Welcome to FIS   Sponsored By
Subscribe to FIS | Register with FIS | Advertise with FIS | Newsletter | About FIS | Contact us
   


Stockpiling for a no-deal Brexit is now well under way and giving UK manufacturing a “temporary boost”

Could a Brexit bullwhip cause turmoil in European industrial production?

Click on the flag for more information about United Kingdom UNITED KINGDOM
Wednesday, January 16, 2019, 21:50 (GMT + 9)

The UK newspaper Guardian reported that in the UK companies have started massive stockpiling. While this is seen as a measure to counter uncertainties around a potential hard Brexit, little has been said about the additional production needed to pile up this inventory and the effects of a substantial decrease in production this year once the inventories are sold off. Linking such active inventory decisions to supply chain understanding can only tell us one thing: even a small inventory adjustment may lead to years of instability across European supply chains.



In the Guardian article, “industry representatives” are quoted to have said: “Frozen and chilled food warehouses, storing everything from garden peas to half-cooked supermarket bread and cold-store potatoes are fully booked for the next six months, with customers being turned away”. Not just fresh and frozen food is being stockpiled. British manufacturers are also storing ingredients. UK food manufacturer Premier Food announced two weeks ago that it is building up about 10 million pounds’ worth of ingredients inventory, and British Tobacco company Imperial Brands said it would add about 30 million pounds worth of inventory.



Of course, this is good business for those leasing out warehouse property. Apparently, in many places in Southern England it is very difficult to even find qualified food-grade warehouse space. Seems like a good opportunity to bring over some reefer containers to the island as my bet is that these may be leased at a premium in the upcoming months.

However, an aspect of stockpiling that has not received any attention in all of this is the bullwhip effect that it may cause in European industrial production. Exactly ten years ago, we conducted research that showed that the sudden decline in inventories caused by the collapse of Lehman Brothers led to massive global fluctuations in industrial output for many years. This so-called “bullwhip effect” was well-known in the literature and to anyone operating a supply chain, but common knowledge was that this was exclusively caused by demand fluctuations. Our work demonstrated that sudden, coordinated inventory adjustments would cause such fluctuations as well. I believe that this is what we will also see as a consequence of Brexit: the Brexit bullwhip.



What is a Brexit bullwhip?

I believe a Brexit-bullwhip could be facing us. The reasoning would be as follows:

Inventories of raw materials, intermediate products, and consumer products are all built up in the UK over a relatively short period of time. (Note: this is not just happening in the UK, as UK exporters will build up inventories on the continent, but I have left this out of scope in my analysis for now).

These inventories need to be produced; this leads to additional industrial production for those products sourced from the EU.

Manufacturers observe an increase in demand for their products, and hence also order more supplies from their suppliers. This surge in demand propagates upstream in the supply chain. Since supply chains are long and not very transparent, these suppliers are unlikely to relate their increase in orders to stockpiling in the UK.

At some point, the stockpiled inventory will reach their targeted level. Orders will go back to their “normal” level. It takes some time, however, before the supply chain adjusts. Cumulatively, across manufacturers, their suppliers, and again their suppliers, inventories could easily amount to a year’s worth of sales. As a consequence, manufacturers further upstream in the supply chain may only feel the consequences of the original stockpiling decisions many months later. Just like if you turn up the heating in your house; it takes some time for the system to respond and you may overheat your house.



Some time next year or in 2020, hopefully supply chains will have been adjusted to post-Brexit border controls and inventories will start to be reduced again. This will further amplify the Brexit bullwhip, leading to a huge decline in industrial production.

How large could the Brexit bullwhip be?

This is not easy to estimate. Inventory records in national statistics are not very good. Also, the complex supply chain relationships are not captured in detailed statistics. But we should be able to make a first-order estimate of the effect.

First we estimate UK imports of (physical) goods from the EU27 to be about 300 billion euros annually (1) with corresponding inventory levels to be at about 6 weeks across the board (2). This would value inventory related to UK imports from the EU at around 34 billion euros.

            

Second, we estimate how much additional inventory is likely to be built up as part of the stockpiling process. For this, we can only rely on anecdotal evidence from the various newspaper reports, suggesting that this is an additional month of inventory, so about 25 billion euros of additional imports from the EU, most of them likely to be purchased in quarter (Q4 2018).

Next we estimate total European industrial production, including the processing of agricultural products. Based on (3), we will work with a figure of about 2,500 billion euros.

Assuming these numbers are more or less correct, this implies that the inventory build-up in the UK would be 1% of European industrial production. Since virtually all of this would have been produced in the last quarter of 2018, the last quarter would then see an additional production of about 4%. That would be a massive number.

Note that none of this includes an additional bullwhip of overreaction. Our studies of the 2008 financial crisis suggest significant overreaction since it is not clear to companies further upstream in the supply chain what causes the increase in demand.

If this were all more or less true, the rebound on the bullwhip in 2019 could be huge, with drops in import figures that would go well beyond the growth in the current quarter.



Obviously, this is an effect analyzed in isolation, and without any modeling at this stage. There are many other effects surrounding the Brexit which I am sure are receiving extensive analysis by economists in the UK, EU and elsewhere. Just today, the Bank of England released such an analysis. The Brexit bullwhip however deserves to be part of this analysis. If anyone has better numbers, I am happy to adjust my calculations accordingly.

[email protected]
www.fis.com


 Print


Click to know how to advertise in FIS
MORE NEWS
Spain
Apr 25, 22:30 (GMT + 9):
Spanish frigate frees Yemeni fishing vessel kidnapped by pirates
United States
Apr 25, 22:00 (GMT + 9):
Important New England scallop ground to be closed 11 months
Norway
Apr 25, 20:50 (GMT + 9):
Fish Pool Salmon Price Status Report for week 17
Ecuador
Apr 25, 20:40 (GMT + 9):
Boats and military submarines monitor 245 Chinese fishing vessels in Galapagos
United States
Apr 25, 06:00 (GMT + 9):
Center for Aquaculture Technologies confirmed sale to Cuna del Mar
Viet Nam
Apr 25, 02:10 (GMT + 9):
Drastic measures needed to remove EU’s yellow card
United States
Apr 25, 00:50 (GMT + 9):
First Asian carp industrial park heralds triumph over invasive fish
Republic of Ireland
Apr 24, 23:50 (GMT + 9):
Migrant workers in the Irish fishing industry to get protection against slavery
Chile
Apr 24, 23:40 (GMT + 9):
Court of Appeals paralyzes operation of salmon farm in the Beagle Channel
Chile
Apr 24, 22:30 (GMT + 9):
Corpesca notices legal uncertainty due to changes in the Fisheries Law
Peru
Apr 24, 22:10 (GMT + 9):
TASA presents the results of its social, economic and environmental activities in its Sustainability Report 2018
European Union
Apr 24, 21:00 (GMT + 9):
MEP Linnéa Engström takes on ‘dream job’ to tackle overfishing
Denmark
Apr 24, 20:00 (GMT + 9):
BioMar is creating feed solutions targeted towards consumers
Japan
Apr 24, 20:00 (GMT + 9):
Japanese imports of frozen bigeye tuna fall in the first two months of 2019
Ghana
Apr 24, 19:00 (GMT + 9):
IN BRIEF - Fish stock threat is real – Minister warns



Lenguaje
FEATURED EVENTS
  
TOP STORIES
SFP announces Target 75 progress
United States The Target 75 initiative launched by Sustainable Fisheries Partnership is halfway toward the goal of 75 percent of seafood production in key sectors classified as sustainable or improving toward sustainability by the end of 2020.
So far in 2019, Korea and Japan are the main destinations for surimi exports
United States At US Customs, the average price of Alaskan pollock surimi (Theragra chalcograma) (HS 0304991130) was USD 2.70/kg in February. This price is up 8% on that of January and 6% on that of February 2018. I...
Auction of new crab quotas expected to generate nearly USD 1.3 billion
Russia Fed. Russia’s Federation Council has approved a law that provides for the introduction of a new type of crab catch quotas.
Surimi imports of Extra-UE increased in 2018
European Union  Table 1: CIF price of Extra-EU surimi imports, of the 28 countries of the EU, 2019/2018, USD/kg Origin ...
 
Maruha Nichiro Corporation
Nichirei Corporation - Headquarters
Pesquera El Golfo S.A.
Ventisqueros - Productos del Mar Ventisqueros S.A
Wärtsilä Corporation -Wartsila Group Headquarter-
ITOCHU Corporation -Headquarter-
BAADER - Nordischer Maschinenbau Rud. Baader GmbH+Co.KG (Head Office)
Inmarsat plc - Global Headquarters
Marks & Spencer
Tesco PLC (Supermarket) - Headquarters
Sea Harvest Corporation (PTY) Ltd. - Group Headquarters
I&J - Irvin & Johnson Holding Company (Pty) Ltd.
Blue Continent Products (Pty) Ltd - (Oceana Group Limited)
Pesquera San Jose S.A.
Nutreco N.V. - Head Office
CNFC China National Fisheries Corporation - Group Headquarters
W. van der Zwan & Zn. B.V.
SMMI - Sunderland Marine Mutual Insurance Co., Ltd. - Headquarters
Icicle Seafoods, Inc
Starkist Seafood Co. - Headquearters
Trident Seafoods Corp.
American Seafoods Group LLC - Head Office
Marel - Group Headquarters
SalMar ASA - Group Headquarters
Sajo Industries Co., Ltd
Hansung Enterprise Co.,Ltd.
BIM - Irish Sea Fisheries Board (An Bord Iascaigh Mhara)
CEFAS - Centre for Environment, Fisheries & Aquaculture Science
COPEINCA ASA - Corporacion Pesquera Inca S.A.C.
Chun Cheng Fishery Enterprise Pte Ltd.
VASEP - Vietnam Association of Seafood Exporters & Producers
Gomes da Costa
Furuno Electric Co., Ltd. (Headquarters)
NISSUI - Nippon Suisan Kaisha, Ltd. - Group Headquarters
FAO - Food and Agriculture Organization - Fisheries and Aquaculture Department (Headquarter)
Hagoromo Foods Co., Ltd.
Koden Electronics Co., Ltd. (Headquarters)
A.P. Møller - Maersk A/S - Headquarters
BVQI - Bureau Veritas Quality International (Head Office)
UPS - United Parcel Service, Inc. - Headquarters
Hamburg Süd Group - (Headquearters)
Armadora Pereira S.A. - Group Headquarters
NOAA - National Oceanic and Atmospheric Administration (Headquarters)
Omega Protein Corporation
Marona S.A.
Mowi ASA (formerly Marine Harvest ASA) - Headquarters
Marubeni Europe Plc -UK-
Findus Ltd
Icom Inc. (Headquarter)
WWF Centroamerica
Oceana Group Limited
The David and Lucile Packard Foundation
Ajinomoto Co., Inc. - Headquarters
Friosur S.A. - Headquarters
Cargill, Incorporated - Global Headquarters
Benihana Inc.
Leardini Pescados Ltda
Mitsubishi Corporation Marine Products Depts. D.Team
CJ Corporation  - Group Headquarters
Greenpeace International - The Netherlands | Headquarters
David Suzuki Foundation
Fisheries and Oceans Canada -Communications Branch-
Mitsui & Co.,Ltd - Headquarters
NOREBO Group (former Ocean Trawlers Group)
Natori Co., Ltd.
Carrefour Supermarket - Headquarters
FedEx Corporation - Headquarters
AKBM - Aker BioMarine ASA
Seafood Choices Alliance -Headquarter-
Austevoll Seafood ASA
Walmart / Wal-Mart Stores, Inc. (Supermarket) -Headquarter-
New Japan Radio Co.Ltd (JRC) -Head Office-
Gulfstream JSC
INVE Group - Head Office
Marine Stewardship Council - MSC Worldwide Headquarters
Royal Dutch Shell plc (Headquarter)
Genki Sushi Co.,Ltd -Headquarter-
Iceland Pelagic ehf
AXA Assistance Argentina S.A.
Caterpillar Inc. - Headquarters
Tiger Brands Limited
Morpol ASA - Group Headquarters
SeaChoice
National Geographic Society
AmazonFresh, LLC - AmazonFresh

Copyright 1995 - 2019 Fish Info & Services Co.Ltd| All Rights Reserved.   DISCLAIMER