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Supply
Chain by the Numbers |
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- Sept. 8, 2022
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Weak Chinese Economy Pushing Commodities and Inflation Down; Steel Giant Closing German Mills due to Nat Gas Prices; Amazon Sees On-line Fall Again; Container Rates in Free Fall |
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0.4% |
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That was the slow economic growth in China in Q2 versus 2021 – in good news on the inflation front. Why? China’s slow economic growth is reducing its demand for commodities, sending prices tumbling, given the share of global commodities it represents in many areas. Low prices for commodities in turn reduce costs to make consumer goods and parts and components for manufacturers. In 2021, for example, China consumed 72% of global iron ore imports, 55% of refined copper and more than 15% of oil, with similar shares in other commodities. So decreases in Chinese demand usually puts downward pressure on commodity prices across the world. For instance, iron ore prices are down around 40% from their peak earlier in the year. Global inflation slowed down in July to 0.3% on a monthly basis, still high, but below an average of 0.7% a month in the first half of 2022. |
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| That was the change in Amazon’s Q2 on-line store revenue, as disclosed in its earnings report last week. That makes three consecutive quarters of a decline in that metric year-over-year. While the drops have been low, it is still a long way from the 20 plus percentage gains and even more Amazon had seen until just recently, as it runs into the law of large numbers and an overall pause in US ecommerce growth. Overall revenues were up a modest 7%, driven by growth in its AWS web services unit and its fast growing advertising business. However, operating cash flow decreased 40% to $35.6 billion for the trailing twelve months. |
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60% |
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That is the drop in the cost to transport a 40-foot ocean shipping container from Asia to the US West coast now versus what it was in January, according to the Freightos Baltic Index. That takes the price down to about $5400, as container rates are currently in something of a freefall, at a time when rates usually are heading the other way, as peak season sailings take hold. Part of the cause is a natural reversal of the crazy cost increases in 2021, when container rates soared by about 10 times, peaking at over $20,000 on those West coast routes in September. But there is another factor: retailers such as Walmart and Target are cutting back orders and thus reducing container shipping demand in the face of excess inventory, caused by perhaps overreactions to supply chain disruptions but also mis-forecasting consumer demand, as shoppers shun apparel and home products in favor of food, which is much more produced domestically. |
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That’s how many mills steel giant ArcellorMittal said this week that it would close in Germany, as soaring natural gas and electricity costs have made operating costs in its energy-intensive steel factories unsustainable. Adding to the plants’ woes: falling demand for steel. The price for natural gas in parts of Europe, used on its own and to produce electricity, have jumped from about 100 euros per megawatt hour at the time of the Russian invasion of Ukraine in February to 250 euros now, and may head still higher, as Russia stops shipping gas to Germany via the Nord Stream pipeline. Germany is madly trying to fill gas storage facilities, and is importing as much liquefied natural gas as it can, though supplies are limited. The German government is planning its third energy crisis relief package this year to subsidize consumers from punishing gas price hikes over the winter.
