Shipping, supply chain crunch could drag into 2022 as world economy awaits Delta variant shock
- China’s determination to stamp out the coronavirus has meant even a small number of cases can cause major disruptions to trade
- Freight rates are being pushed to record highs, prompting some exporters to raise prices or simply cancel shipments altogether
A supply chain crunch that was meant to be temporary now looks like lasting well into next year as the surging Delta variant upends factory production in Asia and disrupts shipping, posing more shocks to the world economy.
“We can’t get enough components, we can’t get containers, costs have been driven up tremendously,” said Christopher Tse, chief executive officer of Hong Kong-based Musical Electronics, which makes consumer products from Bluetooth speakers to Rubik’s Cubes.
Tse said the cost of magnets used in the puzzle toy have risen by about 50 per cent since March, increasing the production cost by about 7 per cent.
“I don’t know if we can make money from Rubik’s Cubes because prices keep changing,” he said.
“Port congestion and a shortage of container shipping capacity may last into the fourth quarter or even mid-2022,” said Hsieh Huey-chuan, president of Taiwan-based Evergreen Marine, the world’s seventh-biggest container liner, at an investor briefing last week. “If the pandemic cannot be effectively contained, port congestion may become a new normal.”
The cost of sending a container from Asia to Europe is about 10 times higher than in May 2020, while the cost from Shanghai to Los Angeles has grown 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 have its effects compounded,” HSBC Holdings said in a note.
In addition, producers including Taiwan’s Giant Manufacturing, the world’s biggest bicycle maker, said they will raise prices to reflect the increased costs.
In the US, forecasters have lowered growth projections for this year and lifted inflation expectations into 2022, according to Bloomberg’s latest monthly survey of economists.
Compared to a year earlier, the personal consumption expenditures price index is now expected to rise 4 per cent in the third quarter and 4.1 per cent in the fourth, double the US Federal Reserve’s 2 per cent goal.
Hong Kong-based coffee-machine maker Eric Chan does not see the crunch easing for months as he juggles a supply line that involves hundreds of components to meet booming demand for kitchen appliances.
“We are storing up critical components for one year of usage because if we miss one component, we cannot manufacture the products,” said Chan, chief executive of Town Ray Holdings, which gets 90 per cent of sales from household brand names in Europe.
Even mighty Toyota Motor is affected. The carmaker warned this month it will suspend output at 14 plants across Japan and slash production by 40 per cent due to supply disruptions including chip shortages.
On the other side of the planet, companies in Britain are grappling with record low levels of stock and retail selling prices are rising at the fastest pace since November 2017.
Germany’s recovery is also under threat. A key measure of business confidence in Europe’s largest economy, released on Wednesday by the Munich-based Ifo Institute for Economic Research fell by more than economists had predicted with the drop blamed in part on shortages for metals, plastic products and semiconductors, among other goods.
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It is hard to see supply chain bottlenecks being resolved any time soon, with some major exporters including Indonesia and Vietnam still struggling to contain the delta outbreak. It could continue to drag on the global recovery by slowing production and pushing up costs, although not derailing it.
Big 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 arrange shipping through logistics firms and freight forwarders. They in turn have been struggling to secure space for clients as vessel owners sell to the highest bidders.
Some 60 per cent to 70 per cent 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. He said auction-style pricing may continue until the Lunar New Year in February.
In Germany, more than half of the 3,000 firms polled by the Association of German Chambers of Industry and Commerce expected widespread supply-chain problems to persist into next year.
“Now container liners don’t sign long-term agreements, and most deals are done by spot prices,” said Jason Lo, CEO of Taiwanese gym equipment maker Johnson Health Tech. He said it was becoming impossible to estimate shipping costs and do financial planning, but “we have no choice.”
Colin Sung, general manager of Dongguan-based World-Beater International Logistics, said one client had more than 70 containers of goods sitting at a warehouse in Shenzhen because his American buyer did not want to pay the shipping cost. Sung said 60 per cent to 70 per cent of his clients have cut shipments due to rising costs.
For Asian factories outside China, the problem is even worse. Many Chinese companies are willing to pay above-market rates to load their cargo, said a spokesman at HMM, South Korea’s biggest container line. So when the ships call at ports outside China, they are already almost full.
Chinese companies that spent decades shifting production of lower-value components to cheaper labour 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 are talking about a lot of money just to move things around,” said Sunny Tan, executive vice-president of Luen Thai International Group, which makes clothing and leather handbags for global brands.
As factories succumb to lockdowns, manufacturers are forced into a game of whac-a-mole, switching raw materials from one country to another. Some have resorted to airfreighting materials such as leather to factories to keep production lines rolling.
Meanwhile, Luen Thai’s Tan, who is also deputy chairman of the Federation of Hong Kong Industries, is trying to figure out how he will fill festive display windows in time for Christmas.
“I wish when shoppers see our product they give it a kiss when they realise how difficult it was just to get it to the shelf,” he said.