China’s Frontline Factories Struggle with Commodity Costs
The Chinese government is ramping up its efforts to help national factories, power plants, and farms through a current surge in commodity costs. While Chinese citizens have escaped the worst of the aftereffects, the supply chain is facing significant financial challenges. Influential politicians, state officials, and exchanges have managed to stabilise prices compared to early May spikes, but the situation cannot continue long as it is.
In April, China’s producer-price index—a strong indicator of factory prices—increased 6.8% year-over-year in its most rapid rise since October 2017.
A Cry for Help
Currently, Chinese factories are absorbing the majority of the cost pressures in order to not pass along the rising prices to consumers. Yet electric goods manufacturers are already cutting rod and pipe orders, according to Henan Qixing Copper Co. When Premier Li Keqiant visited eastern coast city Ningbo, several local manufacturers confronted him with pleas for help: a copper valve producer asked for additional government support, and a home electronics maker explained that astronomical raw materials prices had put great pressure on its factories.
As for farmers, hog producers are facing high corn, soybeans, and wheat feed costs, even as their profits from pork stagnate. According to Liu Chen, a Heilongjiang corn farmer, fertiliser costs have jumped 20%, while land rents and labour expectations have increased by half. ‘We’ll likely lose money by the time harvest comes around’, he said.
Finally, power plants have suffered from elevated coal prices: 865 yuan per ton, approximately 50% above average. ‘Nearly all coal-fired power plants lose money...when prices [rise] above 800 yuan per ton’, said Yu Zhai, a market analyst. Several Guangdong factories have already shifted operation hours, while others have cut their production operations to three days per week. As Yu warned, ‘some plants may try to reduce [electricity] generation’.
International Repercussions Loom Large
Coupled with rising supply shortages, China’s commodity price surges indicate the potential for global inflation. Currently the world’s largest exporter, several powerful countries will suffer if Chinese manufacturers start passing along the consequences of rising costs. While Chinese policy makers assure companies that commodity price impacts won’t last long, the government has promised to strengthen raw-materials market controls.
Overall, the gap between the consumer price inflation (CPI) and producer price inflation (PPI) indicates ‘an uneven recovery of the economy’, according to Raymond Yeung, Australia & New Zealand Banking Group Ltd. chief China economist. The global commodity increase, however, isn’t entirely within China’s control. Qu Hongbin, a Hong-Kong chief China economist at HSBC, explained that ‘any single policy from China [is unlikely to] fully contain the upward pressure on prices’, as global liquidity, supply-chain backlogs, and U.S. market recovery all contribute to the current crisis.
To try to control commodity costs, the Chinese government’s National Development and Reform Commission claimed that it would supervise copper and aluminum markets much more closely. ‘We expect commodity prices to stabilise in the coming months’, said Louis Kuijs, head of Asia economics at Oxford Economics.
Yet many economists predict that China’s PPI will continue to increase through Q2 of this year, especially as the world faces supply chain shortages. Global semiconductor shortages, mining disruptions, and shipping delays will also make recovery difficult. And what happens in China won’t stay in China. ‘If the bargaining power of Chinese producers is strong’, said Zhang Ning, a UBS economist, ‘there is a possibility that the rise in product prices will spill over onto global inflation’.
Driver shortages: Why the industry needs to be worried
While driver shortages are a global problem, with a recent survey from the International Road Transport Union suggesting that driver shortages are expected to increase by 25% year-on-year across its 23 member countries, the issue has very much made itself felt for UK businesses in recent weeks.
A perfect storm of factors, which many within the industry have been wary of, and warning about, for months, have led to a situation wherein businesses are suddenly facing significant difficulties around transporting goods to shelves on time, as well as inflated operating costs for doing so.
What’s more, the public may also see price rises as a result due to demand outmatching supply for certain product lines, which in turn brings with it the risk of customer dissatisfaction and a hit to brand and stakeholder reputation. Given that this price inflation has been speculated to hit in October, when the extended grace period on Brexit customs checks comes to an end, the worst may be yet to come.
"Steps must be taken to make a career in the industry a more attractive proposition for younger drivers, which will require a joint effort from government, industry bodies, and the sector as a whole"
That said, we have already been hearing reports of service interruption due to lack of driver availability, meaning that volumes aren’t being transported, or delivered, to required schedules and lead times. A real-world example of this occurred on the weekend of 4-6 June with convenience retailer Nisa, with deliveries to Nisa outlets across the UK affected by driver shortages to its logistics provider DHL.
But where has this skills shortage stemmed from?
Supply is the primary issue. Specifically, the number of available EU drivers has decreased by up to 15,000 drivers due to Brexit alone, and this has been further exacerbated by drivers returning to their home country during the COVID-19 pandemic, as well as changes to foreign exchange rates making UK a less desirable place to live and work. This, alongside the recent need to manage IR35 tax changes, has also led to significant inflation in driver and transport costs.
COVID-19 complications have also meant that there have been no HGV driver tests over the past year, meaning the expected 6,000-7,000 new drivers over the past year have not appeared. With the return of the hospitality sector we understand that this is a significant challenge with, for instance, order delivery lead times being extended.
It is little surprise, therefore, that the Road Haulage Association (RHA) earlier this month became the latest in a long line of industry spokespeople to write to the government about the driver shortage for trucks. The letter echoed the view held by much of the industry, that the cause of this issue is both multi-faceted and, at least in some aspects, long-standing.
So, many in the industry are in agreement as to the driving factors behind this crisis. But what can be done?
Simply enough, outside of businesses completely reorganising their supply chain network, external support is needed. In the short-term, the government should consider providing the industry with financial aid, and this can also be supported more widely with legislative change.
Specifically, immigration policy could be updated to place drivers on the shortage occupations list, which would go some way towards easing the burden created by foreign drivers returning to their home countries. Looking elsewhere, government should also look for ways to increase the availability of HGV driver tests after the blockage created by the coronavirus lockdowns.
Looking more long-term, steps must be taken to make a career in the industry a more attractive proposition for younger drivers, which will require a joint effort from government, industry bodies, and the sector as a whole. As it stands, multiple sources suggest that the average age of truck drivers in the UK is 48, with only one in every hundred drivers under the age of 25. We must therefore do more to increase the talent pipeline coming into the industry if we are to offset more significant skills shortages further down the line.
On the back of a turbulent year for the supply chain industry, it has become increasingly clear that the long-foretold shortage of drivers is now having a tangible and, in places, crippling effect on supply chains.
Drivers, and the wider supply chain industry, have rightly been recognised for the seismic role they played in keeping the nation moving and fed over the past year under unprecedented strain. If this level of service is to continue, we must now see Government answer calls to provide the support the sector needs, and work hand-in-hand with the industry to find a solution. If we do not see concrete action to this effect soon, we are likely to be in for a turbulent few months.
Rob Wright is executive director at SCALA, a leading provider of management services for the supply chain and logistics sector