Lauren McKinley:
Hello, everyone. Thank you for joining us today for the 2024 Risk Report Webinar hosted by Everstream Analytics. All attendee lines are on mute. Please add any of your questions during the session in the Q&A box, and we will get to as many of the questions as we can before the conclusion of the session. The session is also being recorded, and we will send a copy at the conclusion. My name is Lauren McKinley. Today, I’m joined by our presenters, Jena Santoro and Rachel Rozak from our intelligence solutions team at Everstream Analytics who will walk through today’s content. Again, please add any questions in the Q&A box. Now, I will turn it over to Rachel.
Rachel Rozak:
Thanks so much, Lauren. So to give a brief overview, our annual supply chain risk report is created by applying AI to historical and proprietary data from our intelligence solutions and applied meteorology teams in order to discover the year’s top five supply chain risks. For 2024, we identified escalating tensions in Taiwan, inhibitive protectionist measures, increasing environmental regulations, agricultural commodity shortages, and extreme weather as some of the most pressing supply chain risks to look out for. We’ll also touch on one of our top risks that we predicted in our 2023 report that continues to threaten supply chain stability this year.
So, to waste no time getting into the first risk, we’ve predicted that Taiwanese and Chinese tensions will place pressure on global trade throughout the new year. Now, this tension is placed within a wider landscape of growing global conflict. In 2023, the United Nations reported that the world was experiencing the highest number of violent conflicts since World War II. Even when excluding conflict related to the Russian invasion of Ukraine and the Israel Hamas war, we’ve seen rising conflict levels in recent years, suggesting that instability from conflict is becoming a more prevalent issue in supply chains.
Specifically when thinking of Taiwan and China, you can go ahead and go to the next slide if you’d like. 2023 saw continued declining relations with increased aerial and naval exercises around Taiwan with a lot of these drills coinciding with public appearances from Taiwan’s independence-leaning democratic progressive party leadership. To put the increase in military action into context, from September 2020 to August 2022, Chinese military aircraft crossed the median line of the Taiwan Strait 23 times. Since August 2022 alone, we’ve seen over 500 aircraft cross that line. The Taiwanese presidential election is set for this Saturday, January 13th, and there is a high chance of further deteriorating relations between the two countries in the event another pro-independence candidate wins.
There are many different versions of what an escalated conflict could look like that we could see from that further deterioration. That includes trade restrictions out of both Taiwan and China, further military drills, and more serious escalations like cyber attacks, a naval blockade of Taiwan, or in the most extreme case, a full-scale invasion. Taiwan is the leading producer of semiconductors. They make about 65% of the world’s semiconductors right now, and nearly 90% of all advanced chips come out of Taiwan. So there’s a huge risk to the electronic component sector and those dependent on it.
However, this isn’t the only risk on the table. A blockade would also impact China’s global trade, impacting exports of electronics, textiles, plastics, rubbers, chemicals, and base metals. Crucially, disruptions to the Taiwan Strait, through which about half of all container ships pass, would deeply disrupt shipping to and from Southeast Asia. Moving into our next risk, we’re expecting to see protectionist measures disrupt technology supplies in 2024. Trade relations between the West and China in particular have been increasingly souring, and we’ve seen growing export controls and sanctions as a result of heightening trade wars. You can go ahead and flip to the next slide on this.
So, some of those growing export controls and sanctions that we’ve seen are on special nuclear material out of the US and semiconductor production equipment out of the Netherlands and Japan, but we’re also seeing more and more Chinese companies being banned individually on the US Bureau of Industry and Security entity list on grounds of national security. In response, China has placed export controls on critical minerals used in products like semiconductors and lithium batteries like gallium, germanium, and graphite. And they’re threatening as well to restrict exports of rare earth elements needed for high performance magnets in the future. This threat would be particularly damaging, as China accounts for up to 90% of processed rare earth and magnet output. As a result, numerous tech companies have begun to shift to what many are calling a China plus one strategy to minimize those dependencies on China. A lot of the top countries for supplies, alternate supplies, are including Vietnam, Singapore, and India.
And we’ve seen Apple was a really good example of a leading company doing this. In the last eight years or so, they shut dozens of manufacturing sites in China in exchange for new manufacturing facilities in countries including India, South Korea, and Thailand. In line with this way of thinking, we’re seeing investments in manufacturing plants for electronic components like semiconductors and critical mineral processing take off in alternative countries. So further protectionist measures could speed up the shift away from China, and depending on the speed of these shifts, we could see sourcing problems for high-tech components as companies work to bring new supply online.
Our next risk focuses again on impacts from regulatory measures, namely from an overwhelming amount of environmental regulations being introduced globally. So as countries are rushing to protect natural resources and meet net-zero emissions goals, we’ve been seeing waves of environmental regulations come into play. A couple of big examples have included the EU deforestation regulation and the pending packaging and packaging waste regulation.
On the next slide, there are about 38 times the number of environmental laws today as there were in the ’70s, and there’s a lot of interest in carbon emissions restrictions and reporting as well. So in addition to these net-zero goals, more recent regulations have also been increasingly focusing on specific chemicals or inputs most often citing public health. In 2024, it’s likely that we’ll see more attention on and litigation surrounding the use of toxic materials in manufacturing, including, but definitely not limited to PFAS, which are per- and polyfluoroalkyl substances and ethylene oxide. Both of these have faced proposals for bans or limited use in 2023 in multiple countries, and despite their importance, PFAS, for example, is used in thousands of products. Ethylene oxide is critical in the sterilization of about half of all medical devices and pharmaceuticals. It’s clear that over the past few years, litigation has been skyrocketing in regards to their use, as you can see in the graph below.
In 2023, we saw the first bankruptcy related to PFAS use as well as a 10.3 billion settlement with 3M due to their usage of PFAS. Those cases are only going to continue to grow. Because so many substances that are facing regulatory crackdowns are hard to replace without significant research and development, and as a result, time and money, it’s very likely that we will see ongoing litigation, bankruptcies, and shortages of components or products as companies, especially smaller companies, try to meet compliance. To kind of sum up here, there are simply too many new environmental regulation proposals on both national and state levels to even cover on today’s call, which is part of the challenge for companies trying to adhere to them. But, what we can expect is increasing complexity as many of these new regulations also begin to force companies to verify and report the environmental risks of not only their direct suppliers, but also their sub-tier suppliers. With that, I can hand it over to Jena to cover the remaining risks.
Jena Santoro:
Okay, great. Thanks, Rachel. So we’re now going to move into our next risk topic, which is global shortages of critical raw materials or commodities. So we chose this as a key threat to include in our 2024 risk outlook, mostly because we haven’t yet seen a normalization of the global shortage trends that really began during the COVID pandemic. So during the pandemic, we saw these commodity shortages that were due in large part to these extensive global lockdowns that we saw around the world that had been complicating sourcing efforts. But now, we’re sort of seeing a new wave of shortages that can be attributed to different trends. So we’re seeing things like disproportionately high prices for critical inputs, some general shifts toward trade protectionism.
Lauren McKinley:
I think we might’ve lost Jena. Rachel, are you on?
Rachel Rozak:
Yes, can you hear me?
Lauren McKinley:
Yes.
Rachel Rozak:
Okay, great. Let me just try to pick up where Jena left off here. So to backtrack a little bit, as Jena was saying, a lot of the supply of many raw materials was failing to normalize after the COVID pandemic. A lot of those lost raw materials were due to extensive lockdowns that had complicated sourcing. But this new wave of shortages that we’re seeing going into 2024 can instead be attributed to different trends like high prices for critical inputs, increasing trade protectionism, rising global temperatures, and other major events such as droughts and floods. Jena, let me know if you’re back on here.
Jena Santoro:
Yes, I’m back. I apologize, everyone. If I cut out again, Rachel, just jump back in. So, please bear with us for these connection issues. So as I was saying, in response to these trends last year, we saw many countries restrict raw material exports. So they wanted to protect domestic supplies and control domestic prices, and this was one way of doing so. One impactful example of this that we had monitored last year is when India, Thailand, and Pakistan had limited sugar exports. So the three countries collectively produce about 30% of the world sugar supply. So when they implemented these new export limitations, the availability of sugar on the global market was essentially crippled, and this was only one example. So in total, the protectionist trends of last year, we had Everstream monitor about 35 of them. So that was in the form of new export bans and controls on key raw materials.
So you can see them listed here, broken down by the month of implementation and by the type of restriction or the severity, so whether it was an export control or a full scale export ban. Collectively, again, much like during the pandemic, we saw these lead to sourcing challenges and eventually prompted a lot of production disruptions as well. So this had impacted sectors like food and beverage, clothing and apparel, and industrial metals. And so unfortunately, looking ahead, given of the long-term nature of these issues, we do expect commodity scarcity to continue into this year. And alongside it, those adjacent trends that I had been talking about, trade protectionism, sourcing difficulties, and production disruptions are likely to continue as well. We can see highlighted here in the figure of the left that sugar, rubber, and fuel were some of the most affected commodities last year.
But we do also expect to see this list of disrupted commodities expand even from this, just given the worsening outlook for some of those root causes of the shortages, like those extreme weather trends that we had been pointing to earlier. So that takes us into our next risk, but in keeping with the theme of extreme and volatile weather, this is actually one of the greatest risks to supply chain continuity that we’re watching heading further into the new year. That’s because disruptions are increasing in virtually every weather category that we track. So flooding, wildfires, droughts, storms like hurricanes, heat waves, it’s happening across the board and across nearly every continent. Back in the ’80s in the US, there was a $1 billion weather event about every four months. Now, that cadence has increased to about every three weeks, but it’s really not a US story.
This is not unique to the US. It’s happening quite similarly around the globe. One of the most visible examples that we can give or that we can point to from last year, just detailing how extreme weather can really impact supply chain continuity, is what’s continuing to happen in the Panama Canal. So we know that the canal is experiencing its worst drought on record since the ’50s, due largely to the El Niño weather event. This has prompted canal authorities to pass really drastic measures, such as limiting the daily number of permitted vessel crossings. It really has reached historic lows. Now, the canal is operating only at a fraction of normal operational capacity that we see during typical weather conditions. So what we’re seeing is that the damage inflicted by these weather events is increasing. We’re actually seeing unprecedented impacts on the logistics space in particular.
So last year, in the case of hurricanes, we saw a roughly 75% drop in shipments, you can see here, just around Hurricane Ian in Florida. The case was quite similar with wildfires, when during Canada’s June wildfire season, things like reduced visibility led to between a 50 to 70% reduction in shipments, depending on the area. But this had included some big US cities like New York and Chicago. Maybe to a slightly lesser scale, but still quite significant, there was some spring flooding in western parts of the US, Utah, Nevada, and California, that had led to between a 20 to 30% reduction in shipping.
So we’re even continuing to track some trends that date even a few years back that show that winter storms are increasingly leading to supply chain disruptions as well. So we can point to the deep freeze in Texas in 2021, which had delayed deliveries by about two days. The following year, there was a December freeze in Buffalo, New York that had decreased shipments by about 40%. So this is really all just to say that extreme weather events are likely to continue increasing operating costs for companies, due to things like shipment delays and cancellations. So it’s going to become even more important for companies to closely monitor their routes and shipments and have these mitigation plans in place due to extreme weather.
Okay, and then finally, moving into our last risk, we will finish with the risk that we had covered in our 2023 annual risk report, like Rachel had mentioned. So this remains problematic for supply chain continuity today, and that is cyber crime. So we included this because cyber attacks on supply chains had skyrocketed last year. So we saw over a 200% year-over-year increase. At Everstream, we recorded about 700 cyber attacks on companies, sub-tier suppliers, and even logistics providers. It was the highest level of cyber crime that we recorded over the last five years and had surpassed the previous record that was about 375 cyber attack incidents in 2020. That was during the COVID-19 pandemic, due to the shift to online presence by a lot of companies amid work from home orders, making companies more susceptible to cyber crime.
There are no indications that this trend is reversing or even slowing down anytime soon. In fact, the list of impacted sectors from cyber crime, as you can see on the right, is expanding to include everything from logistics to food and beverage. This is due, at least in part, to widespread shifts across all industries toward automation and digitization that are making companies operations more accessible, more vulnerable to cyber criminals. So while attacks are still primarily targeting logistics, general manufacturing, and automotive sectors, like you can see here, there are other industries like pharmaceuticals, aerospace, and medical devices that are becoming increasingly vulnerable as well. So along with those five new threats that we have identified at Everstream that we just walked through, this is one that’s maintained its relevance and really has even increased in impact severity since last year’s publication, and because of that, warranted an inclusion in our 2024 risk outlook. So I’m going to go ahead and pass it back over to Lauren so we can move into our Q&A segment.
Lauren McKinley:
Great. Thank you so much. Appreciate the presentation today, Rachel and Jena. We have some questions that just came in. If you have any additional questions, please add them in the chat. We will try to get through all of them. The first question is around semiconductors. Will other semiconductor-producing countries be able to mitigate impacts if Taiwanese supply is cut off?
Rachel Rozak:
I can field that one. So yeah, definitely it’s important to what level semiconductor supply is cut off and just exactly for how long. In the event that semiconductor supplies from Taiwan were to be made entirely unavailable for export for any reason, the short answer is that in the near term, there simply just wouldn’t be enough capacity amongst other producing countries to offset that loss. So right now, it’s been estimated it would probably take at least three years and $350 billion, if not more, for other countries to replace Taiwan’s current capacity.
So a lot of other semiconductor producing countries, those might include South Korea, Japan, China, the US, and the Netherlands. Those are currently producing semiconductors, but again, in the event of a blockade, we could see the inhibition of some exports out of Asia. We could also see some higher risk associated with Chinese semiconductors in the event of an escalated conflict, especially because of growing demand for the advanced chips that Taiwan is key in manufacturing. In the near future, demand would simply greatly outpace supply, if those exports were taken off the table. So unfortunately, just no great alternatives until those new manufacturing facilities are up and running in a few more years.
Lauren McKinley:
Great, thank you. Okay, the next question is about the Panama Canal. So the Panama Canal reported that it will increase the number of booking slots available in its locks, Panamax and Neopanamax, from mid-January, compared to the lower number it had planned in a prior announcement. So what’s the risk outlook with this in mind?
Jena Santoro:
Yeah, I can jump in here. So really, the long-term risk outlook for shipping through Panama Canal hasn’t changed as a result of this. So we’re still in the typical dry season in Panama, which began at the beginning of December and is expected to last until the beginning to mid-April. So that’s not expected to change. The dry season happens at the same time every year, and while some unexpected rains that you point to may have eased drought conditions temporarily and is allowing a slightly larger number of vessels to pass, we’re not seeing this as a permanent change, and we’re not really expecting to see a permanent change in the operational status of Panama Canal until Panama’s next rainy season in the upcoming summer.
So there are so many weather factors that go into this, but high temperatures and drought conditions, as I mentioned in my slide earlier, are at unprecedented levels. A little bit of unexpected rains and replenishment in the water levels are probably insufficient and overcompensating, which is really what needs to happen right now to restore normal operational conditions. So we do expect to see these high temperatures, dry drought conditions to remain in place for the next several months, and it’s highly unlikely that we see any permanent reversals or shifts there.
Lauren McKinley:
Great, thank you. All right, another reminder, last call for questions. We have a few more that we think we’ll have time to cover today. Again, if we don’t, we will make sure we reach out following the session. Okay, the next question is about risks and risk ratings. So along with your different risk ratings that you currently provide, such as natural disaster and geopolitical risk, do you provide or have plans to provide risk ratings or scoring at a node level for cybersecurity?
Jena Santoro:
I can take this. This is something that we can certainly connect with the rest of our team and see if there are any plans in place. I don’t actually have an answer for you just off the top of my head, but we can certainly follow up with whoever submitted this question via email or on a phone call after the webinar and let you know of our plans. Because of course, we have a large team of analysts who are working on different risks, and there may be some plans in place that we don’t know about, so happy to follow up.
Lauren McKinley:
Thank you. I know that in the Everstream platform, we do score around cyber risk. So we can make sure we can provide some specifics there as a follow-up. Right, great. Let me go through to our next question. What are you seeing companies do to mitigate cyber crime and cyber risk?
Jena Santoro:
Sure, I can take this one. So I think as I was mentioning earlier, there are these natural widespread shifts across all industries to increase automation and digitization just to keep up with the time. So this is naturally making companies operations more vulnerable and susceptible to cyber crime. But I think there’s a lot of information out there now about the risks and about how they are increasing and becoming increasingly vulnerable. So I think just having some good visibility about supply chains and extended supplier networks and understanding the risks that are involved with their different sub-tier suppliers and contractors are really important for all supply chain continuity, but especially cyber crime as well, so having some good visibility and understanding of who they’re working with, where they’re sourcing materials, and what kind of risks they may be exposed to, given how complex and extended supply chain networks are. So really for us, it always comes back to supply chain mapping, better understanding and visibility of supply chain networks, and that goes for really all the supply chain risks that we had covered today, not just cyber.
Lauren McKinley:
Thank you. Okay, question, how do you share these insights with customers and clients? So I don’t know who wants to take this just to talk a little bit about some of the channels and ways that we share this information with clients outside of the platform, inside of the platform.
Rachel Rozak:
So we have a few options, and I’m sure Jena can jump in and help me if I don’t cover them all, but we regularly publish our real time risk incident reporting. So push to clients based on their settings or how regularly they would like to see these recovering things, such as weather risks, industrial fires, any regulations that are going into action, pretty much anything that could impact your supply chain, we’re monitoring it on our end, including as well cyber risk and some of those ESG risks like environmental and labor issues. We’re also sending out EA watch deep dive reports just to get further into some of those bigger risks that are coming out.
Most recently, I think we sent out an EA watch on the Red Sea attacks just to give our customers a better idea of what’s going on with those specific incidents that might be a little more high profile that people might need a little more information that they aren’t getting necessarily from those shorter risks that we’re sending out. There are alerts going out in our platform. We’re also sending out scored scores on network facilities based on short and long-term risks. I’m sure I’m missing many things here, but …
Jena Santoro:
Maybe I can jump in just with one-
Rachel Rozak:
Thanks, Jena.
Jena Santoro:
Additional item. So in addition to those EA watches that Rachel had detailed, we also issue special reports which are complementary to our EA watches, but they’re longer form, more predictive analytical pieces on the different risk trends that we’re seeing. So you’ll see an EA watch go out about something that is continuing to develop. I don’t want to say it’s reactionary, because it’s not, but a lot of times, the event is still unfolding, and new information is coming out. So you’ll see an EA watch plus an EA watch update, or in some cases, additional updates after that, whereas a special report will go in depth and provide some details about what we’re predicting for a specific industry or a specific risk trend in the months or years to come. So we kind of have both angles there. Like I said, I don’t want to say reactive, but for this purpose, we’ll just say reactive and the predictive.
Lauren McKinley:
Great. Thank you so much. If anyone is interested in getting a copy of the risk report and has not gotten a copy already, you can scan here to download and get the full report with all of the takeaways for the 2024 year and upcoming risks to look out for. Thank you so much to our presenters. Thank you to our attendees, Jenna and Rachel. If you have any additional questions about the content covered today or would like to get in touch with our team, please reach out to [email protected]. We will send a recording following this session. Have a great day. With that, we will close the session.
