Impact of transportation costs on global supply chains

Looking for interesting insights for those of you with the money smarts.

[quote=“NYT”]Cheap oil, the lubricant of quick, inexpensive transportation links across the world, may not return anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Rising concern about global warming, the reaction against lost jobs in rich countries, worries about food safety and security, and the collapse of world trade talks in Geneva last week also signal that political and environmental concerns may make the calculus of globalization far more complex.
The cost of shipping a 40-foot container from Shanghai to the United States has risen to $8,000, compared with $3,000 early in the decade, according to a recent study of transportation costs. Big container ships, the pack mules of the 21st-century economy, have shaved their top speed by nearly 20 percent to save on fuel costs, substantially slowing shipping times.

The study, published in May by the Canadian investment bank CIBC World Markets, calculates that the recent surge in shipping costs is on average the equivalent of a 9 percent tariff on trade. “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,” the report concluded, and as a result “has effectively offset all the trade liberalization efforts of the last three decades.”
Many leading economists say such predictions are probably overblown. “It would be a mistake, a misinterpretation, to think that a huge rollback or reversal of fundamental trends is under way,” said Jeffrey D. Sachs, director of the Earth Institute at Columbia University. “Distance and trade costs do matter, but we are still in a globalized era.”

As economists and business executives well know, shipping costs are only one factor in determining the flow of international trade. When companies decide where to invest in a new factory or from whom to buy a product, they also take into account exchange rates, consumer confidence, labor costs, government regulations and the availability of skilled managers.
One likely outcome if transportation rates stay high, economists said, would be a strengthening of the neighborhood effect. Instead of seeking supplies wherever they can be bought most cheaply, regardless of location, and outsourcing the assembly of products all over the world, manufacturers would instead concentrate on performing those activities as close to home as possible.

In a more regionalized trading world, economists say, China would probably end up buying more of the iron ore it needs from Australia and less from Brazil, and farming out an even greater proportion of its manufacturing work to places like Vietnam and Thailand. Similarly, Mexico’s maquiladora sector, the assembly plants concentrated near its border with the United States, would become more attractive to manufacturers with an eye on the American market.

With tainted products from China and a general questioning of “is this whole free trade thing such a great idea” then maybe some things will move back

But the effort to move factories, industries, skills etc will stave this off until there is more certainty

It’s not all doom and gloom. Industry will move back into America and promote solid growth throughout all income levels.{8964F298-71F2-465C-BBB9-0CA9436F3F4F}&print=true&dist=printTop

This will have an impact on low value high volume products mainly, along with supply chains involving shipping wood from the US to China, making that into sofas using metal shipped from brazil, wool shipped in from New Zealand and cotton shipped from wherever they grow that and then shipping the whole shebang back to the US in order to sell it. I think they must count themselves happy if they can fit 25 standard 2 person sofas into a container, and if they are selling for say 200US a pop FOB, the value of the container is a mere US$5,000. An increase from US$1500 in freight to US$4000 will be felt. If you ship US$45,000 worth of goods, the extra US$2500 won’t be good but it will not be a deal breaker.

I don’t see the fairly compact fairly high volume stuff I am doing moving back due to freight costs, aws freight is still small beer nin the larger scheme of things. Moreover, when people talk about what international freight costs are doing, things must be put into relief. For instance when I ship a container from China to the US mid west, what is more expensive, the sea freight over the pacific or the haulage from Long Beach to say Denver?

The trucking is more expensive, and also most likely a fair bit more polluting too.

Globalisation might slow a bit but we won’t see a reversal. What’s driving changes currently is something altogether more different.

China is getting less and less competitive, and well - factories in Dongguan and Shenzhen are closing as they can’t compete. some is going to vietnam, some is returning to Mexico or the poorer bits of Central Europe, and some of the demand has evaporated due to the global recession.

Interestingly enough, the largest shipper in the world - Maersk Lines - have seen their stocks getting hammered as global container transport is forecast to only grow 7% P.A. this year and next. Moreover, they can’t raise prices on the routes from Asia to Europe which is a negative for them too. (I don’t mind the latter aspect one bit)

Yeah read that in some article.

It’s more expensive to ship wine from California over the Rockys to the Midwest, than to ship from France

So it does seem you may have an advantage in access and proximity to the ocean. China’s industry was located in provinces close to the ocean. If they are moving then doubt it will be inland.
Therefore don’t see much chance then of the more inland provinces being developing further, unless internal consumption picks up

[quote=“TNT”]So it does seem you may have an advantage in access and proximity to the ocean. China’s industry was located in provinces close to the ocean. If they are moving then doubt it will be inland.
Therefore don’t see much chance then of the more inland provinces being developing further, unless internal consumption picks up[/quote]A mutual fund manager I know is betting on Chinese domestic consumption taking off, and points to construction of high-speed rail lines in which the gov’t’s investing more than they spent on the Olympics, but I’m far from convinced that the interior provinces are going to do much more than contribute food stuff and migrant workers.

You are seeing industry moving inland, that I must admit, however it’s where sea transport is an OK option, such as up the Chang Jiang and other places where transport is relatively cheap due to the presence of sailable water. For all the talk about high speed rail note that it matters fuck all for what I do. Granted, I went on a high speed train from Nanjing to Shanghai recently, however for what we did 2 hours drive in the hinterlands behind Nanjing (in a hole called Maanshan, where even the pros were butt ugly), which was meat slicers, the high speed option was fun to ride and that was it. The goods are trucked out on roads which could do with a decent paving, and while the 400km to the port was not too bad I guess costwise, I don’t think it’s an option if you have your sweatshop in say Guiyang. Guiyang and similar locales far away from sailable water are rather unlikely to see a Dongguan style boom, as the costs and the difficulties in getting the goods to port make it hard to export from such locales.

I see the lower end going to SE Asia instead, and Mexico will take some, however the main point I am trying to make is that globalization as such is not going to go away, and most of the transport you see from China, Vietnam, Brazin etc. to the US will be feasible, even if sea transport costs double from their current level. A fuel driven increase will hit land transport by lorry harder as it’s more energy-intensive, so a Boston based supplier of say coffee machines will be relatively less competitive compared to a Chinese or Taiwanese one, when bidding on business in California.

If we are to see falling freight volumes into the US, the culprit will be altogether different. It will be economic weakness in the US itself, leading to a marked decrease in purchase power and much less consumption in the US. This is the most likely scenario in my book, and the implications for us will be a damn sight grimmer than a tripling of sea freight costs.

If US economic weakness spreading to the rest of the world becomes as nprofound in the next 3-4 years as I think and fear, transport and fuel costs will come tumbling down, they might alrady have started to do so.

Oil prices are falling due to drop in demand caused by high fuel prices. An ironic self correction in the fuel market.

I’d be more concerned about the liquidity in the market as credit markets gets tighter. Without easy access to loans and lines of credit, business are just going to slow down…credit and cash is what drives business forward, petrol is just the black stuff you find in barrels.

It all depends on how the markets will react more than how much oil costs…

It will all depend on how people will use their money…
As for me, a bargain hunt in Milano and surrounding areas can save me a lot of cash, when I use some of my holiday time to buy a new wardrobe, specially if it is work related. As for sport related wardrobe, the only thing I buy in Europe are the shoes, as a 46 is quite difficult to find in Taiwan - All the rest I prefer to buy in Taiwan…
If you buy carefully, you will see that finding a nice t-shirt made in Italy can cost you less than 10€ (that is with a 20% VAT on), Italy made pants at 20€ and shoes around the same mark. So why you buy China made products? Because some times, you just don’t have a choice… Try going to a shop in Taiwan of Benetton, and to the same shop in Milano. The difference? You pay the double for the products that are made in China…