From bikes to booze, the global supply chain is on its knees

By Shane Wright and Nick Bonyhady

Before a new bicycle hits the road or a mountain trail, it has usually already travelled thousands of kilometres.

A high-end road bike might be made in Taiwan, with brakes from Japan, a carbon frame from Vietnam, tyres from Germany and gears from mainland China.

Stuart Armstrong, of Velo Cycles in Melbourne, says demand for bikes is currently similar to Christmas levels, but supply is hard to come by.Credit:Jason South

Those wanting something special might choose a model with an electric motor, making it reliant on semiconductors that could come from South Korea.

This combination might deliver the best bicycle, but the buyer will be in for a long wait.

The biggest test of the world’s global supply chain, set in train by the COVID-19 pandemic, is now threatening to end hopes of a day on the trails, bring the international economy to its knees and push up inflation that may drive up official interest rates.

“It’s hard to explain to someone who just wants to buy their 10-year-old a bike, let alone themselves,” says Sydney cycle store owner Michael Kamahl.

Mr Kamahl, who has been in the bike trade so long that he has only the remnants of the 1970s hairstyle that gave his inner-Sydney store Wooly’s Wheels its name, has never seen the market like this.

Stuart Armstrong, of Melbourne bike shop Velo Cycles, is in a similar position, with gaps in his usual range but some in stock as savvy customers prepare for Christmas early.

“Inevitably it’s the wrong size or wrong colour for someone who wants to buy the bike,” he says ruefully.

That’s just to order a bike. Paying for it has not got any easier either.

“You can only fit so many [bikes] in a container,” says Phil Latz, founder of trade publication Micromobility Report. “The unit price has gone from, say, $12 to $50. That’s a significant increase and someone has to pay for that.”

While that may not make a huge difference to the overall cost of a $10,000 carbon-fibre racer, it’s a big jump in the cost of a $300 discount fixed-gear.

Store prices have already risen between 5 and 12 per cent, Mr Latz said, with traditional seasonal discounting all but wiped out and further rises on the horizon.

The Freightos Baltic Index, which tracks real-time prices of moving containers on ships around the world, highlights the issue.

In the week ending October 16 last year, a container cost about $US2232 ($2979) to move. By the end of the week ending October 15 this year, it had climbed to $US10,396 – a 366 per cent jump.

There are fears freight costs will soar even higher.

Paul Zalai, director of the Freight and Trade Alliance that represents importers and exporters, said the cost of shipping a container to Australia from China – about $US8500 – could go higher due to demand out of the US.

“Shipping lines … will use their vessels and containers to service freight lanes that are most profitable in the northern hemisphere,” he fears.

Everything that is moved by ship – from bikes to bottles of high-end booze to textiles – is affected.

The giant cranes of Port Botany have been working furiously to keep up with surging demand.Credit:Dean Sewell

The supply chain issues even go to the equipment used to move goods about. Commercial services business Brambles this week reported issues affecting its 120 million ubiquitous CHEP pallets, which will be familiar to anyone who has seen a supermarket loading dock.

But a timber shortage in the US, after lumber mills shut down due to COVID-19 and a surge in new housing and construction related to economic stimulus efforts have combined to produce a shortage of pallets.

“Pallet availability remained challenging in the first quarter, with industry-wide shortages of new pallet supply across the globe,” Brambles CEO Graham Chipchase noted this week.

Everything is tied to COVID-19. Health measures preventing the spread of the virus fed directly into the jobs market as people stayed at home, lost their work or succumbed to illness or death.

Efforts to offset this have seen the largest injection of cash – by governments and central banks – on record. In Australia, programs such as the $89 billion JobKeeper or the $35 billion cash bonus to small businesses have been aided by the Reserve Bank, which is still pumping $4 billion a week into the financial system.

The deepest recession since the 1930s has turned into the sharpest rebound since the 1950s.

While unemployment rates globally have fallen sharply over the past year, the number of workers in key markets are still well short of their pre-COVID levels.

America’s jobless rate is officially 4.8 per cent, yet there are 5 million fewer people in work than in October 2019. Europe’s manufacturing capital, Germany, has an unemployment rate of 3.6 per cent but is missing almost 400,000 workers.

Without the workers, meeting orders has become increasingly difficult, especially when factories have closed in some countries as staff isolate. That’s prompted business calls for a lift in immigration.

One of the most affected sectors is agriculture, which has relied for years on cheap backpackers. In 2018-19, the tax office processed almost 100,000 tax returns from working holidaymakers. Last financial year, it processed just 287.

What people buy has also changed. Australian Industry Group chief policy adviser Peter Burn said one of the key reasons behind the supply bottlenecks was the way COVID-19 had changed consumer spending patterns.

Shutdowns and health orders meant people could not spend their money on services, from international holidays to a relaxing massage.

Their cash has gone into goods. The home office boom, the upgrade to our televisions and laptops or even the switch from suits to tracksuits have all meant a huge demand for goods.

Woolys Wheels bike store owner Michael Kamahl has been in the business a long time. He’s never seen the market like this.Credit:Wolter Peeters

“Demand for goods has gone through the roof. People haven’t been able to spend on services, so that money has gone into goods and that means an increase in the amount of goods needing to be shipped around,” he said.

“For decades, we’ve been spending more and more on services. COVID turned that around.”

Demand for new cars soared but ran into a global shortage of semiconductors used to run increasingly computerised vehicles.

Semiconductor factories can cost billions to set up and years to build, making supply hard to boost, even as demand ramps up as a result of an ever-increasing thirst for internet-connected devices.

Geopolitical tensions are also an issue, with much of cutting-edge chip production located in Taiwan, which has also experienced a drought that has affected the supply of ultra-pure water.

All of this supply chain pressure is manifesting in higher prices.

Inflation has not been an issue for most countries since the global financial crisis. The Reserve Bank of Australia has failed to meet its inflation target for the past five years.

All central banks are now concerned whether a supply shock, mixed with ultra-low interest rates and the creation of hundreds of billions of dollars to boost the economy, will drive up inflation.

Earlier this month, the Reserve Bank of New Zealand became one of the first central banks to increase official interest rates, taking them to 0.5 per cent. Inflation there hit a decade high 4.9 per cent this week.

Australia’s September quarter inflation report will be released on Wednesday.

Mr Burn cautions higher that interest rates won’t solve a problem that will eventually abate as the economy reopens and businesses improve their supply chain networks.

“Higher interest rates aren’t going to bring inflation down caused by global issues like shipping containers being in the wrong part of the world or shortages in other countries,” he says.

Treasurer Josh Frydenberg said that, while the economy has done well through the pandemic, the current issues around supply have come to the fore.

“The pandemic has shone a light on potential vulnerabilities in global supply chains which have led countries to rethink their sovereign capabilities in areas of critical need and the ability of their industries to access global markets,” he said. “To date, these impacts have not been broad-based and the overall effect on domestic inflation has been relatively modest, with underlying inflation still below the RBA’s target range of 2 to 3 per cent.”

Shipping containers aboard a cargo ship at the Port of Los Angeles in February.Credit:The New York Times

Australia’s ports are groaning under the strain, but holding up better than most.

Dozens of ships laden with containers are waiting weeks to unload at the ports of Los Angeles and Long Beach, which together handle about 40 per cent of America’s imports. Many Australian ports are seeing delays of a few days, according to data from the Australian Freight and Trade Alliance.

Michael Jovicic, chief executive of Patrick Terminals, explained that firms like his have invested heavily in infrastructure such as cranes and port train lines to increase the pace at which goods can move through, but said there was huge pressure on supply chains.

“Over the last 15 to 20 years, companies have been ruthlessly efficient,” Mr Jovicic said. “Supply chains were operating on a just-in-time basis. And that assumed pretty much everything just kept on working.”

With uncertain overseas supplies, Australian retailers and wholesalers are stocking up at their local warehouses, elevating demand.

Then there is the Maritime Union of Australia, which has about 12,000 members who dominate port workforces. With high rates of pay for its members and a militant outlook, the union is unafraid of long industrial disputes.

It is locked in pay and conditions disputes with Patrick nationally and Qube in Fremantle – disputes that have seen the union take forms of industrial action from strikes to bans on overtime, all of which have contributed to delays.

The threat of more strikes is like a sword of Damocles hanging over the ports, Mr Jovicic said. “We’ve had 18 months of industrial action; I want to get a deal squared away and I’ve made that very public. There’s an attractive offer on the table for these people, but I need them to stop taking strike action.”

Jamie Newlyn, the union’s assistant national secretary, blames delays on Patrick and says importers can send their cargo through its rivals while the union is legally campaigning to protect conditions and get members a wage increase.

“The bigger issue is global supply chain problems and there is massive price gouging by international shipowners,” Mr Newlyn said. “It’s obscene.”

Vedran Muratbegovic, vice-president of sales for Oceania at global shipping line Wallenius Wilhelmsen, argued that shipping is one part of a global puzzle that includes hinterland backlogs, global imbalances in trade and unexpected factory closures that make it difficult to plan.

The Ever Given, the giant ship that blocked the Suez Canal earlier in the year, affected the industry for months too, Mr Muratbegovic said.

A single disruption, like the giant MV Ever Given container ship that became lodged in the Suez Canal in March, can ricochet around global supply chains for months.Credit:AP

It is those factors, combined with soaring demand, that have resulted in price rises in goods, but he said Wallenius Wilhelmsen is committed to Australia and its customers here.

Australia, Mr Muratbegovic said, is coping better than other countries such as the US, where there are about 200,000 containers on vessels floating off major ports.

But, he said, “it is no comfort for Australians to look at it from a viewpoint that ‘it could be worse’.”

The bottlenecks won’t be solved quickly, which will be an issue when looking for that special Christmas gift.

The managing director of spirits company Diageo Australia, Angus McPherson, said 80 per cent of what he sells comes from its main production plant in Sydney and Bundaberg, but imported tipples have proved more challenging to source.

Getting a bottle of Casamigos Tequila this Christmas may be tough under the weight of supply chain bottlenecks.Credit:George Rose/Getty

People wanting a bottle of Bundaberg rum, Gordon’s gin or Smirnoff vodka should be satisfied, but it might be a bit tougher for top-end drinks.

“Some of our luxury brands, like our single-malt Scotch whiskies and premium tequilas like Don Julio and Casamigos, will only be available in smaller-than-normal quantities, as we have seen increased demand for this part of the portfolio around the world, as consumers continue to drink less but better,” he said.

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