What the Stock Market Crash Means for Your Supply Chain

Monday saw a market panic unlike any in recent years, and it comes down to China's own market problems. We examine the manufacturing and supply chain implications of the Dow's fall. 

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China's Huge Losses are Seeing Global Repercussions.

The global supply chain’s future hinges in a large part on Chinese imports and exports, both of which have suffered as the nation sees its markets weakening. Analysts are worried about emerging markets suffering from a drop in raw material demand, which could slow manufacturing worldwide.

What Happened to the Global Economy Last Week?

  • Both China and the United States, as of Monday, lost their 2015 growth. It started with the Shanghai Composite Index showing an 8.5 percent drop, and the Dow followed with a panic-inducing 1,000 point (5 percent) drop when markets opened Monday morning.

  • Over the course of the day, the Dow climbed back up to lose about 585 points as closing time. It was the worst drop since 2011, after a four-year period of robust growth.

  • The Shanghai Composite Index is still up 43 percent from last year, although it has lost 38 percent of its value since June.

  • While economists are uncertain of long-term economic implications, what the supply chain industry should be most concerned about are the ripple effects the market crash will have on global trade.

Raw Materials Prices Are Slipping, Carrying Serious Implications.

  • The Bloomberg Commodity Index of 22 raw materials is at its lowest level since 1999, dropping 31 percent in the past year.

  • That’s bad news for the U.S., a big producer of oil, and emerging economies, producers of raw materials like copper and nickel.

  • Monday has seen lumber prices hit the hardest, falling 10 percent from last week, due in large part to a reduction in Chinese infrastructure and building project development.

  • Copper, generally considered a good metric for the health of the global economy, is doing poorly. Prices dropped 3 percent over the weekend, and supply is exceeding demand by 151,000 tons. That’s bad for Brazil, which relies heavily on China’s copper imports.

  • Oil prices have fallen $20/barrel since June to $40/barrel, which is bad news for oil producing areas like Russia, the U.S., and the Middle East.

Why Have Raw Materials Prices Fallen?

  • Economists are pointing to a slump in Chinese manufacturing.

  • China buys 45 percent of the world’s base metals, including copper, aluminum, nickel, and iron-ore. They are also the world’s second-biggest oil importer after the U.S.

  • The Wall Street Journal reported that exports and imports from China were down 8.3 percent in July from a year ago.

  • Manufacturing is now slowing at the fastest rate in six years.

  • The only industry that China is investing in heavily is food—China’s agriculture industry relies on U.S. imports, as U.S. corn is more robust.

  • Falling production rates in China are concerning to supply chain experts: emerging economies rely on China to purchase their abundance of raw materials while western economies utilize China for imports of manufactured goods.

  • This could mean good things for India, whose economy is prepared to take on more manufacturing (as long as it deals with its infrastructure problems).

How Concerned Should I Be?

  • From a manufacturing perspective, Asian-produced goods will benefit in the U.S. from the depreciated value of the Yuan.

  • Other developing economies are expected to devalue their currency, meaning that the dollar will strengthen. Foreign imports will get cheaper, putting pressure on U.S. manufacturers who will see more competition with imported goods.

  • Now is a good time to take a look at your suppliers—where they’re producing, and how financially secure they are. Consider your existing production locations and the changes in pricing, and whether it would make sense to shift your production towards devalued currencies.

  • Currency devaluation allows manufacturers to tap into deeper markets. Consider changes in shipping costs: with the falling price of oil, can you afford to ship products further if you save money on production?

  • The biggest fear is that the Chinese central bank will lose control of the market and cause a global crash, but economists believe that it should be able to distribute capital to keep its market running.

  • Stay up-to-date on raw materials prices and market status by subscribing to our daily newsletter. We will be updating this article as more news comes in.

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