China Products. Be Gettin' 'Em While The Gettin' Is Good.

This client of yours is really lucky. I bet he doesn't sell to Wal-mart. A few manufacturers in China told me that they've already been asked by their U.S. clients to cut prices because of cheaper materials and higher tax rebate.

Inflation has come down so much that consumers feel richer now than they did 6 months ago in China and margins are considerably better for many companies.

This is a very good post, Dan, and I am surprised at how few analysts are picking up on the trend. For instance, if a company like P+G increased prices by 20% in China but consumers kept on buying, now that their costs are lower, expect them to have real good margins.

"Be Gettin' 'Em While The Gettin' Is Good."

http://asia.legalbusinessonline.com/news/breaking-news/30623/details.aspx

That there are winners and losers in any economic dislocation is a cliche because it is true. The P&G example you give is exactly what has happened to my client. His costs are shrinking while his selling price remains at about 20% higher than a few years ago.

The other thing that is happening without any real coverage is the number of companies deciding they absolutely need to go to China now if they are going to have any shot at continuing to grow. In just the last couple of months, we have seen a massive increase in the number of service businesses going to China for this very reason.

Shaun, what are you seeing?

Dan,

They're already advertising 40% savings compared to last year on shopping expeditions to Iceland here in the UK, I'd get over there quick before the rest of Europe snaps it all up. Oh, and be careful that Gordon Brown doesn't have you arrested for engaging in commerce with a terrorist state when you transfer through Heathrow!

An article cited by one commentator rightly notes two significant factors causing the drop in trans-Pacific freight rates over the last few months. Floating bunker fuel surcharges hit $767 per ton in July 2008, up from $500 per ton in January 2008 and $296 per ton in January 2007. Since the high in July 2008 the bunker fuel prices paid by carriers have come down considerably. Those lower bunker fuel costs are solely due to the drop in oil prices during these last four months. Then there is the lowered demand for ocean carriage due to reduced demand for Chinese made finished goods in the US and Canadian markets while the same number of container vessels are available to supply trans-Pacific carriage services.

The third factor, the "breakup" of the conference system, i.e. the Transpacific Stabilization Agreement (TSA), is one that plays less impact than stated in the article cited above. The only member of the TSA group to quit to date is Mitsui OSK Lines (MOL). MOL announced its resignation from the TSA 10/29/08 and cited the EU's abolition of liner anti-trust immunity and the consequent difficulties of aligning business processes throughout the entire organization while regional divisions operated according to different standards. However, that still leaves 10 other very large liner carriers in the conference, e.g. Hanjin Shipping Co., Ltd. and COSCO Container Lines, Ltd., and there is no publicly available information to date to indicate that those carriers are contemplating a departure from the TSA.

Moreover, even if we assumed there was a breakup of the TSA cartel in its entirety, all 11 of the big ocean carriers are facing serious challenges in meeting their financial obligations under financing agreements for vessels they or their subsidiaries own due to already reduced freight rates. The same goes for medium-sized vessel owners who charter vessels to these carriers as charter rates have also plummeted. Reduced freight and charter rates have severely impacted the ability of all vessel owners to make payments to lenders who financed the purchase of these container vessels. Recent press stories include several announcements of shipyard contracts for newbuildings and charters for second-hand vessels being cancelled. Most maritime industry analysts agree there will be a severe shakeup in ocean carriage industry in the very near future. In fact, we should all expect a number of large- and medium-sized vessel owners (or their vessel owning subsidiaries) to go into reorganization or even (God forbid!)foreclosure proceedings. Older ships will likely be scrapped and there will be fewer new vessels coming into service. That combination of events will reduce overall lift capacity and bring freight rates back up. If a shipper's business plan allows for it, it should try to lock in lower freight rates with their carriers now or in the near future. Freight rates will only decline for so long and then they will rebound very quickly.