By Benny Lim.    Photo：Marcin Jozwiak

The May 2023 Purchasing Managers' Index (PMI) in the industry indicates signs of a turnaround in Q1, outperforming expectations. This turnaround is driven by raw materials, which in turn drive integrated circuits (ICs), IC design, and modules. This data suggests that eliminating inventory is no longer the primary concern for importers; rather, terminal demand is the key. Inflation also implies seasonality, where consumer goods are no longer the primary demand for consumers. In the shipping industry, if freight rates are to be increased, raw materials become a crucial factor in their ability to play a role in the supply chain. Raw materials are upstream industries of finished or processed products, which means they are one step ahead of the final products. Bulk carriers, rather than containers carrying finished products, are used in the shipping industry. Therefore, in cases of supply and demand imbalances, shipping rates have already experienced a significant decline from their peak and have reached the bottom, coupled with the rising prices of raw materials. Bulk shipping rates have started to rebound.

Compared to the second half of last year, inventory is already low and it is difficult to further decline. Additionally, the end of the pandemic era has significantly improved supply chain issues such as port congestion, container shortages, and railway congestion. Therefore, lead times are not long and are gradually becoming manageable. This also means that there is no need to reserve lead time for price negotiation, allowing the preservation of the cash flow to address future uncertainties. After a year-long inventory adjustment and with the resolution of the US bond issue at the end of May, as well as the nearing end of interest rate hikes, Q3 is expected to show improvement.

In the case of an economic recession in the United States, bank financing is becoming increasingly strict. Smaller banks with lower credit ratings are facing increased pressure on deposit outflows. As the screening of borrowers becomes more cautious and stringent, it is important to note that small and medium-sized enterprises with already weak financial positions may face increased funding pressures and possible capital constraints, resulting in insufficient cash flow turnover.

Shipping rates reached unprecedented heights during the pandemic period. Although the increase was expected by carriers, it accelerated earlier and only lasted for two years. However, due to structural changes in the shipping industry caused by the pandemic, the freight rates will not revert to the levels before the pandemic. The shipping industry has gained significant attention post-pandemic, and under many uncertain factors, the key is whether funds can be smoothly recovered within the specified timeframe, avoiding capital constraints. Therefore, the resumption of normal shipping and delivery schedules is what businesses hope to see. In such rapidly changing economic conditions, when the business outlook is unfavorable at the beginning of the year, shipping rates may initially appear low in the market, followed by adjustments through surcharges.

Given the mixed fluctuations in terminal demand and the uncertainties faced by industries, it is recommended to focus on inventory policies throughout the supply chain and terminal demand. Evaluate the transferability between inventory items and adjust procurement and inventory policies accordingly.

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