Trouble is brewing in the trans-Pacific trade in the form of Chinese inflation, especially in the main southern manufacturing centers, that shows no signs of slowing.
Come March 1, Hong Kong manufacturers, owners of more than 80 percent of the factories in the southern China manufacturing behemoth of Guangdong, will increase factory-gate prices 10 percent or more to offset rising costs, including an 18.6 percent jump in minimum wages — the second increase in less than a year and extending an inflationary trend that emerged last fall.
The news from neighboring Dongguan is harsher still, with Hong Kong-owned factories facing a minimum wage increase of at least 19.6 percent on March 1.
Some manufacturers undoubtedly will attempt to absorb part of the increase, but fears are growing that the potential for higher prices during a fledgling U.S. recovery will curb consumers’ appetites for Chinese goods — and filter down to trans-Pacific shipping volumes.
|Although many manufacturers have escaped the inflationary pressures on the coast for low-cost interior regions, most of China’s garment and toy production still occurs in Guangdong. If that pressure pushes more manufacturers inland, production costs may decline, but supply chain costs could increase. The U.S. imported more than $25 billion worth of toys from China in 2009, the last full year for which data is available, down from $29.2 billion a year earlier, according to the U.S. Census Bureau. Toy imports represented 8.4 percent of all U.S. imports from China that year.
In Morgan Stanley’s China Business Condition Index for January, 45 percent of those polled said they were intent on passing at least part of the extra labor costs to consumers. Another 40 percent accepted a small cut in profitability as inevitable but took consolation in the possibility that higher incomes could increase domestic consumption.
Willy Lin, chairman of the Hong Kong Shippers’ Council, warned members to prepare for a rough year. “Challenges for shippers in 2011 will come from two main fronts,” he said. “Overseas buyers (including those in the U.S.) are still demanding very low prices. However, it is unlikely that sellers would repeat the same mistake this year of underestimating the impact of cost increases. The big expectation gap is going to make completion of deals difficult, and trade flow will become erratic. The fact is that, as the U.S. dollar continues to dwindle, increases in the price of goods are inevitable.”
For now, local analysts are convinced trans-Pacific trade will ride the wavelets of China inflation. Tom King, regional transportation analyst at Goldman Sachs, concedes inflationary pressures could threaten trans-Pacific demand, but on balance, he believes “the robustness of the economic recovery in the U.S. at a macroeconomic level means there will be more jobs, meaning more people will be able to buy and will be inclined to do so.”
Kim holds out little hope for the Asia-to-Europe trade, forecasting a 5 percent drop in volume, but expects Chinese exports to the U.S. to increase 7 percent, despite Chinese inflation rising 5.5 percent over the coming 12 months and a 6 percent rise in the value of the yuan that would further boost the price of Chinese goods.
On the westbound U.S.-to-China trade, Kim sees little change in the mix of scrap, steel, grain, scrap paper and capital goods, but volume should rise slightly after 2010’s double-digit increases.
While southern China still accounts for the lion’s share of trans-Pacific trade, inflation levels appear more benign, at least for now, in the country as a whole. Alarm bells first tolled in November when inflation peaked at 5.1 percent year-over-year. Food accounted for 75 percent of China’s inflation. Food was also the main culprit when the country’s inflation surged to 8 percent in 2008, when supplies were disrupted.
As the year unfolds, a bigger concern may be a money supply that has soared 50 percent since the beginning of 2009. Real interest rates have fallen over that period, and financial institutions have been lending more than they should against government-imposed limits.
From the carriers’ point of view, it’s difficult to assess the possible impact of inflation because capacity clouds the issue. A number of factors —including the end of numerous economic stimulus programs and rising inventory levels — have imposed downward pressure on volumes since last August’s peak, and capacity will jump this year as an armada of new vessels are delivered.
The first signs that 2011 may be very different on the rate front from last year came early last month when carriers’ efforts to introduce a Jan. 1 general rate increase on trans-Pacific routes largely fell flat. Instead, carriers secured a limited “peak-season surcharge” leading up to the Feb. 2 Chinese New Year, which appears to have triggered a 10.1 percent increase in Drewry Shipping Consultants’ Hong Kong-Los Angeles container rate benchmark in the first week of January, to $2,119 per 40-foot equivalent container unit. There is no evidence to suggest that could be maintained after the holiday.
Contact Mike Grinter at email@example.com.