[mattduke]

Stock up on goods not manufactured in the US.

telegraph

[evilgenius]

Off of the top of my head there are two possible explanations - the one we all know and the 2008 Olympics. They will try to blame the slowdown on the Olympics because that is the Chinese way, they can't stand looking bad.

This makes me wonder about the costs associated with oil tanker shipping over long distances. Won't that begin to have a leveraging effect on price at some point? I wonder if the companies that own the stalled dry ships will try and convert them to wet ships because the oil game will be the most lucrative game around? How will the market place respond?

[DantesPeak]

I posted a similar article from Lloyd's List a month (?) ago.

Basically the energy cost of operating an average container ship has increased about 80% over the last year. That's bound to have shippers thinking of consolidating shipments more.

The drop in shipping charges (Baltic Index) by itself doesn't mean much when you look at the huge run up in shipping charges over the last few years or so.

[killJOY]

test

I keep getting a 406 error.

[Tyler_JC]

Shipping volumes aren't declining because of a scarcity of fuel, they are declining because of a drop in demand for products.

Consumers are buying less stuff from China. As a result, less stuff is being shipped from China to the United States and Europe.

That does NOT mean that we are going to suddenly run out of things not made in this country.

It's supply and demand, not the end of civilization.

[cube]

$this->bbcode_second_pass_quote('Tyler_JC', '.')..It's supply and demand, not the end of civilization.

[MrBill]

I watched BBC World News this weekend. Great investigative reporting. They showed High Street clothing stores in the UK - with a Mission Statement to stamp out unethical manufacturing in The Third World - inadvertantly sourcing clothes made by Indians earning less than a dollar a day and child labor as young as 10-years old earning significantly less. For a 66-hour work week. Basically, their sub-contractors were outsourcing the piecemeal work to others outside the factories controlled by independent auditors.

That labor cost differential is not going to disappear. Think of it as Jevon's Paradox in reverse. Higher transport costs due to the price of oil that result in less consumer demand for goods and services bought from Asia create higher unemployment/under-employment, and lower wages there, so that their exports remain competitive. And as ship and rail transport are the most efficient as measured by tons per mile divided by energy input they will be the floor price for long-distance transport and not the ceiling.

Anecdotally, I have beers every Thursday night with guys in the shipping business. Ship owners as well as those that cater to the shipping industry like marine paint and chemicals as well as supply chain managment and procurement. Really, none of them are singing the blues at the moment over higher fuel prices. Only for their own boats that they use on the weekends for water skiing with the kids. But they are talking about the chaos in financial markets.

Any fall in freight rates is more the result of over-investment in the Asian growth story than high fuel costs. Although high fuel costs certainly hurt profitability as freight rates fall due to a global slowdown. Higher costs + lower volumes = economic pain. Not the same decoupling of the global economy that some predicted. I may have to buy the beers this Thursday.

[alokin]

Mr Bill:

$this->bbcode_second_pass_quote('', 'H')igher transport costs due to the price of oil that result in less consumer demand for goods and services bought from Asia create higher unemployment/under-employment, and lower wages there, so that their exports remain competitive.

[MrBill]

MrBill wrote:
$this->bbcode_second_pass_quote('', 'A')ny fall in freight rates is more the result of over-investment in the Asian growth story than high fuel costs. Although high fuel costs certainly hurt profitability as freight rates fall due to a global slowdown. Higher costs + lower volumes = economic pain.

[watermelonpunch]

$this->bbcode_second_pass_quote('Tyler_JC', 'S')hipping volumes aren't declining because of a scarcity of fuel, they are declining because of a drop in demand for products.

Consumers are buying less stuff from China. As a result, less stuff is being shipped from China to the United States and Europe.

That does NOT mean that we are going to suddenly run out of things not made in this country.

It's supply and demand, not the end of civilization.

[bodigami]

$this->bbcode_second_pass_quote('cube', '')$this->bbcode_second_pass_quote('Tyler_JC', '.')..
It's supply and demand, not the end of civilization.

[Canuk]

http://www.ictsd.org/weekly/08-06-04/story4.htm

Here's an article which outlines the costs of container shipments from China to the Eastern US. Shipping costs affect larger items as they have a significant cost built in - many items like Ipods, etc. will not be affected as 100,000 or so Ipods can fit in a container. The economist sited Rubin works for the CIBC - a big bank here in Canada and a bit of a realist as economists go.

An example of what this will affect - a customer of mine (I build industrial automation) manufactured BBQ's and four years back filed an anti-dumping claim against imported Chinese BBQ's. He claimed the import BBQ's were being sold at a price below his material cost. A large portion of this type of product is shipping costs and with that portion rising as shipping goes up may restart lines that were mothballed due to this cost.

This will also help industries that have all but disappeared since as shipping costs rise small engine or appliance repair, etc. will again be required. These industries were destroyed by low cost goods enabled by the cheap shipping and will likely return as the shipping costs and the products they bring rise. Keep in mind - rising costs are not always bad the return of some decent Blue collar jobs to the US and Canada to offset the Wal-Mart economy will not be a bad thing. Unfortunately it will be short-lived as oil continues its decline but...

[cube]

$this->bbcode_second_pass_quote('mattduke', 'S')tock up on goods not manufactured in the US.

telegraph

[MrBill]

Higher food and fuel prices means less discretionary spending. Less demand for the type of products that Asia produces to sell in Europe and Asia. Lower corporate profits. Less demand for ships. More free capacity. Therefore, falling freight rates.

By the way I did go out with five guys yesterday from the shipping business again last night for beers, so in light of this discussion yesterday I had the chance to once again ask them how high energy prices were affecting them. I got the same answer as last time. It is just a cost of doing business. They think prices are high right now, but they expect them to come back down later. I did not argue with them. But there was no sense of panic either.

p.s. RE: HIGH COST OF CARGO SHIPPING COULD "REVERSE GLOBALISATION this is a good article. Thanks for posting it. It is nice to see some facts and figures.

[Canuk]

I think that there is part of the picture missing from the last mile. Roads, ports, etc. are mostly paid for out of the public purse (tax revenues) thus the true cost cost of transport is subsidised the theory being that all will benefit. Also, the production of most transportation equipment (cars, truicks, planes, ships) is also generally subsidised though tax breaks, etc. Warehouses and stock (products or partson the shelf) are costs to the company that owns or operates them. Of course a company would use a "free" asset to reduce their costs and optimize profits. Additionally the low cost of energy enabled manufacturers, distributors and retail outlets to shift to a Just in Time model to reduce costs. This transferred the cost of private facilities in part onto public assets (via our subsidized transportation networks - Thruways, etc). We enabled the consolidation of factories, retail outlets, etc. and were subsidizing entities (coporate or personal) who consumed greater amounts of products. If the cost of transportation was fully user paid (including policing, environmental, land aquisition, maintenance, etc.) this shift would likely have been not as dramatic.

My experience with LTL shipments at my business is that most of the trucks are running at 30-50% capacity - in 5 years of business I have never had a full truck show up at my dock. I suspect this will change (and delivery times will increase) as the cost of running an empty truck increases. Likely most people will be willing to stretch lead times to lower costs.

As energy costs increase it will likely necessitate a shift back to the previous system were goods were produced or stocked locally(state or smaller level). Instead of 5 warhouses in the US for a given brand it may necessitate 200+ smaller warehouses (obviously with an increase in labour costs) the one time savings from JIT is long past and the increase in costs from many factors including energy is coming. Ideally this could be partially offset by removing the current subsidies in our transportation network creating a user pay system to prevent market skewing by subsidies.

Here in Southern Ontario we shifted to the Big-Box stores nd lack of warehouse model much more recently than the US. As recently as 10-15 years ago we still had many small street front stores for hardware, auto parts, clothes, etc. and many local plants would make multiple products on flexible lines for the local market (Proctor and Gamble was a good Hamilton example - now closed). As shipping costs became a smaller component of the product cost they closed smaller plants to reduce manufacturing costs (the bigger portion of the cost). This trend of making products in only one place for the entire country will likely reverse.

[MrBill]

Thanks Canuk. Good examples. Much appreciated. Cheers

Imports now account for nearly 18 percent of the U.S. aggregate demand, up from 10 percent in the late 1980s

$this->bbcode_second_pass_quote('', 'R')eplacing China as the factory to the world is a tall order. With the exception of India, no country can come close to China's population of potential factory workers, but India lacks the infrastructure to quickly step in.

Still, there are signs that companies are shifting at least some manufacturing elsewhere. Vietnam and Mexico are two of the hottest locales.

Chris Kuehl, chief economist at the Fabricators and Manufacturers Association, said his members were fielding calls from customers looking into moving production to Mexico from China.

"It's still a trickle compared to what it was in the past (before the rise of China), but they keep getting inquiries from people who are saying, 'We're thinking of moving operations back to North America,'" he said.

[Canuk]

Of course the classic corporate answer would be to reduce the manufaturing cost by moving to a lower wage jurisdiction (vietnam - perhaps Bangladesh will also boom...). But since direct labour accounts for less than 20% (http://maaw.info/ArticleSummaries/ArtSumBoerJeter93.htm) of the actual cost of a product there are factors involved.

For example running shoes a high cost high profit product...
$this->bbcode_second_pass_quote('', ' ')American-made shoes were $6 more than the imported ones. That’s about 10% higher, and I happily paid the price. It does make one wonder exactly how much is saved by exporting so much to China, when all is said and done. Is New Balance subsidizing American manufacturing, or is there really not such a huge pricing difference? When I was in retail I learned that the actual cost of production was often minimal compared with distribution, packaging, and markup. Doubling labor cost doesn’t mean doubling the price; it could mean a trivial increase.

[cube]

$this->bbcode_second_pass_quote('', ' ')American-made shoes were $6 more than the imported ones. That’s about 10% higher, and I happily paid the price. It does make one wonder exactly how much is saved by exporting so much to China, when all is said and done. Is New Balance subsidizing American manufacturing, or is there really not such a huge pricing difference? When I was in retail I learned that the actual cost of production was often minimal compared with distribution, packaging, and markup. Doubling labor cost doesn’t mean doubling the price; it could mean a trivial increase.

[Canuk]

I agree - success of companies that outsource manufacturing (Nike...) is due to good marketing and not manipulation of laws. We make choices every day that create the system around us. A company reducing their costs is how the system should work.

The quote is not the best but I was merely emphasizing how little labor cost is actually reflected in a product and consequently how little the cost will rise when the manufacturing is done in jurisdictions closer to the eventual market. Having worked for 20 years in both manufacturing management and a custom manufacturing automation business I am aware of how small the labor cost of production can be relative to retail prices. For instance a ton of hot-rolled steel contains only half an hour of labor yet retails for significantly more than 45 dollars (approximate cost of direct labor and overhead for half an hour of steelworker labor).

Low cost consumer goods in the last decade have been influenced by efficiency in design, manufacturing methods, reduced materials and streamlined supply chains. Retail, marketing, advertising and distribution are far more significant portions of the cost of most products (thus W-Mart is the worlds largest most profitable corp.) Unfortunately these costs are beyond the control of most manufacturers so they work on the areas they can control which is labor.

The great disparity in wages more than offset the increase in shipping costs. As the shipping costs become greater than the difference in labor (as they will for many larger products but likely not running shoes) the manufacturing will return to Mexico, Canada and the US - the result to the consumer will not be the sky is falling but likely a marginal increase in prices - the increasing costs of energy will have a far more significant impact on prices than just the shipping as the cost of all the inputs increase and labor will become an even smaller portion of the cost.

[Denny]

$this->bbcode_second_pass_quote('Canuk', 'I') was merely emphasizing how little labor cost is actually reflected in a product and consequently how little the cost will rise when the manufacturing is done in jurisdictions closer to the eventual market. Having worked for 20 years in both manufacturing management and a custom manufacturing automation business I am aware of how small the labor cost of production can be relative to retail prices.