Attacks On Red Sea Ships Put Pressure On China's Exporters As Expenses And Delays Rise.

 

Beijing/Shanghai, January 19 (Reuters) - Red Sea freight bottlenecks are putting Chinese billionaire Han Changming's trade operation in the eastern province of Fujian in jeopardy.

Han, who buys off-road vehicles from Europe and sells Chinese-made automobiles to Africa, told Reuters that the cost of transporting a container to Europe has increased to almost $7,000 from $3,000 in December, when the Houthi movement in Yemen, which is associated with Iran, increased attacks on ships.

"The disruptions have wiped out our already thin profits," Han stated, adding that his 2016 startup, Fuzhou Han Changming International Trade Co Ltd, is suffering from increased shipping-insurance rates.

The disruption of one of the busiest shipping routes globally has revealed how susceptible China's export-driven economy is to supply bottlenecks and external demand shocks. Premier Li Qiang stressed the need of maintaining "stable and smooth" global supply chains in an address on Tuesday at the World Economic Forum in Davos, without making any explicit mention of the Red Sea.

In an effort to lessen the effects of the interruptions, some businesses, including the American company BDI Furniture, have stated they are depending more on manufacturers in nations like Vietnam and Turkey. This is in addition to recent efforts by Western nations to lessen their reliance on China in the face of geopolitical unrest.

The possibility that other businesses would reevaluate their de-risking plans and perhaps decide to move manufacturing closer to home—a practice known as "near-shoring"—is what China is currently facing.

The founder of IC Trade, which ships mechanical components built in China to Europe, Marco Castelli, stated, "If it's permanent, and it could be permanent, then the whole mechanism will be readjusted." Certain corporations could also think about shifting their manufacturing to India, as it is located one week closer to Europe. Businesses must reassess everything.

more interruptions in the Red Sea would put more strain on China's already fragile economy, which is battling a housing crisis, feeble consumer demand, a declining population, and slow global development.

Han stated that 40% of his total business comes from trading with Europe and Africa, and that in order to keep his firm solvent, he has been pleading with suppliers and customers to pick up part of the extra costs. According to him, several orders had shipping delays of up to several weeks.

For other businesses, the problems are made worse by the fact that they are already dealing with a logistical nightmare in the lead-up to Lunar New Year in February, when nearly all Chinese factories close and 300 million migrant workers take time off, leading to a mad rush in the weeks before to transport products.

Vice President for Supply Chains and Operations Mike Sagan of KidKraft, a manufacturer of wooden toys and outdoor play equipment located in Shenzhen, claimed that many of his European clients are slamming on the brakes and telling him to "hold it, don't ship anything."

"A lot of suppliers, they're screaming about money today," Sagan, whose firm serves Walmart and Target, said.

The snowball impact on smaller suppliers with narrow margins, who would be among the last to get payments but are essential to the supply chain, is a concern for larger firms, he added.

Rerouting ships around the Cape of Good Hope from the Red Sea, the fastest route from Asia to Europe via the Suez Canal, can add two weeks to shipping timetables. This reduces the capacity of containers globally and disrupts supply chains since it takes longer for ships to return to ports to reload.

This most likely indicates delays for products that were supposed to hit Western markets in April or May. According to BMI, an industry research group, several logistics businesses have already reported a container shortfall at China's Ningbo-Zhoushan port, which is among the busiest in the world by cargo volume.

China mostly ships its commodities westward via the Suez Canal, accounting for around 60% of its exports to Europe, according to the Middle East Institute, a research group with headquarters in Washington.

"HUGE" IMPACT

Yang Bingben, whose business, based in Wenzhou, the industrial capital of eastern China, manufactures industrial-use valves, reported this week that a client in Shanghai reduced an order for 75 valves, which were to be assembled into huge machinery and sent overseas, to 15 due to rising freight costs.

Yang remarked, "The impact is huge," and mentioned that he had prepared raw materials that were processed and could not be returned. "It's like I received an order that makes me lose money."

Yang says he can't promise pay since his employees are paid according to the quantity of work they complete, so he is now reevaluating his staffing needs for this year.

"If I don't have enough work to give them, I'm afraid they won't be able to make a living."

Guangzhou-based freight forwarder Wei Qiongfang said that certain suppliers in southern China were squeezing manufacturers' stocks by postponing delivery of lower-value items.

Businesses that depend on just-in-time delivery or that must often replace their inventory are particularly affected as once-predictable trade circumstances grow more unpredictable.

Castelli said that another problem is that factories aren't paid until the products are delivered to their intended location.

"So if their payment is delayed, they can't pay their suppliers, they can't pay their workers," he explained. "China is so successful in the global market because they work with tiny margins: when you have volume, the money rolls in; when the money stops coming, you have a big problem."

Gerhard Flatz, managing director of luxury sportswear company KTC, is worried that some businesses struggling with declining margins may fail in Dongguan, a city in the Pearl River Delta.

They are having difficulties, and there is currently another logistical issue. Many will have to close their doors eventually, you know," Flatz remarked.

Additional reporting by Colleen Howe and Joe Cash in Beijing, with reporting from Samuel Shen, Casey Hall, and Ellen Zhang in Shanghai and Beijing Writing and editing by Anne Marie Roantree and David Crawshaw.

Source: reuters.com