Home > Latest News > Retailers & Supplier Facing Rocky Period Ahead, Shipping, Inflation & Shutdowns Set To Impact Market

Retailers & Supplier Facing Rocky Period Ahead, Shipping, Inflation & Shutdowns Set To Impact Market

Australian CE and appliance retailers are facing a double whammy with COVID outbreaks in China delaying stock and rising prices due to the high cost of shipping goods, then, there’s the issue of rising inflation and it’s affect on buying patterns.

With both Shenzhen and Shanghai ports struggling to ship goods because factories have been forced to close as China tries to contain a spreading Covid-19 outbreak retailers and suppliers are struggling to identify what the future holds.

In Shenzhen where a lot of CE products are manufactured 17.5 million residents were told to work from home, with all non-essential businesses and public transport shutdown.

This has had an immediate on brands such as Lenovo, TCL, and Apple via their manufacturing relationship with Foxconn.

Also set to be hit are brands such as Sony, LG and Samsung who manufacture their value TVs via OEM partners such as TCL who are the world’s largest manufacturer of TVs.

Apple supplier Foxconn shut down two operations this week in Shenzhen which will impact supplies of iPhones iPads and Apple’s new MAC computers.

Apple’s top iPhone manufacturer said it is waiting on the advice of the local government to determine when the factories will reopen.

Shenzhen is also home to around half of all the online retail exporters in China, many who ship into Australia are now closed down.

17.5 million Shenzhen residents have been told to work from home, with all non-essential businesses and public transport shut down.

At yesterday launch of the new range of Samsung TVs for the Australian market the Vice President of consumer Jeremy Senior said, “touch wood, we have stock of the new models, they are landed and, in our warehouses,”.

Several brands who have stock on the water are now struggling to ship further stock out of China.

Besides rerouting Apple’s supply chain, the weeklong lockdown in Shenzhen could cause major disruption to international supply lines of other tech giants. Shenzhen is home to some of the world’s largest ports and is a major terminus in trade between the U.S. and China.

When authorities halted operations at Shenzhen’s Yantian port to tackle a COVID outbreak last June, it caused a shipping backlog that took months to ease.

Yantian is the world’s fourth largest port and processes roughly 90% of China’s electronics shipments.

At the same time tight capacity and rising fuel costs resulting from the war in Europe between Russia and Ukraine has already seen an increase in air cargo rates up, with Freightos Air index (FAX) Shanghai-US East Coast rates climbing to more than $16/kg last week, a 42% increase so far this month.

Rates from Europe to Australia are also rising, with prices from Frankfurt, for example, increasing 17% to Sydney, 18% to Shanghai and 110% to Hong Kong as it struggles with its own surge.

The pause in manufacturing will is most likely to cause a surge in freight demand once factories reopen claim analysts.

And the degree of impact on ocean logistics will depend on how long the lockdown lasts, and the extent to which the ports are affected.

If some of the ports close because of a lack of products to ship, US and EU destinations could experience a welcome lull of arrivals in the coming weeks, followed by an unwelcome surge as pent-up demand is rushed out.

The outbreak at the port of Yantian last May and into June saw operations decrease by about 75%. It took about three weeks to recover, causing a backlog of ships at Yantian and congestion at ports such as Sydney and Melbourne.

Capacity idled by congestion also led to ocean rate increases of more than 25% from Asia to Australia, and a 21% rise to Europe.

Rates from Asia to Australia are already 86% higher than they were even after the June increase pushed rates to $9k/FEU, and Asia-N. Europe rates of $13,283/FEU are 21% higher than last June.

The latest indicators suggest that transpacific demand remains strong, and current rates are still about 20% below the records set during the height of peak season in September.

So, depending on the extent of the current disruption, it could be enough to send transpacific prices up once again, though perhaps not to the same degree as late last year.

The next big issue is inflation with the cost of consumer electronics and appliances tipped to rise by as much as 20-25%.

According to Small Cap Analysts inflation has been stalking Australians for a while now but it is no longer a secret with flying petrol and diesel prices hitting the back pocket of everybody.

And while the direct cost is being felt at the bowser, it won’t be long until higher fuel costs filter through to most transactions, in the retail space particularly CE and appliance products.

One of the few banks willing to punt on how high inflation will go is ANZ, which has now forecast it to hit as much as 5% this year, slashing purchasing power for millions of Australians.

Adding to that pain, ANZ is throwing in a forecast for continuing low wage growth and interest rate hikes, which would exacerbate the pain in the wallet.

The inflationary pressures began with the COVID-19 supply chain disruptions but now they are being added to by floods and the war in the Ukraine – setting the scene for a very interesting second half of 2022.

“We see headline inflation approaching 5% by mid-2022 as the impact of higher petrol and food prices flows through,’’ said the ANZ report.

“While this spike is not unexpected, as the RBA noted in recent commentary, it increases the peak and duration of higher inflation.”

The last time inflation hit those levels was way back in September 2008 – during the global financial crisis – although at that time rising wages cushioned the blow somewhat.

Higher prices a shock after low inflation era
For many who have been brought up in an era of very low inflation, this new burst could come as a big shock as the real purchasing power of wages is eroded and household wealth and purchasing power goes backwards.

In some ways it is a bit like the super low interest rates and big government stimulus giveaways of the last couple of years are about to be swallowed up in higher prices.

Rising prices would also stimulate a war of further giveaways in the Federal Election, with the coming March Budget now almost certain to contain some sweeteners such as tax cuts or payments designed to make it look like households are getting some relief from price pressures.

Will inflation psychology worsen the damage?
The ANZ report reminded us that the Reserve Bank of Australia (RBA) has previously spoken about inflation psychology – something that happens when people become so accustomed to the idea of rising prices that they become something of a self-fulfilling prophecy.

If this shift in inflationary thinking happens then any further supply shock will keep feeding inflation and higher inflation would become much more entrenched and tougher to get rid of.

This is particularly the case in Australia because much of the current inflationary pressures – including higher fuel prices – have been imported but they will also start to feed into further inflation on a local level.

For the time being these price rises have not been followed up by rises in interest rates, although that could well happen – particularly if even faster rising inflation in the US is pursued by rising rates.

RBA promise to hang tough but higher rates are coming
RBA governor Dr Philip Lowe has explicitly said he is not feeling pressured to raise rates due to the large number of pundits predicting higher rates, although he did warn that people should be prepared for higher rates in the future.

“I don’t feel mounting pressure. We do what we think is the right thing at each of our meetings, so the pressure, it’s great for media stories, but I don’t feel that myself,” Dr Lowe said.

It will be a different matter if domestic inflationary pressures build up more strongly than expected.

The US situation is instructive with inflation hitting 7.9% annualised last week with some expecting that to rise to 9% in coming months as fuel prices ratchet through supply chains.

If the US raises rates above Australia’s that could lead to a situation in which our dollar comes under pressure, which might give the RBA cause not to open up too much of a disconnect to interest rates in other advanced countries.

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