Is Thai supply chain anchored to China?

China's Covid containment measures, especially in the world's largest port city of Shanghai, have influenced Thailand's supply chain security and could cast a shadow on local manufacturers' decisions in the medium term.

Is Thai supply chain anchored to China?
Business

Is Thai supply chain anchored to China?

Port lockdowns in the Middle Kingdom have ensnarled shipments and made producers rethink where to source raw materials

published : 18 May 2022 at 06:43

newspaper section: Business

writer: Janine Phakdeetham

China's Covid containment measures, especially in the world's largest port city of Shanghai, have influenced Thailand's supply chain security and could cast a shadow on local manufacturers' decisions in the medium term.

How have China's port lockdowns affected Thailand's supply chain security?

Nomura Securities said 40 cities in China are under full or partial lockdowns, or have implemented district-based controls. This means restrictions on mobility for businesses as well as local residents.

Shanghai's port is one of the busiest in the world, with S&P Global Market Intelligence reporting there has been an increase in wait times in recent months for bulk cargo ships at anchor waiting to enter Chinese ports. The number of ships waiting has increased to 600-700 from 500 in early March, or about 20% to 40% more than two months ago.

Mana Nimitvanich, first vice-president at Krungthai Bank on the Business Risk & Macro Research Team, said China's zero-Covid policy has already affected Thailand's supply chain.

"In the first quarter, Thai import quantities from six Chinese provinces with high confirmed cases [Shanghai, Guangdong, Fujian, Shandong, Zhejiang and Jiangsu] significantly decreased. Items that posted contractions include chemicals, fertiliser, glass and wood products."

He referred to data from the "Global Trade Atlas" that indicated a decrease of 16.4% in February of exports from the six provinces to Thailand, followed by a 2.4% drop in March.

"For the rest of the year, Thai manufacturers that are highly dependent on China's products are likely to face a raw material shortage," Mr Mana said.

What are the effects on Thailand's manufacturing sector?

For manufacturing, Thai exporters are still being shielded from any significant impact of China's Covid port lockdowns in the short term.

"Thai factories already stocked up on industrial items and that could last about 3-6 months. This can be confirmed by Thailand's manufacturing PMI data, which continues to expand," he said.

Mr Mana advised manufacturers in Thailand to use domestically produced components instead of importing them for industrial products because it is likely the supply chain pressure will persist throughout 2022.

What does four consecutive MONTHS of PMI increases mean?

The S&P Global Thailand Manufacturing PMI measured 51.9 in April 2022, up slightly from 51.8 in March. This is the fourth consecutive monthly uptick and the fastest expansion since February, according to the agency.

Jingyi Pan, the economics associate director of S&P Global Market Intelligence, told the Bangkok Post she expects sustained inflationary pressures and supply chain issues to keep a lid on manufacturing production activities in the near term, with industrial production expansion downgraded to 3.2% for 2022.

"Foreign demand remained lacklustre in April following eight consecutive months of decline. This was amid persistent disruptions from developments such as the Ukraine war and higher inflationary pressures on the back of China's lockdowns," she said.

"The PMI input cost and output price indicators certainly reflected sustained price pressures in the Thai manufacturing sector in April. Notably manufacturers reported increasing their input purchases to safely build up stock, adjusting to the effects of these supply chain disruptions."

How is this affecting shipping and logistics?

As for Thai exports to China, Chaichan Chareonsuk, president of the Thai National Shippers' Council, said the country posted 4.18% growth year-on-year in the first quarter this year.

"If we examine the first-quarter figures closely, three categories experienced a significant decrease for shipments to China: automotive and auto spare parts [-44.4%]; perishable items such as fruit and vegetables, which suffered from zero-Covid restrictions [-23.9%]; and chemical substances [-13.0%]," he said.

Mr Chaichan said in terms of logistics, there are three areas to focus on: the container shortage, container circulation, and freight costs. He said the shortage no longer seems to be an issue because the world has opened up and there are many available containers moving through different ports.

However, there are still some issues with container circulation because China's port lockdowns and "bubble and seal" measures make it challenging for workers to move shipments around, leading to insufficient circulation, said Mr Chaichan.

He said freight cost remained high last month, 160% above the same period last year, though the cost is a staggering 390% higher than in April 2019.

Why to watch CHINA'S PMI figures?

Over the next six months, Mr Chaichan recommended keeping a close watch on China's PMI, which fell to 47.4 in April from 49.5 in March, according to China's National Bureau of Statistics.

These figures are consistent with a private survey by the Caixin/Markit manufacturing PMI that found China's factory activity contracted at a steeper pace, posting 46 in April, a decline from 48.1 in the previous month.

On Monday, Shanghai deputy mayor Zong Ming announced the city has plans to put a stop to the sharp slowdown in China's economic activity and return to a more normal life beginning from June 1.

"From June 1 to later in the month, as long as risks of a rebound in infections are controlled, we will fully implement epidemic prevention and control measures, normalise management, and fully restore normal production and life in the city," said Mrs Zong.

Does the port lockdown dampen Thailand's GDP forecast?

The short answer is not quite, as the National Economic and Social Development Council (NESDC) released its forecast for Southeast Asia's second-largest economy yesterday, revising its economic growth outlook for 2022 from 3.5-4.5% to 2.5-3.5% because of higher inflation and slower global growth, linked to Russia's invasion of Ukraine.

NESDC secretary-general Danucha Pichayanan said at a press conference the country's first-quarter growth was 2.2%. The economy was supported by the easing of lockdown measures and the resumption of various economic activities.

This year, the Thai economy is expected to be supported by an increase in exports, domestic demand and a recovery in tourism, he said.

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