Friday, 30 October 2015

Brussels' diesel decision condemns many to death and illness

Brussels' move to water down diesel vehicle emission rules condemns many to an early grave and far more to pulmonary illness unless the European Parliament votes to reject the approach by unelected EU officials seemingly deferring to the diesel lobby. Air pollution from all sources is estimated to kill about 60,000 persons in Britain alone every year, with 80% of the pollutants affecting health coming from transport, according to Britain's environment ministry. Across the whole of Europe the death toll is put at 500,000. The cost to Britain's national health service and the economy is incalculable, though a recent estimate puts the cost of the VW scandal alone at £300 million in health and social costs annually. Road transport is by far the biggest cause of nitrogen dioxide (NO2), a known killer for decades, and despite the diesel engine industry's advances in cleaner engines none can yet cope with sub 2.5 micron oily particulates which lodge permanently in the body.

VW's rigging of emission standards based on defeat software to give favourable readings only on rolling road tests will cause over 60 early deaths and maybe even up to 200 every year in Britain alone if VW drags its feet, according to a study by Harvard University and Massachusetts Institute of Technology, specifically examining the VW diesel car impact. VW's criminal act has led to recalls of 482,000 cars in America and 1.2 million in Britain, leaving the company facing an investigation by the Serious Fraud Office for "corporate criminality." Britain's Transport Minister, Robert Goodwill, says the option of pursuing a prosecution of corporate manslaughter is also "open."

So how has the EU-wide legislative 'green' environment come to this ugly pass? When it came to global warming issues an EU official said that the block was carbon neutral but because petrol emits more carbon than diesel the latter was favoured with lower fuel duties and other incentives. This soon led to half of all cars sold in Britain being diesel-powered. Unlike petrol, however, diesel emits lethal sub 2.5 micron oily particulates which soot filters and other emission controls cannot eradicate, so they lurk permanently lodged in the body as silent, insidious killers.

What Brussels' unelected officials want from their watering down of emission rules is that diesel engine manufacturers be allowed to exceed legal levels of nitrogen oxides (NOx) by 110% between September 2017 and the start of 2020. After that, the industry will be permitted to exceed the limit by 50% indefinitely, a time frame that would apply to new models. To their credit, Denmark's and Holland's officials voted against such watering down. Clearly, the EU policy makers are out to protect diesel technology, the mainstay of the European motor industry, irrespective of health concerns. That does not, however, mean that the public cannot fight back against an industry that has callously put profit before lives.

In Britain, for example, the Government plans to improve air quality in city centres, with diesel vehicle owners facing pollution surcharges, extra parking charges and even a ban on entering towns and cities at certain times. In the short term these diesel-free zones and punitive surcharges are the best way to tackle the problem of law-breaking, diesel vehicle producers but there is much the public can do to break the arrogant spirit of not just VW but other suspected diesel car producers. They could stop buying diesel cars forever.

In the logistics industry the problem of eschewing diesel forklifts is less in that the alternative motive power sources like electric and the oncoming hydrogen fuel cells and bio-gas are more than just feasible alternatives. At one time diesel was favoured over electric because of its superior performance. That is no longer the case cite the electric forklift lobby owing to advances in battery technology, in particular.

The need for strong, determined action now is imperative. Dr Penny Woods, chief executive of the British Lung Foundation, said: "Every year in the UK there are tens of thousands of premature deaths linked to air pollution...The VW emissions scandal is only the tip of the iceberg."

Wednesday, 23 September 2015

More woe for British food retail suppliers?

The tribulations of the food and drinks suppliers seem only to be getting worse at the hands of their large retail taskmasters. Not content with extending payments to quarterly intervals, or worse, the world's biggest food retailer, Walmart (sales $486 billion p.a.) now proposes to charge its suppliers for storing goods in its own warehouses and shelf space in new shops. For some years, of course, other food retailers have levied multiple charges like rental for favourable shop shelf positions but Walmart has been reluctant to be so proactive. However, for added chutzpah, to help suppliers adjust to prolonged payment schedules, Walmart is encouraging them to seek low-interest loans through one of its financing programmes.Understandably, many of its 10,000 suppliers are discommoded, with some reaching for their lawyers, and one wonders how long it may be before Walmart's British subsidiary, ASDA, one of the four dominant UK grocers, will follow suit.

Some see Walmart's move as an attempt to fatten its margins and offset raises it recently gave store workers but Walmart says its new fees are part of a strategy to revive its US business through moves like keeping its often chilly stores warmer.

This strategy of business revival may have disturbing implications for all of Britain's grocery retail suppliers because the big four grocers are struggling to stem market share losses to the smaller, largely foreign-owned, retailers who offer so much better value, based on their business model that gives them logistics advantages the big retailers cannot enjoy with their current business models.

These no-frills, low-cost, recent UK start-up retailers like Aldi, Netto and Lidl have one enormous logistics advantage over the giants. Their small, fast-moving SKU range of typically 1,600 products, means that no vast sums of money are tied up in huge stocks for long periods, a cost that can dwarf all other warehouse costs combined. Some 25 years ago I visited the Danish food discounter, Netto, where just one centralised distribution centre (DC) replenished all of its 120 EPOS-connected shops overnight so that 90% of the DC's stocks passed through it every 24 hours. SKUs that became slow movers were quickly replaced for new, hoped-for fast movers.

However much Walmart may argue that driving everyday low cost gets to everyday low price increases sales for them and suppliers, the inescapable fact remains that without a fundamental change in their business model to meet the new paradigm shift in shoppers' habits, where good value is paramount, it is unlikely to succeed against the arrivistes tilting at the giants.

Tuesday, 25 August 2015

Profiting from risky global supply chains

It is a certainty that world trade will continue to expand, albeit with hiccups, but to what extent will global businesses realize that the growing key role of effective supply chain management will be the prime battleground to keep ahead of the competition in an ever-more competitive and risky world? How should they prepare to meet the new challenges and sidestep the growing complexity of risks? Does it call for a new generation of logisticians more skilled in future proofing than the mundane tasks of managing supply chain flows at every level? And what are the exciting new supply chain investment opportunities looming on the world stage and how best to exploit them?

In a jargon-free 263 pages Mark Millar's new book: "Global Supply Chain Ecosystems --Strategies for competitive advantage in a complex world* admirably deals with these interdependent issues, though in certain areas there is some room for improvement he could consider for any revised edition he may plan.

Based in Hong Kong as a visiting lecturer at Hong Kong Polytechnic University, he has completed over 350 speaking engagements at corporate events and industry conferences across 23 countries so he has an inside track on the crucible of momentous logistics changes based in the Far East, which comes through strongly in his book, being regarded as one of Asia's top 50 influencers in supply chain and logistics. He has no doubts that Asia, for example, will not suffer from the trend beyond globalization to more regional supply chains. He says that re-shoring or near-shoring formerly outsourced manufacturing to Asia back to Europe and America for a host of good reasons will not lead to a mass exodus from manufacturing in Asia largely because of a well-established, finely tuned and highly efficient and global supply chain ecosystems that service the Asia-Europe and Asia-America trades, but also because the potential of the domestic consumer markets in the economies is so enormous. One can only hope that will be true but there are significant risks that could upset the apple cart. A more immediate problem, however, that exists for multi-national brands who are following the expansion of Asian consumer markets closely is which means they need to review and reconfigure how their supply chain ecosystems operate to reach and service these markets.

What companies often do not know is what is happening throughout their supply chain ecosystems, which includes information on trends, costs, performance metrics and other measurements essential for continuous improvement and development, says Mark. "In order to sense a problem it must be visible," but I would aver that it is also important to sense the as yet invisible problems by observing much more than the trends. A 2014 Economist Intelligence Unit/KPMG international report said 49% of global manufacturing executives admitted that their companies do not have visibility of their supply chains beyond their tier 1 suppliers. Only 9% said they had complete supplier visibility and visibility is probably the biggest challenge to their businesses and it will almost certainly worsen in the near term.

The author agreed with this writer that boardrooms are seriously lacking in their assessment of moral hazards and political risks to the global supply chains, and he gives a warning note on this. "More so than ever before is a need for detailed due diligence in the evaluation and selection of supply chain partners, processes that involve not just assessment of their capabilities but also scrutinizes their reputations, track record and background, including their finances. Since the world's consumers became netizens the power of social media can destroy in seconds the diligently developed and carefully nurtured reputations of companies, brands and products." Yet in my view global corporations seem little fazed by these threats, hoping they will blow over and be soon forgotten. But a seemingly new threat is looming on the horizon that could be a game changer. A Californian woman is suing Costco for selling farmed shrimp from Thailand, where slave labour and human trafficking in the fishing industry are widespread, and allegedly misleading US consumers. The degree of slavery, torture and murder among the migrant workers on board Thai-owned trawlers can be seen by Googling my blog: "Thailand's trawlers of terror shame food supply chains." If the law suit succeeds it could open the floodgates for an ocean of similar actions.

One area where the book seems to be lightweight is the problem of JIT-oriented global supplies and how to acquire robust disaster recovery plans before a disaster hits. A case study offers some limited advice on spreading contract awards among several suppliers, which provides flexibility of supplier choice and enables one to switch to another supplier who already knows your product. There is no mention how global companies with manufacturing plants spread around the world, like General Motors, have bred flexibility through commonality by replicating their factories and standardising manufacturing processes. None of GM's flexible plants has fixed conveyor lines and each plant can be reconfigured over a weekend. Such capabilities, however, will require flexible supply contracts and flexible distribution capabilities. Standardising manufacturing processes is not the only way to create flexibility through interchangeability. One can redesign products to use standardised parts so that several factories within one corporate group can contribute when problems loom.

The degree of global exposure to JIT-oriented parts supplies was eminently highlighted by the 2011 Japanese sub-sea quake and resulting tsunami, which led to multi-billion dollar losses around the world, with the auto industry particularly hard hit. It prompted one US logistics company chief executive to proclaim: "In many cases tightly stretched global supply chains do not make sense anymore." The degree of dependence on Japan for electronic components at the time was alarming, and Japan was home to nearly 100 manufacturing choke points that could affect business worldwide. But how well prepared is global business post 2011? Not much, it seems. As Mark Millar points out, some 50% of the world's laptop chips and 65% of iPads are produced in the capital of Chengdu, Sichuan province, a known high risk earthquake zone.

There is one risk that is still being largely ignored, says Millar, and it is like a ticking time bomb, but one amenable to prevention -- management of human capital. As the author rightly points out, managing a vast, varied pool of human capital is probably the most important topic in the book. This is because every other aspect of operating a productive supply chain is "utterly dependent on how well staff carry out their tasks." In Vietnam as in many other countries there are not enough young people choosing logistics as their career. An ageing population within the logistics sector could undermine long-term economic growth. There are tips on how to attract and retain the right form of talent. Not least of the problems, it seems, is the low salaries offered.

The final chapter on supply chain innovation devotes only one page to warehouse robotics while giving no mention to the power of WMS to cut storage costs drastically. A good stock forecasting program, for example, that can react in real time to, say, daily weather forecasts can trim inventories by up to 30% while leaving customer service levels unharmed. Given that the cost of holding inventories can dwarf all other warehouse running costs combined, these programs can deliver a 2-week payback.

Despite these few lightly touched areas that deserve more prominence the book presents a well-rounded view of the problems, solutions and opportunities that lie ahead in the fast-changing, global supply chains and deserves to be on every logistician's bookshelf.

*Published by Kogan Page.

                                                         Mark Millar


Monday, 10 August 2015

British justice's darkest hour looms?

More cuts to Britain's legal aid budget due to come into force next January paint a bleak picture for the principle of affordable access to justice for all, which has been the envy of the world, so what can and should be done to meet the challenge effectively to prevent what Lord Justice Neuberger fears could lead to defendants "taking the law into their own hands," and is the legal profession partly to blame for its parlous prospects?

The Government's additional cut of 8.75% to the amount paid to litigators in legal aid services, as well as a cut in advocacy fees of £10 million per year will mean that over the past two years legal aid solicitors representing people accused of crimes have seen their fees cut by 17.5%. According, however, to solicitors specialising in criminal legal aid cases, in some areas fees will fall a further 25-30% next year, with rates for some categories dropping by more than half. The Government also intends to press ahead with the new duty solicitor contracts due to begin on January 11, 2016 which will see a reduction in the number of law firms providing 24-hr cover at police stations from 1,600 to 527. By any measure these are draconian cuts. It will also mean that accused defenders would lose the right t choose the solicitors they want to represent them in legal aid cases.

The apparent perception among much of the public that lawyers do protest too much because, like insurance companies, there are no poor ones, has undoubtedly been fanned by a sensationalist Press highlighting the very costly, but relatively few, cases where fees for solicitors and advocates have been seemingly astronomic. Such recent cases include the collapsed trial of a vicar and six co-defendants accused of conveyor belt sham marriages that left the taxpayer with an immediate £600,000 bill that is likely to run into millions and the child killers, Mick and Mairead Philpott, racking up a £350,000 legal aid bill. In the former case prosecution barristers netted £76,834 and lead counsel £44,469, while in the latter each of the lead barristers earned over £55,000. In short, it could be said that the few notoriously costly cases give the whole legal profession an odious name in the public's eye.

                                           Fat Cat myths

The reality for most lawyers and advocates, however, is far from the image of widespread fat catery. To give a recent example take the case of young Mr X who pleaded guilty at his first court appearance on advice from his lawyers which meant the offender had to sign the Sex Offender's Register. The case involved a young couple in an online, consensual relationship that turned sour after several years, in which there were explicit pictures of his ex-girlfriend found on his mobile phone. He was charged with possession of indecent images of a child because she was under 18 at the time the pictures were sent. Worried at the prospect of listing on the Register he than approached the law firm of Bindmans, who engaged Sara Williams from Doughty Street Chambers. She returned to the magistrates' court, arguing that the guilty plea should be withdrawn and a not guilty plea entered. She succeeded and the trial date was set in the Crown Court. Bindmans quickly requested that the Crown Prosecution Service (CPS) review their decision to prosecute but it was six months after taking on the case and almost 11 months since the charge before the CPS finally did so, citing that it was not in the public interest to continue. Now here is a clear case where the defendant's lawyers saved the taxpayers relatively considerable sums because no 'trial fee' was incurred, and Bindman's earnings for all this? A derisory £4.66 per hour and the barrister only £1.50 per hour, hardly fat cat earnings.

Now it is true that Britain's legal aid bill dwarfs that of every other country in Europe -- or is it? At £2 billion a year it is 20 times the European average and more than seven times the amount spent by France and Germany, yet in the National Audit Office Report of 2012 the UK was exactly average in comparison with world-wide spend on the criminal justice system (0.33%). But to what extent does this apparent great disparity in UK and European spend on criminal legal aid reflect a difference in legal systems? The British legal system is an adversarial one in which the State must prove the accused's guilt beyond all reasonable doubt but most other criminal justice systems work on an investigative basis where investigating magistrates do not limit themselves to deciding upon the evidence presented to them. They go forth and seek as much information about the case as they can. It is this that leads to the UK having a higher legal aid bill. It is not so much that defence in a criminal trial costs more in the UK system but rather it is that these costs are differently apportioned. Far more of crimes in the UK system turn up on a specific citizen's account for his defence rather than in the general running costs of the courts as a whole.

Rather crassly, it appears, "asylum" seekers are to be excluded from the proposed cuts of £350 million, despite the legal aid bill for asylum seekers between 2003 and 2010 totalling £824 million, and that does not include the cost of manning the immigration courts. In the light of the current European migrant crisis that bill could soar unless firm measures are taken, like refusing any appeals after appellants have failed a fair immigration hearing. This could be part of a wider approach to the problems of legal aid cutbacks, which risks throwing the baby (justice) out with the bath water. What is needed is an honest debate about legal aid. One option would be to develop a system where legal aid is given as a loan payable only on conviction of the guilty and recovered through existing tax and benefit systems. Another mooted solution is to ask the City to pay for the cost of fraud trials that result from negligence on its watch because fraud trials consume a large amount of the legal aid bill.

Time is running out for many lawyers and public justice because any more cuts will force lawyers to abandon worthy cases as they become financially worthless causes. The legal profession must now show stiffened, united, national and sustained resolve by withdrawing their services until the Government has been persuaded to change tack.


Tuesday, 9 June 2015

Should China's South China Sea ambitions be thwarted?

If absolute power corrupts absolutely then it surely follows that absolutely strong, big economies can bully absolutely. That now seems to be the scenario unfolding in the South China Sea where China is claiming sovereignty over 90% of the region even though its mainland is about 650 miles from the disputed Spratly islands, while Vietnam and the Philippines are only about 350 miles away, both of whom also lay claim to these islands and reefs, thought to be rich in oil and gas.

The Philippines has submitted evidence to a UN tribunal hearing its case against China's territorial claims but China has refused to take part in the arbitration and warned that the case would damage bilateral ties and is already doing so in artful ways. The Philippines claims that China's claims are illegal under the UN Convention on the Law of the Sea but it is unlikely that there will be any ruling until the end of this year. Meanwhile, China has militarised Mischief Reef by building an artificial island with an airstrip and installed mobile artillery. Not content with that, China is building another runway on Subi reef and has built a substantial port on Fiery Cross reef. Subi, Mischief and Fiery Cross reefs are three of at least seven reefs in the Spratlys that have been filled in by China and are being fitted out for what can only be military purposes.

The Philippines has challenged its Asean (Association of South-East Asian Nations) members "to finally stand up" to China and demand an end to China's reclamation works. Asean, however, has a history of failing to respond vigorously to Beijing owing to China's immense trade and diplomatic leverage and because not all 10 Asean members have a stake in the maritime disputes. This means that the likelihood of US intervention following more Chinese provocation is stronger.

International relations between south-east Asia and China are reportedly lower than at anytime since the 1960s and the Japanese Prime Minister, Shinzo Abe, has compared the situation to 1914 just before the outbreak of World War One. The potential of this rising tension has huge implications for global logistics that stretches far beyond the costs of higher insurance and the re-routing of ships to avoid the South China Sea, through which passes about US$5.5 trillion of trade every year, should it come to a shooting war.

It is an irony of history that the best of intentions regarding foreign trade can midwife the law of unintended consequences, and its sometimes baleful outcome. In the bid for liberalizing US trade with China back in the 1990s advocates said economic interdependence would inevitably lead to peaceful co-existence. Well, yes, but that is more likely in open, transparent, democratic societies rather than autocracies like China. What Washington has failed to do in recent years is to keep a careful watch over what goods are made where, especially when it comes to vital items like electronics and drugs, which means America now depends far more on China than vice versa, and that can only weaken America's political leverage.

The asininity of western corporations' over reliance on Japan in 2011 for a host of key electronic and vehicle components, a choke point for nearly 100 products, left them nursing billions of pounds in losses following the 2011 Japanese tsunami which severely disrupted JIT-supplied components because alternative sources could not be quickly mobilised. That lesson should not be lost on logisticians who should now be ensuring that they have robust alternative supply sources for all their needs, or else build up their reserve stocks, given now the potential for political disruption spreading from the South China Sea.

This is not to argue that globalization of trade has been wrong-headed. On the contrary, it has pulled China up by its boot straps, kept western inflation down, and enriched its nearby trading partners. But the fact remains that one-sided dependencies invite military adventurism, as China's growing belligerence today proves. What America must now do is address the fundamental flaws in the international trade system that give China such a big advantage.

The most likely outcome of China's latest developments on the Spratlys is that it will repeat its actions of 2013 when China unilaterally imposed an "air defence declarization zone" covering portions of the East China Sea and claim territorial waters around its man-made islands in the Spratlys. Such chutzpah should be vigourously resisted by all nations who depend on unhindered navigation through these seas. America, reportedly, is considering conducting "freedom of navigation" exercises where it would send warships into the waters around the reclaimed Chinese man-made islands. This would show that it does not recognize the sandbanks as islands with their own territorial waters, but all other nations using these waters should be at one with America in this.

China is a land with a sorrowful past but history can have valuable lessons for avoiding a repetition of past mistakes. The likelihood, however, is that China's leaders will ignore the Spanish philosopher Santayana's warning: "Those who cannot remember the past are condemned to repeat it." In becoming much wealthier over the last two decades through foreign trade expansion, China had a great opportunity to show the world that true greatness does not spring from the barrel of a gun, but through friendly, honourable cooperation with its global trade partners in which there is no place for bullying smaller neighbours and intimidating military strutting like cockerels on a dunghill. But human nature does not change so easily, despite the benefit of hindsight that history offers.

What concerns Chinese people most is rising living standards but it only takes a handful of politicians in an autocracy like China to risk all that. Maintaining face is deeply rooted in the Chinese psyche and they will only act soberly when they are resolutely faced down. China's top leaders should be paying far more attention to their internal problems where its greatest political risks lurk. Nature can be cruel to China through its immensely costly floods, typhoons and earthquakes, from which there will be no respite. The people rightly deserve to see their hard-earned wealth channelled to where it is most needed, rather than frittered away on risky, foreign adventurism. Its very low-lying sandbank islands in the Spratlys could easily succumb to a tsunami washing away everything at huge cost, and it may come sooner than expected.

For bullies to triumph all it takes is for good men to look the other way. Recent history shows how dreadful the consequences can be for such insouciance.

Wednesday, 27 May 2015

Logisticians must reassess Asian supply chain threats

Global logisticians now have two reasons to dust down their contingency plans to cope with heightened supply chain risks in the Far East -- financial and now political. As mentioned in my last blog: "Heightened global supply chain risks herald gathering storms?" the Chartered Institute of Purchasing and Supply's latest quarterly risk index shows that the risk of disruption to corporate supply chains is running at an almost record high, and in particular highlights China's slowdown and its manufacturing sectors at serious risk of defaulting on state-backed loans. So much for the financial risks but now comes the political, which if realized will have far greater adverse, global economic consequences.

The problem is the potential flashpoint over China's development of artificial islands in the South China Sea, around the largely uninhabited Paracel and Spratly islands, a region potentially rich in oil and gas but contested by geographically much closer countries like Vietnam, the Philippines and Malaysia. China says its right to the area goes back centuries to when the Paracels and Spratly island chains were regarded as integral parts of the Chinese nation, and in 1947 it issued a map detailing its claims. Vietnam says it has actually ruled over both the Paracels and the Spratlys since the 17th century and has the documents to prove it. The other major claimant is the Philippines, which invokes its geographical proximity to the Spratlys as the main basis of its claim for part of the islands' grouping.

China's fatuous claim lacks merit and is akin to Britain, say, reclaiming the Hawaiian Islands, previously called the Sandwich Islands after the Earl of Sandwich and whose flag today contains a Union Jack. Geographical proximity must surely be a more valid claim, which does not favour China.

The fear is that, natural resources apart, China's moves are politically motivated, and America's President Barack Obama said that his county is concerned that China is "flexing its muscles and power" to dominate smaller countries in the region. According to American estimates, China has expanded the artificial islands in the Spratly chain to 2,000 acres, up from only 500 last year. It has already built an airstrip capable of taking jet fighters. If China' activity continues apace it would give them defacto control of the maritime territory they claim, said Admiral Samuel Locklear, head of the US Pacific Command, speaking to the US Senate. That means China could base warships and 'planes on the islands, and install long range detection radars, potentially giving them the ability to enforce an air defence identification zone.

China has embarked on a substantial modernization of its maritime and paramilitary forces, as well as naval capabilities to enforce its sovereignty and jurisdiction claims, if necessary. At the same time it is developing capabilities that could put US forces in the region at risk in a conflict. The flip side of this development is a significant rearmament programme by China's smaller neighbours who feel threatened by China's posturings. They are prioritizing their spending on their navies amid the rising tensions in the South China Sea, with annual defence spending in South East Asia projected to reach $52 billion by 2020, up from the expected $42 billion this year, and submarines will feature prominently in that.

Peter Dutton, professor of Strategic Studies and Director of the China Maritime Studies Institute at the American Naval War College, said: "Tensions in the South China Sea pose an economic security risk to the entire globe." He went on the say that: "If a flare up were to arise between China and one of its smaller neighbours those global trade routes could be affected, hurting the world economy." It is not difficult to see why. Each year an estimated $5.3 trillion of trade passes through the South China Sea, with US trade accounting for $1.2 trillion of the total. In 2013 the US exported $79 billion of goods to countries around the South China Sea and imported $127 billion from that region. Should a crisis occur the diversion of cargo ships to other routes would harm regional economies as a result of increased insurance rates and longer transits. Even if shipping companies still attempted to pass through the area during a conflict, whether to access resources there or to cut transit times, "the insurance costs would be prohibitive," said Peter Dutton.

There are some who feel that the trade routes and the concern over freedom of navigation will never become a point of contention in the region because, as the argument goes, everyone needs the shipping lanes to function, most of all China. But if recent history is any guide politicians pay scant regard to economics.

Sensible global logisticians, therefore, should reassess their vulnerability to any disruption to trade passing through the South China Sea, especially if they are reliant on JIT deliveries of component supplies that are only sourced from that region, and so avoid a repeat of the upheaval caused by the Japanese tsunami of 2011, which cost global corporations around the world billions of dollars.


Saturday, 16 May 2015

Heightened global supply chain risks herald gathering storms?

In the logistics firmament it is often said that demand for forklifts is an accurate bellwether for any economy, in that it is usually the first into a recession and the last out but that observation tends to apply to individual economies. For a global take on economic prospects perhaps the best bellwether is shipping, particularly the dry bulk vessels, and the bells from that quarter are not ringing joyously.

As if to highlight the gathering storm, the Chartered Institute of Purchasing and Supply's latest quarterly risk index, backdated to 1995, shows that the risk of disruption to corporate supply chains is running at an almost record high, helped by a drop in commodity prices and a slowdown in China. Admittedly, the risk rise is not universal. In North America and western Europe the supply chain risk fell last year but that does not mean these areas will escape unscathed if current trends in global commodity trade and deflation persist much longer.

What we are seeing in the global supply chain is essentially a financial risk that began with the global financial crisis in 2008. In the Far East, particularly China, the manufacturing sectors are at serious risks of defaulting on state-backed loans, while in South America collapses in soya bean, copper and oil prices are affecting much of that Continent. In Australia the collapse in mineral prices, particularly iron-ore and coal, have left the country with the highest unemployment for 13 years, with apparently worse to come as investment continues to fall. In Japan, once the world's second largest economy, manufacturers are reluctant to spend on machinery upgrades, where the average age of their facilities and equipment is now 15 years, the highest in 30 years, and the antithesis for any efforts to boost economic recovery. Japan's lost decades of stagnation and deflation have prompted companies to restrain investment and now those same fears over deflation threaten the rest of the global economy.

Nowhere, perhaps, is the problem most acute and obvious than in shipping, and by extension the banking industry, which by some estimates has about half a trillion dollars worth of outstanding loans to shipping companies, much of which is at significant risk of default. The current market state for shipping commodities across the world's oceans is dire, which even an expected record of over 100 ship scrappings this year will not improve. Daily earnings for the industry will still tumble, though it must be said that prediction is not the shipping industry's forte. As recently as February this year it forecast that shipping rates would jump but now forecasts are turning bearish as China's imports of coal plunge and its iron-ore imports expand at its lowest pace on record. As the world's second largest economy, China will expand the least in a generation this year, according to estimates compiled by Bloomberg. Despite an expected demolition of 6% of Cape-size vessels, earnings per vessel will still slump about 20% this year, based on a survey of 10 shipping analysts. Freight rates have been pushed to historic lows, thanks to a perfect storm of collapsing commodity shipments, particularly in coal and iron-ore, combining with a market glutted  with vessels ordered as long as a decade ago. Ships competing for spot cargoes today are earning about $4,200 a day this year so far, the worst start since 2000. Cape-size average earnings are now expected to drop to $11,000 a day this year, having been predicted only in February this year to rise to $18,750 a day.

China is the world's top iron-ore and coal consumer, importing almost 60% of the world's sea-borne iron-ore and about a quarter of the global coal shipments. It is worrying, therefore, when China's Iron and Steel Association sees overcapacity for sea-borne iron persisting until at least 2019, as the world's largest suppliers expand production even more. The risk to coal shipments, however, has more permanent forces at work --- pollution. China's biggest coal company, China Shenhua Energy Co, which supplies about 16% of the country's coal, cut its sales 10% last year and forecasts another 10% cut this year. This reflects China's attempts to reduce its energy intensity in coal dependence so as to cut pollution, understandable in a country where air pollution from all sources kills an estimated 1.2 million a year. Part of China's strategy is to develop alternative sources of electricity generation, such as hydro, wind, nuclear, gas, and solar PV. Cuts to China's demand for fossil fuels are so great that its imports will be heavily affected. The sea-borne market in coal cannot expect any comfort elsewhere from fast-developing countries. India's Energy Minister has made it clear that India's thermal coal imports could potentially go to zero within two to three years.

China's imports of copper in February 2015 tumbled the most in four years, while oil and iron-ore imports slowed to the weakest rate in 3 months. China is now already building the world's largest renewable energy system, for which it deserves a bow, and which in 2013 stood at just over one trillion kw/hrs, almost as much as the combined electricity generated by France and Germany. All this bodes ill for the shipping industry and shipyards, where orders for new ships have plunged to about 400,000 dwt a month for this year, according to Clarkson, the world's biggest ship broker, the smallest since the early 1990s, and about 98% below the peak commissioning rate set in 2007, when 23 million dwt were ordered in a single month.

Now is not a good time to be in shipping, without a long purse, and never, perhaps, have global logisticians faced such uncertain times. Let us hope that uncertain times do not mean living through "interesting times" as the old Chinese curse goes.