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  • From: Tompkins County Relocalization Project <tcrp-news AT lists.ibiblio.org>
  • To: tcrp-news AT lists.ibiblio.org
  • Subject: [tcrp-news] Fw: Transport costs could alter world trade
  • Date: Wed, 20 Aug 2008 12:00:15 -0400

This is the second major media story on the effect of fuel prices
on world trade to appear in the space of little more than a week.
(I forwarded the first of these, from the New York Times, on 3
August; the one below from USA Today appeared 12 August.) As I
indicated earlier, the shortening of manufacturing supply chains
is one of the most important consequences of the increasing costs
of fuel and possibly the single most important consequence as far
as relocalization is concerned.

Jon

==================================================================

http://www.usatoday.com/money/industries/manufacturing/2008-08-11-cargo-costs-oil_N.htm

Transport costs could alter world trade
By David J. Lynch, USA TODAY
[Front page of Money section, 12 August 2009]

On the high seas, giant vessels stuffed with furniture, toys and
electronics are slowing down in a bid to conserve fuel.

Customers are pulling packages from costly air shipments and
sending them by ship instead.

And some are beginning to wonder what an era of persistently high
oil prices will mean for the multinational corporations that have
come to rely on globe-girdling supply chains.

Crude prices have backed off last month's run toward $150 a
barrel. But they persist above $110 a barrel, a level that was
hard to fathom even a year ago. The end of cheap oil heralds a
potentially dramatic reshaping of the globalized trade flows that
have emerged in the past two decades. Rising transport costs are
suddenly a key factor in decisions about both where to place
factories and how much inventory to stockpile.

For now, the trend seems to favor the United States. Swedish
furniture maker Ikea opened a new plant in Virginia. Midwestern
steelmakers are thriving. And consumer products giant Procter &
Gamble is considering new distribution centers. All, some say,
because the cost of moving things from far-away places is
beginning to trump the savings involved in using far-away,
low-wage workers.

"Globalization is reversible," says Jeff Rubin, an analyst at CIBC
World Markets in Toronto.

Well, maybe. No one predicts a wholesale return of manufacturing
jobs to the United States. And there are other forces at work,
including a weak dollar, which boosts exporters. But today's oil
prices act like a tariff on global commerce, discouraging
long-distance shipment of some components and finished goods,
Rubin says. Shipping a standard 40-foot container from Shanghai to
the U.S. East Coast in May cost about $8,000, vs. $3,000 eight
years ago, when oil was around $20 a barrel.

If long-term trends push oil prices near $200, as some analysts
expect, sending that shipping container halfway around the world
would cost a staggering $15,000.

At such prices, the calculations that drove a doubling in global
trade volume since 2000 and the establishment of far-flung supply
networks might require rethinking. Orders might be placed with
factories closer to home. Shuttered assembly lines could be given
new life. And suddenly, the confident claims of globalization's
cheerleaders that distance doesn't matter would ring hollow.

"The low-hanging fruit of globalization has been picked. ... Now,
things are changing," says Stephen Jen, currency strategist for
Morgan Stanley in London.

At UPS, executives are nervously eyeing emerging shifts in trade
between continents, which could require swapping the shipper's
largest cargo aircraft for smaller planes on some ocean-spanning
routes. UPS also is looking ahead to the potential impact of
$200-a-barrel oil, examining the possibility that manufacturers
might relocate some production closer to the USA.

"If we see prolonged very high oil, you may see trade lanes
change. You may see more near-sourcing in the future, people
building the goods closer to the end consumer," CEO Scott Davis
told analysts on a July 22 conference call.

Offshore momentum slows

Higher shipping costs are casting a chill on what had seemed an
unstoppable trend toward the offshoring of U.S. jobs and
production. In an April survey of nearly 1,000 companies by RSM
McGladrey, the number planning to move offshore fell by 20% from a
year earlier.

A follow-up report that the Minneapolis-based consultants released
on July 31 showed that businesses are increasingly focused on
their transportation costs. In a survey of 357 small and midsize
businesses, 52% said they expect "dramatic increases" in their
freight costs, vs. 20% that identified transport charges as a
worry three months earlier.

"Where things are being made is going to change," says McGladrey
executive Tom Murphy. There already are tentative signs that
well-established patterns are in flux. Through July 19,
U.S. railroads had carried 5 million shipping containers, down
3.4% compared with the same period last year.

In May, Swedish furniture maker Ikea announced plans for a
930,000-square-foot manufacturing facility in Danville, Va. The
company decided to open its first U.S. production facility in part
because the cost of shipping its Expedit bookshelves, Lack coffee
tables and Besta entertainment centers exceeded the cost of making
them, says spokesman Joseph Roth.

One industry already might be benefiting from near-sourcing, Rubin
says. The first four months of this year, U.S. steel imports from
Australia and five Asian nations (China, South Korea, Japan, India
and Taiwan) fell 14.6%. That's helped domestic steel producers,
such as U.S. Steel, Nucor and AK Steel. Last month, AK Steel of
West Chester, Ohio, reported a record second-quarter profit of
$145.2 million, up 32% from the year-earlier period.

For the first time in more than 10 years, rising transport costs
are overwhelming the advantages of cheap foreign labor, making
made-in-the-USA steel products more competitive in the domestic
market, says Rubin. And the same thing is likely to happen in
other industries where transport costs represent a significant
share of the final price, such as furniture, apparel and
footwear. More than half of China's manufactured exports to the
USA are similarly "freight-intensive," he argues.

"I'm not saying all of that's coming back to Pittsburgh. ... But
this is something that's already started," he says.

Still, it's far from clear that the rise in transport costs
explains what's happening in global trade patterns. The decline in
container shipments might reflect the slowing U.S. economy. Some
companies are relocating production because inflation in
developing countries such as Vietnam and China is elevating
costs. And the domestic steel industry's improving outlook might
owe more to the falling U.S. dollar, which makes U.S.-made
products more attractive to foreign buyers, and to changes in
Chinese policy that began discouraging runaway steel exports in
the middle of last year.

"I'm not sure we would attribute much to the higher shipping
costs. ... I don't think that's a significant factor," says AK
Steel's Alan McCoy.

No big turnaround expected

Likewise, Yossi Sheffi, a professor at the Massachusetts Institute
of Technology, doubts there will be a wholesale return of
manufacturing to the USA. In part, that's because countries such
as China and India now offer more than cheap labor. Increasingly,
their product design and engineering expertise are winning
business. "They're going up the value chain. They're starting to
provide things that are just good," says Sheffi, director of MIT's
center for transportation and logistics.

Shippers' response to higher fuel bills is prompting a rethinking
of the lean inventory approach that has dominated business
strategy for years. From consumer products to autos, companies are
proliferating distribution centers so they're closer to customers,
Murphy says. That means inventories, whether in warehouses or
floating on ships that are moving more deliberately across the
waves, will be higher than in the past.

Consumer products giant Procter & Gamble began readying itself for
this new era even before the past year's doubling in crude oil
prices. In the past, the cost of building a factory or
distribution center far outweighed the costs of moving goods from
there to customers, says P&G spokesman Paul Fox.

"That is going to flip flop. Transportation costs are now going to
be critical to the distribution of products," he says.

Bloc by bloc

Morgan Stanley's Jen anticipates higher fuel costs eventually
reshaping global trade into regional blocs. Instead of relying so
heavily on imports from Chinese factories 7,500 miles away, the
U.S. will source from Mexico. Western Europe will rely upon
suppliers in the former Soviet bloc or Turkey. And Asia will
orient itself around the ever-larger Chinese economy, expected to
be roughly as large as the U.S. economy by 2030, according to a
new Carnegie Endowment study.

If Mexico stands to benefit, China's role as factory-to-the-world
faces challenges. Wages for factory workers in export centers have
been ticking higher. The full impact of higher world oil prices
has not yet been felt in export factories, thanks to government
energy subsidies. But that protection is scheduled to be
withdrawn, meaning Chinese factories will face higher energy
bills. Higher wages, electric bills and shipping costs -- all will
eat into Chinese manufacturers' profit margins.

"Many companies want to be in China anyhow to serve the domestic
market. The question is whether China is the best place to serve
the U.S. market," says economist Marc Levinson, author of The Box,
a history of the shipping container.

Whatever the long-term results, higher fuel bills are affecting
shipping lines and others involved in moving products from point A
to point B. At NYK Line, captains are slowing their container
ships, while executives consider retrofitting or scrapping older,
thirstier models.

Slowing a giant oceangoing vessel to a speed of 23 miles per hour
from almost 29 mph can lead to fuel savings of at least 20%, says
Peter Keller, president of NYK Line. But to maintain the same
level of service on a given route, the shipping line must add a
ship. NYK also has raised prices and is scouring its fleet for
older ships that can be made more efficient or that must be
retired.

Older vessels, such as the Iris, built in 1983, carry a little
more than 2,000 20-foot containers. Newer models, such as the NYK
Vesta, christened last year, tote four times as many.

Still, Keller is skeptical that higher transport costs will turn
back the clock to an era when the world economy was much less
integrated. "The case for globalization is so strong...
Personally, I don't think we'll go back," he says.




  • [tcrp-news] Fw: Transport costs could alter world trade, Tompkins County Relocalization Project, 08/20/2008

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