[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]

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

Why do people keep on posting it's "not the end of civilization" on this website?
The fact that this website is up and running kind of suggests that already doesn't it?

[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:

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.

I don't think that the higher unemployment in Asia will have many effects. These guys earning $1 a day if a high unemployment rate pushes wages even lower (and the wages can't be pushed lower eternally as even Asian must eat and pay for shelter) the proportion of manufacturing wages on the final product is very low (let's assume that instead of $1 it will be $ 0.80). For this reason; I guess that increase in transporting costs are more influental on the final product price than wages (which are actually that low that it is difficult pushing them lower).

Your statement Mr. Bill that these guys in the shipping industry are not hurt at all by high oil prices is most astonishing.

[MrBill]

MrBill wrote:

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.

alokin wrote:

Your statement Mr. Bill that these guys in the shipping industry are not hurt at all by high oil prices is most astonishing.

Is it my writing skills or your reading comprehension that is causing this lack of communication? : - ))

Sorry, but they have not been talking about higher fuel prices much less complaining about them. The marine chemical and paint guys have so far been able to pass along their increased costs as the shipping business has been booming on the back of growth in Asia and global trade rising at twice the rate of world GDP. But as per that article, if fuel prices represent 60% of their costs, and they are still rising, then going forward those ship owners are going to be hurt as the volume of freight decreases from a slowing global economy.

That does not change the dynamics of long-distance intermodal transport using ships and rail. It re-inforces them. The higher fuel prices are the more attractive bulk transport looks in comparison to truck or plane. Only fuel shortages would change that.

If wages in Asia cannot fall any further then those higher fuel prices will have to be passed along to end consumers. That along with a slowing global economy means that rich world consumers may simply buy less from Asia. Period.

Those Indian workers in sweatshop conditions have no choice. They have no pricing power. They are at the margins of society in a very poor country. Some are refugees from place like Sri Lanka, so they have very little legal protection in India. So they can be exploited even more than local citizens. But if they do not work then they do not earn. That is why even human rights organizations on the ground work to improve their working conditions, but stop short of telling High Street clothiers in the UK, for example, to stop sourcing from India.

Poorly paid work is better for them than no work. The solution is raising living standards by uniformly enforcing existing labor laws that ban child labor and minimum wage laws as well as rules governing the length of the work week and worker safety issues. So long as existing rules and laws are not enforced then there will always be unscrupulous sub-contractors to exploit the most vulnerable whether that is in Asia, Mexico or a meat packing plant in Des Moines.

[watermelonpunch]

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.

No, if this is the case, it's more likely that the stuff already here will just sit on the store shelves. Even if you tend toward the armageddon alarmist scenario, the hungry masses probably won't be storming the stores for bobble head dolls, formaldehyde soaked clothes, and poisoned toothpaste.

Why do people keep on posting it's "not the end of civilization" on this website?
The fact that this website is up and running kind of suggests that already doesn't it?

I don't know, that could go either way maybe. LOL

[bodigami]

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

Why do people keep on posting it's "not the end of civilization" on this website?
The fact that this website is up and running kind of suggests that already doesn't it?

The end of civilization will happen "any moment now"... well, probably civilization will just change drastically.

[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]

Stock up on goods not manufactured in the US.

telegraph

I made a post previously about shipping costs ships+trucks and how it relates to "the last mile".
http://www.peakoil.com/fortopic36619-0-asc-0.html

There have been endless debates on this forum as to how significant is fuel costs relative to (long haul travel) for example shipping containers 9,000 miles across the ocean. I think people are looking at this from the wrong angle. It is not the 9,000 miles that is expensive, it is the last 100 miles that is expensive. It is the unloading of the containers onto 1,000 trucks and "fanning out" the final leg of the travel to 1,000 different locations that is expensive. The salary of 1,000 truck drivers is definitely more then a single ship's crew. The cost of maintenance for 1,000 trucks is more then a single ship. The last 100 miles costs more then the first 9,000 miles. It is the cost of the last mile that will make or break human society in a post PO world and there is only 1 vehicle that can accommodate the last mile --> trucks. Therefore it is the cost of running trucks that will determine the fate of humanity: not planes, trains, and ships.

Perhaps the "cause" of decreased shipping volume is the decreased volume of trucking?
When a ship docks, it's cargo is unloaded onto trucks.
less trucking == less shipping
Everything is connected huh?

[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

Replacing 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.

source: Inflation has firms rethinking Made in China

[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...

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.

The flood of low cost goods here in N. America has been largely due to the low cost of other factors in the overall price such as energy, infrastructure (Free ports and highways), retailing makeup (aka Wal-Mart), lack of middlemen, etc. The greatest increase to the price of a product won't be throught the increase in labour costs (except in labour intensive productzs) but will be driven by the changes to the other factors driven by the increase in energy costs. A reduction in the overhead costs such as maketing can help hold down product costs and rein in inflation.

I did like the note about the interest in returning production to North America - some of these companies must have taken their heads out of the sand for a minute and looked around. It will also benefit Mexico which had anticipated greater manufacturing investment after NAFTA but lost out due to the lower wages in China, strong pro-corporate governement and the artifically low cost of Transportation we've had until the last couple years.

[cube]

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.

*delicate cough*
That sounds like it was written by a bleeding heart liberal with no sense of economic reality.
It's very popular these days to blame someone else (preferably someone more financially success than us) for the world's problems.
However at the end of the day, I truly believe the world is the way it is NOT because of big business manipulating laws but because you, me, and everyone else made choices.
//
If every American did what the author above mentioned then shoes would be made in America and not China. I can imagine a PO future where shoes are produced maybe 1,000 miles away from point of sell instead of say 10,000 miles however I just don't see shoes being made in America. Mexico perhaps?

[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]

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.

That seems so true. So many business decision are make on narrow margins of difference. A typical pick-up truck had roughly 21 hours of direct labor back in the 80's when I was in that business. That is strictly for vehicle assembly, not components. Maybe less labor now with increased outsourcing of subassemblies. So, let's say that truck is shifted for production from Canada to Mexico, which in fact now seems to be the plan by GM. If the wages, overhead and benefit load difference is $35 per hour that would amount to under $800 saved on that item, which is priced in the $17,000 to $35,000 range. Now, let's ponder what it costs to ship that finished vehicle to Canada or New England from Mexico. And, what is costs extra to ship major components, such as engines, transmissions, axles and frames from the midwestern U.S. to Mexico to be incorporated into that assembled vehicle.