Tuesday, January 18

The global economy supply chain problem continues to worsen


A supply chain crisis that was meant to be temporary now looks set to last into next year as the rising delta variant overturns production at factories in Asia and disrupts shipping, representing further shocks. for the world economy.

Manufacturers reeling from shortages of key components and rising raw material and energy costs are being forced into bidding wars for space on ships, driving freight rates to records and pushing forward some exporters to raise prices or simply cancel shipments altogether.

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“We can’t get enough components, we can’t get containers, the costs have increased tremendously,” said Christopher Tse, chief executive of Hong Kong-based Musical Electronics, which makes consumer products from Bluetooth speakers to Rubik’s Cubes.

Tse said that the cost of the magnets used in the puzzle toy has increased by about 50% since March, increasing the cost of production by about 7%. “I don’t know if we can make money from Rubik’s cubes because prices keep changing.”

China’s determination to end Covid has meant that even a small number of cases can cause major disruptions to trade. This month, the government temporarily closed part of the world’s third-busiest container port in Ningbo for two weeks after a single dock worker was found to have the delta variant. Earlier this year, the docks in Shenzhen were idle after the discovery of a handful of coronavirus cases.

“Port congestion and container shipping capacity shortages may last into the fourth quarter or even mid-2022,” said Hsieh Huey-chuan, president of Taiwan-based Evergreen Marine Corp., the seventh container liner. world’s largest investor briefing on August 20. “If the pandemic cannot be effectively contained, port congestion may become a new normal.”

The cost of shipping a container from Asia to Europe is roughly 10 times higher than in May 2020, while the cost from Shanghai to Los Angeles has increased more than sixfold, according to the Drewry World Container Index. The global supply chain has become so fragile that a single small accident “could easily compound its effects,” HSBC Holdings Plc. he said in a note.

Higher freight rates and semiconductor prices could fuel inflation, said Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte. In Singapore. Additionally, producers, including Taiwan’s Giant Manufacturing, the world’s largest bicycle manufacturer, say they will raise prices to reflect rising costs.

In the U.S., forecasters have lowered growth projections for this year and raised inflation expectations through 2022, according to the latest Bloomberg monthly survey of economists. Compared to the prior year, the price index for personal consumption expenditures is now expected to rise 4% in the third quarter and 4.1% in the fourth, double the Reserve’s 2% target. Federal.

Hong Kong-based coffee machine maker Eric Chan hasn’t seen the crisis easing for months as he juggles a supply line involving hundreds of components to meet the growing demand for kitchen appliances.

“We are storing critical components for a year of use because if we forget a component, we cannot make the products,” said Chan, CEO of Town Ray Holdings, which accounts for 90% of sales from well-known brands in Europe.

The spread of the delta variant, especially in Southeast Asia, makes it difficult for many factories to operate. In Vietnam, the world’s second-largest shoe and clothing producer, the government ordered manufacturers to allow workers to sleep in their factories to try to keep exports moving.

Even the mighty Toyota Motor Corp is affected. The automaker warned this month that it will suspend production at 14 plants across Japan and cut production by 40% due to supply disruptions, including chip shortages.

On the other side of the planet, UK companies are grappling with record levels of shares and retail prices are rising at the fastest pace since November 2017.

Germany’s recovery is also threatened. A key measure of business confidence in Europe’s largest economy, released Wednesday by the Munich-based Ifo institute. It fell more than economists had predicted, and the drop was attributed in part to shortages of metals, plastics and semiconductors, among other goods.

What Bloomberg Economics Says …

It’s hard to see the supply chain bottlenecks resolved anytime soon as some major exporters, including Indonesia and Vietnam, are still struggling to contain the delta outbreak. It could continue to drag the global recovery down by slowing production and driving up costs, but without derailing it. – Chang Shu, Asia Chief Economist

At the center of the price pressures is the transportation bottleneck.

Large retailers tend to have long-term contracts with container lines, but Asian production relies on networks of tens of thousands of small and medium-sized producers who often organize shipping through logistics companies and freight forwarders. In turn, they have been fighting to secure a space for customers, as boat owners sell to the highest bidders.

About 60% to 70% of shipping deals on the Asia-America route are done through spot or short-term deals, according to Michael Wang, an analyst at President Capital Management Corp. He said auction-style pricing can continue until Chinese New Year. in February 2022.

Buyers agree. In Germany, more than half of the 3,000 companies surveyed by the Association of German Chambers of Industry and Commerce expected widespread supply chain problems to persist into next year.

‘No choice’

“Now ocean liners don’t sign long-term deals, and most deals are at spot prices,” said Jason Lo, chief executive of Taiwanese gym equipment maker Johnson Health Tech Co. He said it was becoming impossible to estimate the shipping costs and doing it. financial planning, but “we have no other choice.”

Colin Sung, general manager of Dongguan-based World-Beater International Logistics Co., said a customer had more than 70 containers of goods in a warehouse in Shenzhen because his American buyer did not want to pay the shipping cost. Sung said that between 60% and 70% of his customers have reduced shipments due to increased costs.

For Asian factories outside of China, the problem is even worse. Many Chinese companies are willing to pay higher-than-market rates to load their cargo, said a spokesman for HMM Co., South Korea’s largest container line. So when the ships dock in ports outside of China, they are almost full.

Chinese companies that spent decades shifting production of lower-value components to cheaper labor markets in South and Southeast Asia now face the headache of trying to get those parts to factories where they can be assembled into finished products. .

“We’re talking a lot of money just to get things moving,” said Sunny Tan, executive vice president of Luen Thai International Group, which makes leather clothing and bags for global brands.

As factories succumb to closures, manufacturers are forced to play whac-a-mole, shifting raw materials from one country to another. Some have turned to air freight materials, such as leather, to factories to keep production lines running.

Meanwhile, Luen Thai’s Tan, who is also a vice president of the Hong Kong Federation of Industries, is trying to figure out how he will fill holiday shop windows in time for Christmas. “Hopefully buyers will see our product and kiss it when they realize how difficult it was to get it on the shelf.”

© 2021 Bloomberg


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