Pressure on prices
As the world’s pandemic lockdowns ease, New Zealand and other economies are counting the cost and preparing for a period of rising prices and inflation.
Pressure on the messy and congested international shipping network is unlikely to ease for a year or more. Many manufacturers are reporting shortages in raw materials and cost increases. Freight costs are rising, as are prices for everything from consumables to council rates and house prices. Inflation is on the way.
In New Zealand, ASB Senior Economist Mark Smith recently stated he expected inflation to run at above 2 percent for this year. Rising fuel prices
(up by over 7 percent) and new and used car prices (up by about 15 percent) have been particularly noticeable.
Business borrowing by small and medium-sized businesses was kept low over the past year thanks to the government support being provided through Covid until the end of 2023. However, almost all automotive businesses are back to normal and are likely to once again be relying on banks and other lenders for their borrowing.
So far, the Reserve Bank Credit Conditions Survey has found businesses are being cautious with their borrowing and holding off on spending.
The March report stated: “Most banks expect the softer demand from SMEs to continue for the next six months, with the exception of demand for working capital, which is anticipated to increase as the Covid-19 support measures come to an end.” Several banks also reported that agreements for temporary overdrafts, loan deferrals and other credit support had now reverted to normal.
Shipping containers are increasingly hard to find and rapidly rising in cost. Frank Willett, CEO of vehicle shipping company Autohub, says he has heard of containers that once cost around US$5,000 to book now being charged out at up to US$40,000.
The problem is, many of the world’s containers lie empty at the wrong ports, waiting for the congested shipping lines to be able to return them to where they are needed. Other ports have no containers available. “I have heard that at some overseas ports where there is nearby manufacturing ability, extra containers are being made so that exporters can get their goods out of the country.”
With the big shipping companies losing hundreds of millions of dollars in income during Covid-19, they are now trying to recoup their losses, as well as manage the costs of the shipping congestion.
“There are queues at some ports, including those in New Zealand, which are slowing up deliveries and loading. Each day they wait at anchor costs about US$50,000 a day, which has to be recouped.” The delay also lengthens the ship’s cycle between its regular ports.
Most cars come into New Zealand on RORO (roll-on roll-off) vessels. Frank says Toyota New Zealand’s carrier, Toyofuji, has chartered an extra two vessels to shift its usual monthly volumes as well as help with its backlog of over 10,000 new vehicles.
But their delivery won’t be helped by part of Auckland’s wharf space now being clogged by empty containers while the port is dogged by difficulties with a new automated container system. Meanwhile, in the South Island, Lyttelton has reduced capacity while its wharf is extended.
The abrupt grounding of most international aviation has had more than one knock-on effect. Martin Storey, Executive General Manager of automotive parts distributor Bapcor, says there has been a 10 percent increase in the cost of base engine oils. “Many factors impact on the price. One is that some oils are a by-product of avgas production so there is a shortage because less is being processed. Shortages in raw materials lead to price increases.”
Sea freight has become an even more dominant form of freight transfer, over bulk air and Martin is working on the assumption it will be a year or more before the borders open and aviation is back in shape for competition.
He says ensuring the New Zealand automotive industry has the parts and other supplies it needs has not been easy.
“Container prices continue to rise and we are hearing of China-Europe routes experiencing increases of more than 500 percent. Given the emerging post-lockdown demand in Europe and the US, we have found it even more challenging to bring products out of Asia and down to New Zealand. China’s shipments to US and Europe are being given priority and ships for us are often cancelled, rescheduled, or repurposed.”
However, he says that Bapcor has built up its inventories, especially in fast-moving lines, and adjusted its business forecasting to reflect the new way the world is operating.