

• NORTH AMERICA: The index fell to -0.39, from -0.21, its lowest level since August, but still well below its recent bottom of -0.85 in June.
• EUROPE: The index fell to -0.92, from -0.85, its lowest in three months and consistent with severe fragility within the region's manufacturing sector.
• U.K.: After rising to -0.58 in November, its highest since April, the index dropped to -1.05 in December, its lowest since April 2020, thereby highlighting considerable weakness across U.K. manufacturing.
• ASIA: The index fell to -0.42, from -0.24, its lowest level in the post-pandemic era and pointing to growing signs of weakness within the globe's key hub for goods production.

For more information, visit www.gep.com/volatility

Note: Full historical data dating back to January 2005 is available for subscription. Please contact economics@spglobal.com.

The next release of the GEP Global Supply Chain Volatility Index will be 8 a.m. ET, February 13, 2024.

About the GEP Global Supply Chain Volatility Index 
The GEP Global Supply Chain Volatility Index is produced by S&P Global and GEP. It is derived from S&P Global's PMI® surveys, sent to companies in over 40 countries, totaling around 27,000 companies. The headline figure is a weighted sum of six sub-indices derived from PMI data, PMI Comments Trackers and PMI Commodity Price & Supply Indicators compiled by S&P Global.

• A value above 0 indicates that supply chain capacity is being stretched and supply chain volatility is increasing. The further above 0, the greater the extent to which capacity is being stretched.
• A value below 0 indicates that supply chain capacity is being underutilized, reducing supply chain volatility. The further below 0, the greater the extent to which capacity is being underutilized.

A Supply Chain Volatility Index is also published at a regional level for Europe, Asia, North America and the U.K. For more information about the methodology, click here.

About GEP
GEP^® delivers AI-powered procurement and supply chain solutions that help global enterprises become more agile and resilient, operate more efficiently and effectively, gain competitive advantage, boost profitability and increase shareholder value.

Fresh thinking, innovative products, unrivaled domain expertise, smart, passionate people — this is how GEP SOFTWARE™, GEP STRATEGY™ and GEP MANAGED SERVICES™ together deliver procurement and supply chain solutions of unprecedented scale, power and effectiveness. Our customers are the world's best companies, including more than 550 Fortune 500 and Global 2000 industry leaders who rely on GEP to meet ambitious strategic, financial and operational goals.

A leader in multiple Gartner Magic Quadrants, GEP's cloud-native software and digital business platforms consistently win awards and recognition from industry analysts, research firms and media outlets, including Gartner, Forrester, IDC, ISG, and Spend Matters.

GEP is also regularly ranked a top procurement and supply chain consulting and strategy firm, and a leading managed services provider by ALM, Everest Group, NelsonHall, IDC, ISG and HFS, among others. Headquartered in Clark, New Jersey, GEP has offices and operations centers across Europe, Asia, Africa and the Americas. To learn more, visit www.gep.com.

About S&P Global
S&P Global (NYSE: SPGI) S&P Global provides essential intelligence. We enable governments, businesses and individuals with the right data, expertise and connected technology so that they can make decisions with conviction. From helping our customers assess new investments to guiding them through ESG and energy transition across supply chains, we unlock new opportunities, solve challenges and accelerate progress for the world. We are widely sought after by many of the world's leading organizations to provide credit ratings, benchmarks, analytics and workflow solutions in the global capital, commodity and automotive markets. With every one of our offerings, we help the world's leading organizations plan for tomorrow, today.

Disclaimer
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Media Contacts

Derek Creevey Director, Public Relations GEP Phone: +1 732-382-6565 Email: derek.creevey@gep.com

Joe Hayes Principal Economist S&P Global Market Intelligence T: +44-1344-328-099 joe.hayes@spglobal.com

 

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SOURCE GEP

FAQ

What does the GEP Global Supply Chain Volatility Index show for December 2023?

The GEP Global Supply Chain Volatility Index showed rising spare capacity and weak demand in December 2023.

What is the impact of the spare capacity on global manufacturing recession?

Rising spare capacity at suppliers worldwide means that the end to the global manufacturing recession is still some way off.

What are the key findings for December 2023?

The key findings for December 2023 include a downturn in demand for raw materials, worsening demand for components and commodities, steady reports of safety stockpiling, historically low reports of item shortages and backlogs, and transportation costs running below their long-term average.

What are the regional supply chain volatility levels for North America, Europe, and Asia?

The index for North America fell to -0.39, for Europe it fell to -0.92, and for Asia it fell to -0.42, indicating varying levels of supply chain volatility across these regions.

When is the next release of the GEP Global Supply Chain Volatility Index?

The next release of the GEP Global Supply Chain Volatility Index will be at 8 a.m. ET on February 13, 2024.