Supply Chain by the Numbers

- May 24, 2019 -

  Supply Chain by the Numbers for May 24 2019 - China Tariff Edition

Tariffs on Chinese Imports May Accelerate US Store Closings; Will China Reduce Rare Earth Metal Exports to US; Shoe Companies Says Tarffs will Hit Consumers Hard; Major Retailers at Risk from Higher Costs



That is how many retail store closures we could see in 2019, the result both of general forces impacting retail and additional pressure resulting from the new tariffs on Chinese imports, exceeding by far the previous record of about 8000 in 2017. That according to new analysis from investment firm UBS, which adds that the tariffs could reduce US retail sales by some $40 billion. "The market is not realizing how much brick & mortar retail is incrementally struggling and how new 25% tariffs could force widespread store closures," UBS analyst Jay Sole wrote in the report. "We think potential 25% tariffs on Chinese imports could accelerate pressure on these company's profit margins to the point where major store closures become a real possibility." UBS was already expecting more store closures and calculated 20,710 current clothing stores will close by 2026, but the tariffs could rapidly accelerate that pace. Even before the risk of tariffs, retailers have been struggling this year and have announced more closings in the first 20 weeks of 2019 than all of last year, according to Coresight Research.



That was the share of so-called rare earth metal produced in China in 2018, according to US government data. What are rare earth metals? A group of 17 elements, such as yttrium and promethium, vital to producing products including autos, electronics, electric cars, batteries, defense systems and more, including serving as catalysts to turn oil into gas and jet fuel. There are growing concerns China could restrict exports of rare earth metals as part of the growing trade war with the US. Those concerns became a lot more tangible this week when Chinese premier Xi, accompanied by his point man for US trade talks, visited a facility in the heart of China's rare-earths industrial complex. This wouldn't be the first time China has used its dominant position in rare earths as geopolitical leverage. In 2010, China sharply limited rare-earth exports to Japan, a big consumer, while the two countries were sparring over disputed islands. The embargo won China some short-term victories but also drove other countries to reassess and reduce their reliance on critical materials that Beijing controls – but that concern has faded in recent years. The US has the ability to produce its own rare earth metals, but mining attempts have mostly failed given low prices from China, and it would take years to fully ramp up production. Same story in Australia, though China is home to 37% of global rare earths reserves. In May, US senators introduced legislation to encourage development of domestic supplies.


$7 Billion

That's how much more US consumers will pay annually for shoes if the tariffs on Chinese imports move to an elevated 25% level on a new group of goods, as now planned . That according to a letter sent this week to President Trump from more than 170 shoe brands and retailers, including Nike and Adidas. The letter said the proposed 25% tariffs would have a "catastrophic" effect on consumers, companies and the US economy. The letter urged Trump to immediately remove shoes from the list of products made in China that could face the additional tariff in the coming months. "This significant tax increase, in the form of tariffs, would impact every type of shoe and every single segment of our society," the shoe companies wrote, adding that impact of the tariffs would disproportionally fall on working class Americans. This is "unfathomable," the letter said. It added that making shoes is capital intensive, and that production could not be quickly moved to the US or elsewhere, so Chinese factories would still get the work, but at higher prices for consumers.



That's the percent of Walmart's US sales that come from goods imported from China, according to a new estimate from UBS. The Wall Street firm also estimates Target's sourcing from China at 34%, Dick's Sporting Goods at 51% and Bed Bath & Beyond at 53% - with all these and other retailers at risk from the planned coming new tariffs on $325 billion more of imports from China. The targeted goods for the next round includes toys, clothes, shoes, consumer electronics and more. Home Depot said new 25% tariffs will add $1 billion to its costs annually. The key question: how much will retailers hike prices to account for the tariffs versus not passing along the full costs and taking the hit in margins? An additional 25% tariff on all merchandise coming from China would wipe out all retail earnings growth over the next 12 months, according to analyst Greg Melich at Evercore ISI – but SCDigest questions that analysis, as it would seem to based on the notion retailers won't raise prices in response.

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