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Retail Sourcing Report Facts & Insight

Q2 2018

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RETAIL SOURCING REPORT

CBX Software’s Retail Sourcing Report provides research and analysis

aimed at informing global sourcing and buying decisions for retailers, brands

and other sourcing professionals. Each issue includes a snapshot of key

information and trends impacting global sourcing, such as economic

conditions in sourcing countries, container shipping trends, currency

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Q2 2018 Retail Sourcing Report

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Content

RETAIL SOURCING REPORT ............................................................................................................................ 0

FORWARD ..................................................................................................................................................... 1

PURCHASING MANAGER’S INDEX (PMI) ................................................................................................... 3

LOW COST COUNTRY SOURCING (LCCS) HIGHLIGHTS ........................................................................ 4

GLOBAL COMPETITIVENESS INDEX ......................................................................................................... 5

CHINA WAGE TREND SNAPSHOT .............................................................................................................. 6

GLOBAL LOW-COST SOURCING COUNTRY WAGE SNAPSHOT ........................................................... 7

CONTAINER FREIGHT RATES FOR MAJOR ROUTES ............................................................................. 8

CURRENCY EXCHANGE RATES ................................................................................................................. 9

GLOBAL COMMODITY RATES .................................................................................................................. 10

CRUDE OIL ................................................................................................................................................. 10 RUBBER ..................................................................................................................................................... 10 METALS ...................................................................................................................................................... 10 COTTON ..................................................................................................................................................... 11 WOOL......................................................................................................................................................... 11 PLASTICS AND FIBERS ................................................................................................................................. 12

FOCUS TOPICS ........................................................................................................................................... 12

QUALITY CONTROL PERFORMANCE INDICATORS ........................................................................................... 12 CHINA/US TRADE - NEGOTIATION OR TRADE WAR? ...................................................................................... 13

ABOUT CBX SOFTWARE ........................................................................................................................... 15


3

Purchasing Manager’s Index (PMI)

To help understand industry and economic conditions in a country, the PMI Index tracks variables such as

output, new orders, stock levels, employment and prices across private companies in the manufacturing,

construction, retail and service sectors. Over 30 countries and regions participate in various PMI surveys.

A reading below 50 indicates contraction from the previous month, while a reading above 50 indicates

growth. This update looks at a selection of emerging economies and key sourcing countries, providing

indicators for recent months based on data provided by IHS Markit, NIKKEI, CAIXIN and other sources.

Q2 2018 News & Analysis: While still in expansion mode, the rate of global manufacturing growth slowed

down to a five-month low in late Q1, according to a JP Morgan survey. This drop is based on weaker demand

in the consumer and intermediate goods sector, resulting in reductions in output, new orders and

employment. Companies in some countries reported on increases in purchase pricing due to disruption in

the supply chain and shortages of raw material inputs. Overall the view on manufacturing for the remainder

of 2018 is cautiously optimistic given currency and geopolitical concerns.

Country Jan 2018

Feb 2018

Mar 2018

Summary of Indicators

Brazil 51.2 53.2 53.4 Brazilian manufacturing expanded strongly through Q1 on robust demand. Growth in exports and steady job creation position Brazil for a solid Q2.

China 51.5 51.6 51.0 The Caixin PMI index reported that China’s manufacturing improved marginally through Q1, with softening in output, new orders and export sales.

Czech Republic

59.8 58.8 57.3 Despite a small dip in March, the Czech manufacturing sector continued its growth run which is expected to persist through the rest of 2018.

Egypt 49.9 49.7 49.2 Despite expected improvements in the Egyptian economy due to IMF economic reforms, manufacturing is still growing slower than expected.

India 52.4 52.1 51.0 Although still in expansion mode, Nikkei’s India PMI index reported a slowdown in Indian manufacturing into Q2, partly due to cost inflation.

Indonesia 49.9 51.4 50.7 Manufacturing remained in expansion mode in late Q1, with data indicating a softening in new orders and output, alongside rising input prices.

Malaysia 50.5 49.9 49.5 Malaysian manufacturing declined through Q1 on slowing export demand, with a reduction in purchasing, although the outlook for 2018 is still optimistic.

Mexico 52.6 51.6 52.4 Mexican manufacturing conditions improved through Q1, as order growth reached a four-month high on international demand, despite input inflation.

Myanmar 51.7 52.6 53.7 Manufacturing in Myanmar expanded to a 2-year high, with optimism for the rest of 2018 on increases in output and new orders, putting strain on capacity.

Poland 54.6 53.7 53.7 Business conditions continued in expansion mode in Poland, on growth in output and production, with some weakening in new orders and exports.

Russia 52.1 50.2 50.6 Despite higher material costs, Russia experienced a marginal improvement in operating conditions, on rising output levels and increase in export demand.

South Africa

49.9 50.8 46.9 With a stronger Rand impacting exports, South Africa’s ABSA PMI index fell in March as business activity, new sales and inventory declined.

South Korea

50.7 50.3 49.1 Manufacturing in South Korea contracted in March, with fewer new orders leading to a reduction in output and business confidence at a 3-month low.

Turkey 55.7 55.6 51.8 While growth slowed, March was the 13th consecutive month that Turkish manufacturing expanded due to both foreign and domestic demand.

Vietnam 53.4 53.5 51.6 While still in growth mode, Vietnam’s manufacturing saw a softer expansion in output, with new orders and exports still expected to perform well.

Sources: IHS Markit Economics, Nikkei, Caixin


4 4

Low Cost Country Sourcing (LCCS) Highlights

This section looks at selected issues impacting sourcing from key LCCS destinations based on data available

at the time of printing the report, alongside official import/export numbers highlighting global sourcing trends.

Bangladesh – India and Bangladesh signed 6 MOU’s in April, including a 130 km oil pipeline deal to supply Bangladesh with a million tons of oil per year. India and China are both vying for influence in Bangladesh. Cambodia – Cambodia’s economy is forecast to grow by 7% through 2018 despite uncertainty around upcoming elections in July. Merchandise exports slowed to 9.3% in 2017 from 10.1% in 2016. India – Merchandise exports dipped in March by 0.7% to $29 bln year-on-year on concerns over trade tensions and potential US tariffs. India’s trade deficit grew to $13.7 billion due to a surge in imports. Indonesia – Indonesia and China recently agreed on contracts worth $23.3 billion and other MOU’s as part of China’s Belt and Road Initiative to create infrastructure across Asia, Africa and Europe. Pakistan – Pakistan’s trade deficit grew to 17.3% year-on-year to $27.3 billion in the 9-month period to March, despite a year-on-year export increase of 24.4% or $439 million and attempts to curb imports. Philippines – The Philippine economy is expected to grow by 6.7% in 2018, one of the fastest in East Asia, the World Bank reported recently. A pivot move to align with China over the US will boost investment. Thailand – Thailand’s economy should grow by 4.1% in 2018, reported the World Bank, the fastest since 2012. The country will also see a new minimum wage implemented as of April 1 of 5-22 baht per day. Turkey – Turkey’s textile and garment sector agreed to support the ACT living wage initiative which would support increasing wages to a higher standard for the country’s large number of textile and garment workers. Vietnam – Vietnam was one of 11 countries to sign the revised TPP deal, now known as the CPTPP after the US withdrew. Concerned over potential loss of US exports, Vietnam is looking for other trade partners.

Exports (% yoy growth)

Aug 2017

Sep 2017

Oct 2017

Nov 2017

Dec 2017

Jan 2018

Feb 2018

Bangladesh 10.7 -9.8 6.4 6.2 8.4 - -

Cambodia 41.7 43.2 57.2 24.3 29.3 - -

India 10.3 25.7 -1.1 30.6 12.4 - -

Indonesia 19.4 15.7 19.6 13.5 7.5 8.6 11.8

Pakistan 12.9 8.9 7.9 12.4 14.8 - -

Philippines 9.6 4.9 7.1 2.7 2.3 0.5 -

Thailand 13.2 12.2 13.1 13.4 8.6 17.6 -

Turkey 12.1 8.4 8.8 11.0 8.6 - --

Vietnam 19.3 20.0 21.3 21.5 21.2 41.6 26.1

Imports (% yoy growth)

Aug 2017

Sep 2017

Oct 2017

Nov 2017

Dec 2017

Jan 2018

Feb 2018

Bangladesh 16.9 20.6 21.7 13.9 - - -

Cambodia 10.5 38.9 5.9 26.9 -0.1 -0.1 -

India 21.0 18.1 7.6 19.6 21.1 - -

Indonesia 9.1 13.1 23.8 19.2 18.1 27.9 25.2

Pakistan 15.1 16.7 23.6 16.5 10.1 - -

Philippines 10.4 4.4 13.1 20.1 20.0 11.4 -

Thailand 14.9 9.7 13.5 13.7 16.6 24.3 -

Turkey 15.3 30.6 24.7 21.3 25.4 - -

Vietnam 22.5 22.7 21.6 21.2 20.8 53.1 20.5

Sources: News Reports, Fung Group, Various Statistical Bureaus


5

Global Competitiveness Index

The Global Competitiveness Index is a ranking of countries based on their competitiveness across different

measures such as government regulations, labor market efficiency, education, infrastructure and other

measures important to doing business in a country. Below is a selection of emerging economies which are

important low cost and strategic sourcing locations. Most of these countries are increasing their

competitiveness on key economic measures every year, with China leading overall.

Note: The below data is released annually by the World Economic Forum (WEF). For this report we have

selected relevant countries and updated the chart as of current data released in December 2017.

Global Competitiveness Index: Selected Indicators, 2017-2018 (Ranking of 137 countries)

Rank/137 Bangladesh Cambodia China India Indonesia Pakistan Philippines Thailand Turkey Vietnam

Overall competitiveness

99(↑7) 94(↓5) 27(↑1) 40(↓1) 36(↑5) 115(↑7) 56(↑1) 32(↑2) 53(↑2) 55(↑5)

Institutions 107(↑18) 106(↓2) 41(↑4) 39(↑3) 47(↑9) 90(↑21) 94(↓3) 78(↑6) 71(↑3) 79(↑3)

Intellectual property protection

124(↑5) 130(-) 49(↑13) 52(↓10) 46(↑4) 97(↑12) 71(↑3) 106(↑15) 94(↑1) 99(↓7)

Burden of government regulation

78(↑15) 68(↓3) 18(↑3) 20(↑3) 27(↑10) 64(↑11) 111(↑6) 58(↑3) 67(↑4) 76(↑12)

Strength of investor protection

66(↑13) 95(↓1) 102(↑6) 13(↓5) 66(↑13) 26(↓1) 111(↑9) 26(↑10) 21(↓1) 79(↑22)

Infrastructure 111(↑3) 106(-) 46(↓4) 66(↑2) 52(↑8) 110(↑6) 97(↓2) 43(↑6) 53(↓5) 79(-)

Quality of roads 105(↑8) 99(↓6) 42(↓3) 55(↓4) 64(↑11) 76(↑1) 104(↑2) 59(↑1) 30(↓2) 92(↓3)

Quality of railroad 60(↑12) 94((↑4) 17(↓3) 28(↓5) 30(↑9) 52(↑1) 91(↓2) 72(↑5) 57(↓2) 59(↓7)

Quality of port 85(↑4) 81(↓5) 49(↓6) 47(↑1) 72(↑3) 73(↑11) 114(↓1) 63(↑2) 54(↓2) 82(↓5)

Quality of air transport

115(-) 106(↓7) 45(↑4) 61(↑2) 51(↑11) 91(-) 124(↓8) 39(↑3) 31(↓2) 103(↓17)

Quality of electricity supply

101(↑9) 106(-) 65(↓9) 80(↑8) 86(↑3) 115(↑6) 92(↑2) 57(↑4) 88(↓4) 90(↓5)

Macroeconomic environment

56(↑9) 70(↓20) 17(↓9) 80(↓5) 26(↑4) 106(↑10) 22(↓2) 9(↑4) 50(↑4) 77(-)

Health & primary education

102(↑3) 101(↑2) 40(↑1) 91(↓6) 94(↑6) 129(↓1) 82(↓1) 90(↓4) 84(↓5) 67(↓2)

Higher education & training

117(↑1) 124(↑10) 47(↑7) 75(↑6) 64(↓1) 120(↑3) 55(↑3) 57(↑5) 48(↑2) 84(↓1)

Goods market efficiency

94(↑2) 85(↓9) 46(↑10) 56(↑4) 43(↑15) 107(↑10) 103(↓4) 33(↑4) 53(↓1) 91(↓10)

Prevalence of trade barriers

35(↑21) 93(↓7) 58(↑20) 54(↓7) 79(↑12) 106(↑6) 64(↓4) 67(↑8) 45(↓1) 109(↓1)

Trade tariffs, %duty

126(↓1) 96(-) 118(-) 124(↓1) 67(↓5) 135(↓1) 58(↓9) 89(↓4) 75(↑1) 91(-)

Burden of customs procedures

98(↑18) 127(-) 44(↑11) 47(↓10) 63(↑10) 93(↑20) 125(↓4) 78(↑4) 80(↓6) 95(↑8)

Labor market efficiency

118(↑2) 48(↑10) 38(↑1) 75(↑9) 96(↑12) 128(↑1) 84(↑2) 65(↑6) 127(↓1) 57(↑6)

Cooperation in labor-employer relations

76(↑15) 67(↑3) 50(↓3) 56(↑11) 41(↑4) 125(↑9) 33(↓6) 36(-) 118(↑1) 85(↓6)

Flexibility of wage determination

58(↑11) 100(↑4) 89(↓7) 104(↑8) 99(↑10) 122(↓2) 86(↑11) 103(↑4) 51(↑11) 81(↑3)

Pay and productivity

80(↑3) 64(↓1) 26(↑1) 33(-) 22(↑7) 85(↑15) 43(↓6) 47(↑5) 91(↑3) 66(↓4)

Business sophistication

91(↑16) 106(↑8) 33(↑1) 39(↓4) 32(↑7) 81(↑14) 58(↓6) 42(↑1) 67(↓2) 100(↓4)

Local supplier quantity

62(↓15) 127(↓2) 52(↓36) 53(↓17) 42(↓2) 107(↓5) 49(↑11) 59(-) 44(↓3) 105(↓19)

Local supplier quality

78(-) 122(↑3) 56(↑1) 69(↓10) 54(↑16) 108(↑3) 73(↑1) 74(↑3) 52(↓4) 116(↓7)

State of cluster development

65(↑12) 48(↓2) 27(↓6) 31(↓4) 26(↑3) 55(↑21) 62(↑4) 67(↓5) 59(↓2) 68(↓15)

Source: World Economic Forum (WEF)


6 6

China Wage Trend Snapshot

Q2 2018 News & Analysis: The broader policy initiative driving China’s minimum wage levels in the coming years is President Xi Jinpeng’s comments at the 19th Communist Party Congress in October 2017, where he made a pledge to eradicate rural poverty by 2020. So far in 2018 several provinces and regions have already increased their minimum wages. These include Shanghai -- the highest minimum wage region in China-- which increased wages by 5% as of April 1. As per central policy guidelines, many of the recent increases are in China’s rural regions. Minimum wages are typically updated in the first half of the year, so more updates are likely to happen through Q2. Note: These are official wage guidelines mandated by each province or region based on information publicly available as of March 30, 2018. As such these numbers serve as an indicator. Actual wages may include benefits, food, housing etc. Minimum wage is typically 40-60% of average total wage.

2018 Minimum Wage Updates (official) (District variances are averaged across province)

City/Region/Province Monthly Min Avg Wage (RMB)

Increase % Official Update

Anhui 1,520 20.6% Nov 1, 2015

Beijing 2,000 5.8% Sep 1, 2017

Fujian 1,700 13.3% Jul 1, 2017

Chongqing 1,500 n/a Jan 1, 2015

Gansu 1,620 10.2% Jun 1, 2017

Guangxi 1,400 16.7% Jan 1, 2015

Guangdong 1,895 22.3% May 1, 2015

Guizhou 1,680 5.0% Jul 1, 2017

Hainan 1,430 12.6% Feb 1, 2016

Heilongjiang 1,680 15.4% Oct 1, 2017

Henan 1,570 8.2% Oct 1, 2017

Hebei 1,650 12.5% Jul 1, 2016

Hubei 1,750 13.1% Nov 1, 2017

Hunan 1,580 13.6% Jul 1, 2017

Inner Mongolia 1,760 8.0% Aug 1, 2017

Jiangsu 1,890 8.1% Jul 1, 2017

Jiangxi 1,680 15.1% Jan 1, 2018

Jilin 1,780 22.5% Oct 1, 2017

Liaoning 1,620 7.6% Jan 1, 2018

Ningxia 1,660 12.4% Oct 1, 2017

Qinghai 1500 15.3% May 1, 2017

Shaanxi 1,680 5.4% Oct 1, 2017

Shandong 1,810 6.7% Jun 1, 2017

Shanghai 2,420 5% Apr 1, 2018

Shenzhen 2,130 4.9% Jun 1, 2017

Sichuan 1,500 7.1% Jul 1, 2015

Tianjin 2,050 5.1% Jul 1, 2017

Tibet 1,650 17.8% Jan 1, 2015

Xinjiang Uyghur 1,670 12.9% Jul 1, 2015

Yunnan 1,570 10.6% Sep 1, 2015

Zhejiang 2,010 8.4% Dec 1, 2017


7

Global Low-Cost Sourcing Country Wage Snapshot

Below is a snapshot of minimum wages in selected Asian sourcing locations, with the addition of Egypt,

Ethiopia and Turkey to give a comparative view. Wages vary by region or province and indicate either an

estimated or actual/official rate. In cases with a distinct variance, we provide an average. Currency

fluctuations mean that these figures are approximate at the time of finalizing this report.

Q2 2018 News & Analysis: Minimum wages, especially in the Asean region continued to increase through

the first few months of 2018, with further increases expected through the year as inflation and living costs

rise. The trend of worker and union pressure to push for a living wage in these countries will persist.

Governments will also continue to balance the need to raise the economic standard of their people (as in

China) and encourage consumer spending without discouraging foreign investment. In some cases, like

Myanmar, where adjustments were overdue, wages increased by 33%, the first increase since 2015.

Notes: Figures are provided in USD/month based on currency exchange as of March 30, 2018. Minimum

wage policies are updated as per data available at the time of finalizing this report and are based primarily

on unskilled wages. Consult sources such as Fair Wage Guide or Wageindicator.org to assess and

calculate benchmarks for wages in particular countries and regions not covered here.

BANGLADESH CAMBODIA CHINA EGYPT ETHIOPIA

$68 (Jan 2018) $170 (Jan 2018) $137-$639 (Mar 2018) $172 (Jan 1/17) $35-$4 (under review)

Bangladesh raised the minimum wage for garment workers – up by 77%. To 5,300 Taka ($68) following a labor dispute that shut factories in the Ashulia industrial zone.

Ahead of new elections, Cambodian workers will receive an 11% increase in min. wages effective early 2018. Monthly wages will increase to $170 from $153, of which $5 will be paid by the government.

Minimum wages in China are set by local governments and vary widely by region wages formulas (with housing, food, overtime etc.) Wages continue to increase each year in most regions.

Egypt’s official minimum wage (for public workers) was raised to 1,200 EGP/month as of Jan 2017 according to CAPMAS. Actual wages for non-public workers are mostly below this amount.

Ethiopia is working on a system to determine a min. wage for the private sector (wage guidelines exist for govt. workers). Entry level wages in the textile sector range from $35 -$40.

INDIA INDONESIA LAO PDR MALAYSIA MYANMAR

$40-$130 (Jan 2018) $115-$273 (Jan 1/18) $142 (Jan 2018) $233-$253 (Jan 2018) $108 (Mar 2018)

Indian min. wages vary by region and skill level; however, the central Indian labor ministry is considering a significant increase for 2018, which could bring wages up to $280 in some areas.

Local governments agreed to raise minimum wages by 8.71% effective Jan. 1, 2018 based on a new formula accounting for GDP growth and inflation. Indonesia wages vary by their 34 provinces and regions.

Talks are still ongoing to increase monthly wages in Laos. A tentative agreement has been made to increase wages from Kip 900,000 (US$107) to Kip 1,200,000 (US$142)) in key provinces for 2018.

Wages vary by region and are supposed to be reviewed every 2 years. Malaysian officials announced a new minimum wage for 2018 to bridge the gap between Peninsular Malaysia and East Malaysia.

Myanmar revised its minimum wage from K,600 Kyat ($2.70) per day to K4,800 (3.60) or K600 per hour for an eight-hour work day. This represents an increase of 33%, mostly impacting garment workers.

PHILLIPPINES SRI LANKA THAILAND TURKEY VIETNAM

$110-220 (Jan 25/18) $67 (Mar 2016) $190-$196 (Apr 1/18) $495 (Jan 2018) $122-176 (Jan 1/18)

Wages in the Philippines vary by region, skill level and wage classification. Negotiations are still underway, but Manila for example saw a 21 Peso ($0.42) increase in their daily wage to 491 Pesos ($9.82) in Q4 2017.

Sri Lanka adopted two laws on minimum wages as of early 2016, mandating a minimum wage of Rs 10,000 (+/- $67) and an increase of Rs 2,500 (+/-f$17) for workers earning less than Rs 40,000 per month (+/- $270)

Thailand increased minimum wages for the first time since 2013 by 2-5%, or around 5-22 Baht per day across the 69 provinces. Wages will range from 308 to 3330 THB ($9.60-$10.58) per day for unskilled workers.

Following negotiations in late 2017, Turkey raised its minimum wage by 14.2% in January 2018 to 1,603 Turkish Lira’s per month (+/- $400). Before deductions, the wage would be 2,029 Liras a month, +/- US $500 (as of April 14, 2018).

Vietnam announced increases to their two types of minimum wages, for state and non-state enterprises. These rate increases of around 7%, are smaller than in previous years and vary by region and industry.

Sources: WageIndicator.org, SAFSA, Local News Reports

http://fairwageguide.org/

http://www.wageindicator.org/


8 8

Container Freight Rates for Major Routes

Q2 2018 News and Analysis: The period following Chinese New Year is typically a slow season for global

containerized shipping with service contracts under review in April/May to agree on rates for the coming

year. Demand for shipping is expected to remain steady given both the US and the EU’s GDP is expected

to increase in the range of 2.5% plus through 2018.

Despite consolidation among the carriers into 3 main alliances, new shipping capacity, in the form of

megaships, is still coming on board at a rate higher than demand which should keep prices stable. It will be

interesting to see what happens in the shipping sector post-2018 when the various alliances are fully in place

and capacity has stabilized.

Asia - Europe Trade Lanes

Spot rates for shipping containers from China to Europe continued a decline which started around the

Chinese Lunar New Year. In early April, they fell below rates on Asia-Mediterranean trade routes to $585

per TEU, below the $600 mark for the first time. Analyst expects rates to continue to be squeezed since

supply of container ships is still greater

than demand.

Some of the decline in rates is due to the

traditional slowdown in Chinese

manfufacturing in Q1 following the busy

pre-Christmas period and Lunar holiday.

Rates are still down 25% year-on-year

though. Demand on the Asia Europe route

is expected to grow by by 4%, less than

the predicted 8.8% increase in Shipping

capacity predicted by SeaIntel.

Asia – North America Trade Lanes

Container shipping spot rates from Asia to

both the US East and West coasts slide downward following Chinese New Year (see chart below). But

April saw rates climb back up over $1000 to the West Coast and to over $2,000 to the East Coast.

Analysts predict that container imports to

the US should increase in the coming

months and will either match or fall just

short of capacity growth.

The threat of increasing tariffs between

China and the US is something to watch

for and will factor into shipping contract

renewals which take place in April/May

each year. The major carriers are

expected to increase capacity through the

summer as more mega-ships, with

capacity of up to 22,000 TEU’s come on

board, which could impact prices.

Sources: IHS Markit, Joc.com Alphaliner, SeaIntel


9

Currency Exchange Rates

Following are exchange rates and indicators for major currencies commonly factored into global sourcing costing estimations. The big news impacting trading currencies through Q1 and into Q2 is the US/China tariff skirmish, which may yet turn into a trade war. China is continuing a trend of letting their currency appreciate, which may change in the near term depending on how the US/China tussle turns out. 2018 should continue to be a good year for the Euro given economic growth in the Eurozone alongside geopolitical factors and the US trade deficit. EUR / USD (April 10, 2017 – April 10, 2018)

EUR / CNY (April 10, 2017 – April 10, 2018)

USD / CNY ((April 10, 2017 – April 10, 2018)

Sources: XE.com, News/Analyst Reports

Euro appreciation against the USD cooled off through Q1, remaining stable into Q2. The Eurozone economy is still performing well, and the EUR will likely benefit from several factors pushing the USD down.

EUR/USD Low High

2 years 1.03 1.25

1 year 1.06 1.25

6 months 1.15 1.25

3 months 1.21 1.24

30 days 1.22 1.24

The Euro remained flat against the CNY through Q1 and into Q2 as the Chinese currency depreciated moderately. Some analysts believe that current economic growth in the Eurozone is unsustainable.

EUR/CNY Low High

2 years 7.22 7.97

1 year 7.31 7.97

6 months 7.71 7.93

3 months 7.71 7.93

30 days 7.70 7.82

The USD hit 2-year lows around $6.25 against the CNY through late Q1 and into Q2. Trade concerns between China and the US should continue to impact the two currencies.

USD/CNY Low High

2 years 6.25 6.96

1 year 6.25 6.91

6 months 6.25 6.64

3 months 6.25 6.46

30 days 6.25 6.34


10 10

Global Commodity Rates

Q2 2018 News & Analysis: As Q2 gears up, the big topic on the mind of most analysts and pundits is the

US/China tension which is still heating up and already impacting commodity prices. While oil prices have

been driven higher on reduced supply, other commodities such as rubber (in over-supply) metals and other

industrial commodities which would be impacted by threatened tariffs are facing a downside risk. A forecast

of slower global economic expansion for the rest of 2018 should also push commodity prices down.

Crude Oil

Rubber

Metals

40

45

50

55

60

65

70Oil US$ per barrel Dated

Brent,light blend 38API

Dubai,medium, fobDubaiFateh 32API

WestTexasIntermedia 40 API,MidlandTexas

0.5

1

1.5

2

2.5

3

Rubber, No. 3 Smoked Sheet (RSS3), Singapore Exchange

Price in US cents per kilogram

3533

2581

77 0.00

1000.00

2000.00

3000.00

0.00

4000.00

8000.00

12000.00

16000.00

20000.00

24000.00

Metals US$ per metric ton

Tin Aluminum Copper Nickel Zinc Lead Iron

Rubber prices are still trending down due to over-supply and uncertainty in the market. An agreement by Thailand, Indonesia and Malaysia (which account for 70% of global production) to reduce exports by 350,000 metric tons expired on March 31. Tire makers are also running at lower capacity and China/US tension is creating uncertainty in the rubber markets since tires are

From a low of $45 per barrel in mid-2017, oil prices recovered strongly through Q1, hovering close to $70 a barrel. With a sustained effort by OPEC to reduce supply, inventories are down to a 5-year average. The impact on prices of lower oil supply is compounded by the current tension in the Middle-East with Russia and the US vying for control in Syria and tension between Iran and Saudi Arabia.

While metal prices have made solid gains since 2016, prices started to soften through Q1 and into Q2. The risk of higher interest rates and now trade tensions and tariffs on steel imports from China are creating fear of and uncertainty in the market. The Caixin PMI Index, which surveys small and medium private companies, indicated a downturn in demand and new orders which is impacting a range of commodities.


11

Cotton

Cotton prices have remained relatively stable, increasing modestly through Q1 and into Q2 on expectations that inventories will be lower. As with other commodities there is some uncertainty in the US, given that cotton is one import that China is threatening to hit with increased tariffs in retaliation to US tariffs. The coming months will reveal more, but even if tariffs are applied, the impact should be marginal. US exports of cotton to China have been lower in recent years since China has been drawing off its own stockpiles over buying imported cotton.

Wool

With International buyers driving demand, wool prices are at a high. China is now the largest wool producer, but Australia produces the majority of fine Merino wool and will produce 345,000 tons in 2018. The price of medium micron wool is up by 25% this year. The below charts provide a reference for directionality of wool prices.

Sources: National Cotton Council, Cotlook, News Reports

Sources: Australian Government Department of Agriculture, News Reports


12 12

Plastics and Fibers

A selection of plastic related prices is provided below. These are calculated from offer prices in the Plasticker

Material Exchange, which provides an indication of trends.

Q2 2018 Snapshot: Global demand for synthetic fibres, including acrylic, nylon, polyester and polypropylene

yarns is forecast to increase in the next few years with wider applications in clothing, home furnishing,

automotive and other sectors. Prices trended down in late Q1 on fewer new orders and uncertainty of

demand, given rising oil prices and US/China trade tension.

Sources: IMF data, Index Mundi Plasticker

Focus Topics

Quality Control Performance Indicators

This report frequently covers quality control and quality assurance issues. Audit and inspection data provide

an indicator of activity in various sourcing regions. According to Asia Inspection (AI) data for Q1, inspection

volumes in China increased by 5.9% year-on-year, while growth remained in the double digits in Southeast

Asia. AI data also indicates growing demand for environmental and ethical audits, especially in South and

South-East Asia.

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00Plastics & Fibers, Regrind/ Flakes (Euros/kg)

Nylon

Polyester

ABS

PVC

PP

PS


13

China/US Trade - Negotiation or Trade War?

The biggest news impacting global sourcing this year is the trade “dispute”” between the United States and

China which began with the US imposing tariffs on Chinese exports to the US, followed by retaliatory Chinese

tariffs. This “trade war” has been brewing since Trump took office on the pledge of bringing manufacturing

back to the US and reducing the trade imbalance between the US and China.

Some pundits think a trade war is inevitable, while others suggest this a tactical negotiation which will resolve

itself in the coming months. Either way we weighed in on some of the issues.

Timeline of the Trade Dispute

January 2018 – The US announces a 30% tariff on imported solar panels, which mostly are made

in China, along with a 20% tariff on residential washing machines

February 2018 – The Commerce Department proposes tariffs on steel (24%) and aluminum (7.7%).

China vows to “take necessary measures to defend our rights.”

March 9, 2018 - Trump announces 25% tariffs on steel and 10% tariffs on all aluminum imports that

would take effect on March 8th.

These tariffs are not necessarily

aimed at China. After a global

reaction, the US exempts several

countries, including Canada, the

biggest importer of steel and

aluminum into the US.

March 2018: China responds with

tariffs of around $3 billion in

American imports, mostly

agricultural related, including fruits,

nuts and wine (15%) and recycled

aluminum and pork (25%).

March 2018: Trump signs

retaliatory tariffs on $60 billion of

Chinese imports, mostly in the high

tech and energy industries.

April 3, 2018: The U.S trade representative releases a list of 1,300 product categories covered by

the 25% tariff, including goods in the aerospace, machinery and medical sectors.

April 4, 2018: China responds with retaliatory tariffs of 25% on more American goods, including

whiskey, cars and soybeans, valued at around $50 billion.

April 5, 2018: Trump fires back, calling for more tariffs worth $100 billion. China warns of more

retaliatory tariffs.

Who will win a trade War?

While President Trump feels that “trade wars are good, and easy to win,” history shows that they come with

an excessive cost and he may be playing with fire. In the 1930’s when many countries put tariffs in place to

protect their economies, global trade fell dramatically, leading to unemployment and mass poverty.

In the big picture, the number of tariffs threatened on both sides so far is limited. In 2017 the US imported

around US$3 billion in steel and aluminum from China, which represents less than 1% of total US imports of

Chinese goods. Similarly, China’s retaliatory tariffs would also not affect a large amount of trade.


14 14

Economically, both the US and China are likely to lose if this posturing escalates into a real trade war.

Despite President Trump’s comments that the US has “already lost the trade war,” there is still a lot at stake.

Pushing up costs on Chinese parts required for US manufacturing will likely hurt American manufacturing

and make consumer goods in the US more expensive.

Analysts predict that if this trade dispute escalates, it could reduce global economic expansion, from a

projected growth of 3% in 2019 to 2.5%. Financial markets will also continue to fluctuate and suffer, as have

individual companies such as Boeing, Ford, GM and Caterpillar. There would also be an impact on countries

which supply components to China that use “Made in China” products, including Japan and South Korea.

Countries, such as Germany, which make cars and other products in China which may be exported to the

US, worry that their products will be hit by tariffs.

Maybe more so than the US, China has strategically targeted the products they will impose tariffs on. China

already buys half of all American soybean exports and has an alternative supplier in Brazil. If China suddenly

stops buying, American farmers in the mid-West will suffer. These farming states are a dedicated support

base for Trump and voted him in based on his pre-election rhetoric of promising to “Make America Great.”

Also, in China’s favor is that their Chinese Central Bank is government controlled, unlike the US Federal

Reserve, meaning they can cut interest rates to spur demand and tell their state-owned banks to extend

more credit and depreciate their currency if imports become too costly.

A final thing to consider is that China’s strength is in taking the long view. Their process of 5-year central

economic planning and social development have made China the number 2 global economy in only a few

decades. President Trump could be voted out of office in 2020, while Chinese President Xi is firmly

entrenched. Unlike the US, Chinese policy will likely continue in the same direction with or without their

current leader.

Unlike other countries like South Korea, which the US was able to bully into submission to US trade terms,

China appears not afraid of confrontation. “If the United States wants a fight, we are prepared to stay with it

until achieving a complete victory. All options will be on the table and we will not back down,” the Chinese

Ambassador to Canada, Lu Shaye, commented recently, echoing his governments sentiments.


15

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