News focus: How will the slowdown in the Chinese economy affect buyers?

Will Green is news editor of Supply Management
10 February 2015

Experts anticipate China’s growth will slow to 7 per cent this year. Will Green looks at how this could impact on buyers

A slowdown in the Chinese economy has the potential to send shockwaves through the global economy, and buyers will not be immune from these forces.

Figures from the World Bank and the IMF indicate the prospect is real, with growth predictions for 2015 at around 7 per cent. Most countries would celebrate such a growth rate, but when you consider China was growing at more than 10 per cent a year, and the size of its economy, such a downshift will have an impact.

A fall in demand

Dale Schmidt, procurement research analyst at IBISWorld, says between 1990 and 2011 mainland China averaged growth of 10.4 per cent per year.

“The slowdown is mainly due to the fall in demand for Chinese exports as the main buying countries have struggled to recover from the recession,” he says.

“This has resulted in overcapacity in select Chinese industries, especially those related to construction, causing prices to fall.”

Schmidt says the largest over-production is taking place in construction-based commodities, including steel, cement and copper.

“China experienced tremendous growth in demand for these commodities over the past decade, and the easing of this demand releases price pressure on these commodities around the globe.”

The price of oil, already at a five-year low, will be driven down further by a slowdown in China, which consumes around 10 million barrels a day, according to Damien Cox, analyst at EnergyQuote JHA.

“A lack of growth or a slowdown is going to be a downward driver, it’s going to be bearish for oil prices,” he says.

“Oil prices are the leading energy commodity. If they are falling that has a bearing on other energy types like natural gas and power in the UK. You can trace the impact of the driver on oil prices through to gas and power prices in the UK.”

But a drop in commodity prices is not good news for everyone, particularly African economies dependent on mining. Lillian Karuri-Magero, head of sourcing for a leading bank and chairwoman of the CIPS Gauteng branch in South Africa, says a Chinese slowdown would have a “domino effect, not least of which could be adverse effects on commodity pricing”.

“This would be a devastating blow to African economies that need to sustain an average 5 per cent plus growth to maintain stability, jobs and development,” she says.

However, Carlos Risopatron, director of economics and environment at the International Copper Study Group, is less convinced about a connection between a Chinese slowdown and commodity prices. He says demand for refined copper in China in 2014 is expected to be more than 10.7 million tonnes, compared to 9.6 million tonnes in 2013. Risopatron says the current low copper price is being driven by an oversupply, with global mine production increasing by more than two million tonnes between 2011 and 2014.

“The Chinese are importing more than ever so I don’t see any significant relation between Chinese GDP in the short term and the demand for copper,” he says.

“China knows that it will need a lot of copper in the future so the current copper mine oversupply is a good time to buy for stocks.

“China is still growing. The slowdown is something relative. They physically will need more [commodities] than last year.”

Drive a harder bargain

A slowdown does offer the opportunity to drive a harder bargain with Chinese suppliers. Ian Duke, group supply chain manager at Pinewood Shepperton, says: “The slowdown in China’s growth should lessen demand for imports and provide opportunities for exports to increase once again and prices to be driven down on products manufactured from steel and especially the technology sector.”

Tom Woodham, director at PwC and chairman of the CIPS South Yorkshire branch agrees, but adds an economic slowdown also increases supply chain risk. “There are likely to be good opportunities for better terms from suppliers in China, but that will need to be balanced with an increased focus on supply chain risk,” he says.

“With the current uncertainties in the global economy, it’s a good time to put increased focus on your supply chain risk management approach, especially considering how you can use technology and social media to improve real-time monitoring of your supply chains.”

Woodham says PwC’s annual Global CEO Survey shows the US “has overtaken China as the CEO’s most important growth market”. A 2013 report by AlixPartners predicted “by 2015 the cost of importing manufactured products from China will be about the same as manufacturing them in the US”.

Duke says the slowdown “could be beneficial or in some cases it could make the prospect of sourcing in China less lucrative”.

“China is clearly at the top of the list when developing a low-cost country sourcing strategy,” he says, in terms of manufacturing capacity and capability, wages, rent and taxes.

“The important element to keep in mind when developing any sourcing strategy, but especially one that involves any political, environmental or economic risk, is defining the products you are sourcing.

“Research is the key and understanding the total cost of ownership for the products/services that are included in the strategy.”

Les Ball, vice president of supply chain management for EMEA and global sourcing at Eaton, says costs in China may be growing but “competitiveness remains” with “many electrical and industrial categories remaining viable to source and deliver good levels of savings”.

“A mixed and balanced portfolio is necessary to ensure contingency actions can protect future needs, which with its scale suggests China sourcing will form a major component for many companies in the future, even if there is some focus to find more competitive solutions from organisations that are perhaps in lower cost areas of the country away from the eastern seaboard,” he says.

Karuri-Magero believes supplier relationship management is “going to become an imperative” and “implementing programmes that diversify supply chain risk will be a key attribute... How well we as supply chain professionals collaborate with suppliers to plan, assess and mitigate risk is going to be a competitive differentiator,” she says.

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