‘Everyone suffers’: How the global shipping crisis is impacting retail, building and mining in Australia
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In the week since we published the first part of our series on the global shipping crisis, are freight rates still outlandishly high?
As we saw last week, experts believe it will take years for the situation to fully unwind, if prices do indeed ever drop fourfold back to pre-pandemic levels.
Almost every ship that can be on the water is in transit or in port stocking up on goods.
And it will likely take until 2023 for new build ships to hit the high seas.
Warehouses are stuffed with orders shipping lines are unable to, or unwilling to, ferry to countries like Australia if it means missing out on the potential US$25,000/t rates on offer to take goods from China to North America and Europe.
Tasmanian Logistics Committee chair Brett Charlton from logistics provider Agility told Stockhead few areas of the Australian trade sector would not be impacted.
“There’s no one that’s not going to suffer, there’s not one party in this scenario that’s not going to be a victim of what’s happening be it import or export,” he said.
So just how will freight rates shake up some of the Australian economy’s key industries?
The Australian Retailers Association’s members are already facing disruption to their businesses by a wave of Covid-related lockdowns across the country.
They are also concerned about how they will maintain healthy stock inventories ahead of the Christmas season in light of port and supply chain disruptions and freight costs.
CEO Paul Zahra said supply chain issues had been seen throughout the pandemic, along with international flight caps that have reduced air freight volumes.
“Supply chain issues have been an ongoing concern for retailers throughout the pandemic, and it’s an issue that’s unlikely to go away any time soon as Covid continues to disrupt the delivery of products throughout the world,” he said.
“We’re deeply concerned about the cut to incoming flight caps and the flow on effects to the supply chains of Australian retailers who are reliant on sourcing their products from overseas.
“This comes at a time when businesses are already dealing with global supply chain issues and high shipping costs due to Covid impacts outside of their control.”
Australian retail giant JB Hi-Fi has increased its inventories by almost $200 million to address Covid-related supply disruptions and stock reductions.
But it is still seeing shortages in high value imports like computers and telco products, which have also been impacted by a global semiconductor shortage.
“We are still seeing though that we’ve still got stock shortages in some key categories,” incoming group CEO Terry Smart said on an earnings call Monday.
“For JB that’s categories like computing, we’ve seen some significant stock shortages from Apple, from Microsoft, from HP, which tend to be those premium products.
“We’re seeing shortages come through telco, through Apple and Samsung again being very short on stock.”
Large, preferred customers like JB Hi-Fi with heft and established supplier relationships may be able to wait out the storm, but others could find it harder to access containerised goods.
“Liners prioritise their key clients, so people who are absolutely essential to keep happy, they keep happy. And perhaps those customers in the liner business who are nice to have, not need to have, may feel a pinch,” BIMCO chief shipping analyst Peter Sand said.
“At the end in a crunch like this, liners have to make some tough decisions on where to deploy the empties, so naturally they go for where the freight rates are highest and where the clients are the essential ones.”
Sand believes the biggest losers from the freight shock could be back-haul exporters who were previously able to access containers for the next leg. Now those containers are being sent back to China as empties to be redeployed to more profitable trade routes.
“It may be grains exporters out of the US, it may be exporters out of Australia or New Zealand, which usually rely on the fact the container shipping industry needs to relocate the containers,” he said.
Sand said freight rates were being driven by consumer demand to the extent that importers may be able to increase prices to their customers down the line as well.
“They got accustomed to super low freight rates over many years,” he said.
“They may pay more for logistics right now, but I think the fact is the higher freight rates are also coming out of higher demand from customers.
“The proof of the pudding will be whether these higher freight rates and cost of logistics may find their way into consumer pricing index in the end.”
Housing demand went on an absolute tear on the back of the pandemic as the Federal Government and a couple of state governments in WA and Tasmania launched major stimulus packages to keep the building industry afloat.
Combined with record low interest rates and the relative ease with which most of Australia saw off the first bout of the pandemic, what they did instead was put the sector on steroids.
“Demand for new construction is well above normal, nearly all parts of the country are booming and some are at record levels,” Housing Industry Association of Australia senior economist Nicholas Ward told Stockhead.
“The ABS hasn’t released full data yet, but we anticipate they will report that with the financial year just finished there were between 130,000 and 140,000 detached houses started.
“That’s around 27% above the average over the past 10 years.”
About 80% of timber for housing is supplied locally, Ward said. But the balance is made up of imports and that is the part of the market that is more sensitive and flexible to demand surges.
According to some sources builders are also falling prey to the dog-eat-dog nature of international trade caused by the post-pandemic global shipping crisis.
The Master Builders Association of Victoria told The Age a recent shipment of European timber that could have supplied 500 homes was dumped in Shanghai so the container could be used to carry goods on the more lucrative US route.
Ward said he could not speak to the comments from the Master Builders, but he said timber import shortages were being noticed in the housing supply chain.
“Imports of timber have responded more slowly to booming domestic demand than is ideal,” he said.
“Timber is about 80% domestically produced in normal times but demand is stronger than normal at the moment, so we do need a few more imports than normal and those imports are slower to arrive than is ideal.
“We can see imports climbing though, so hopefully they’re not too far away.”
Ward said demand had been the big driver of building delays, which have blown out from 7-9 months to 12 months and longer.
Other sectors have warned of delays and supply disruption to major infrastructure projects as well, with the Australian Steel Association warning shipping costs were only going up.
“You’ve got this huge increase in global steel prices, you’ve got these huge increases in shipping costs, you’ve got congestion at the wharves … sometimes you can’t even get your product off the port overseas,” ASA chief executive David Buchanan told the AFR.
While container ship prices have been en fuego in 2021, bulk shipping prices, which threatened a similar spiral at the start of the year, have held steady.
That has maintained margins and customer appetite for Australian iron ore, which is sold on a free on board basis.
Back in the boom of 2008, Capesize freighters got a little out of hand, averaging US$147,000 a day through the first seven months of the year.
This year prices are way above normal levels and briefly touched US$40,000, but have since receded to more normal levels between US$25,000 and US$30,000.
That has maintained demand for Australian iron ore which, despite concerns about sliding Chinese demand and steel production cuts, is still at elevated levels of around US$160/t.
On the other hand, smaller Handymaxes and Panamaxes are carrying similar freight costs to Capesizes despite their lower payload, meaning smaller scale producers of more marginal commodities like bauxite have suffered.
Struggling bauxite miner and exporter Metro Mining (ASX:MMI) is one company that has partly blamed elevated freight rates for some of its issues.
It is engineering a shift to Capesizes to improve the project economics for its Bauxite Hills mine in Queensland.
“The least spectacular among the dry shipping industry is actually the Capesizes. I think across the board looking at freighters for dry bulk shipping, you pretty much pay $US30,000 regardless of the size of the ship,” Sand said.
“So if you have a Handymax that transports some 40,000t of cargo, you still pay $30,000, so that is comparably much more expensive.
“So I think actually the Australian (iron ore) exporters have benefitted from Capesizes not going through the roof, we have not seen Capesize rates of $100,000 per day, we have not seen them exceed US$40,000.
“It is strong freight rates but it is not demand destructive in any way.”
The broader challenge in the bulk shipping market is the spectre of Covid-19 related delays at Chinese ports, most recently seen at Ningbo – the world’s third biggest cargo port after Shanghai and Singapore.
“Recently we have seen ship managers have been told not to do crew change in China,” Sand said.
“To dry bulk, if all of a sudden ships pile up across the Chinese coast if demand stays strong, if that takes out capacity there will be at least a brief spike.
“But if demand is evaporating at the same time then those ships will just sit there.
“You saw with the coal ships (in Yantian), more than 100 ships being piled up with no impact on the wider market, but I guess if we are talking about the iron ore carriers unable to discharge, that would be more significant.”
The causes of the global shipping crisis and its impacts on Australian trade are now largely well-established.
And with some analysts predicting there could be at least two more years before the crunch unwinds, what then can be done to alleviate the pressure on the local economy?
“The Federal Government needs to continue to work collaboratively with industry to understand and support freight channels so retailers can maintain healthy inventory levels and that consumers can get the products they want as the busy Christmas shopping season approaches,” the ARA’s Zahra suggested.
Charlton, who sits on the reference group for the National Freight and Supply Chain Strategy said the simplest measure would be to increase warehouse capacity and source what could be sourced domestically.
Those measures, however, would only bring partial relief.
“As much as we like to think we have the capability to change all of the manufacturing to here, the reality of it is not quite right,” he said.
“There are a lot of things we can’t or we’re not set up to make here. I often hear in the media why can’t I get my bicycle here?
“There aremore mountain bike shops in Launceston than there are cargo ships. That’s great but you’ve got to have a rubber factory for the tyres, wire factory for the brake lines, steel… it’s not just a matter of making bikes.”
Charlton said another commonly-raised solution is a national shipping fleet.
“I hear throwaway lines like we should have a national shipping fleet; well that’s great, we haven’t had a national shipping fleet for many years,” he said.
“The way the ports in the world are set up with terminals is these large shipping lines have the arrangements with the terminals.
“If Australia went and bought a shipping fleet to do their trade, where is that going to go? Is it going to go to China, India or America?
“Then you’ve got your equipment, how are you going to get your containers, then you’ve got your seafarers.
“It’s such a big thing that in my vision it just doesn’t sit right.”
Given our lack of control over the global shipping crisis, Charlton said internal measures like boosting local manufacturing and improving supply chain management in Australia would be most effective measures at government and industry’s disposal.
“They can fix some of our systems, like the biosecurity system and they’ve allocated federal money to that, (and) you can look at reducing or spending money where there are blocks to infrastructure on the roads,” he said.
“Which they’re doing – all of these national supply chain strategies, there is a national plan and a lot of these things are being addressed, there is a lot of focus on data.”
Other things, like reducing red tape around the shipping industry, will also help remove unnecessary delays, Charlton said.
“We can work locally to try alleviate some of our bottlenecks here in Australia, we can also work on some of our trading patterns and some of our antiquated processes,” he said.
“We still need to send an original document overseas. In this day and age surely we can arrange for something digital to be done, blockchain and the like.
“The other thing is, as much as it doesn’t do me any good, relook at how some of these people are trading.
“Can we set up manufacturing here, … is there the ability to replace some of the timber that’s lost from the Sydney and Melbourne fires with timber from Tasmania, rather than export logs to China?
“Those are the things we can do because there’s no fix to the international shipping. All this stuff comes from overseas.”