Analysis: Breakages in global supply chains can appear dramatic. The six-day blockage of the Suez Canal when the 400-metre Ever Given ran aground. The Marlin Luanda burning in the Gulf of Aden, struck by a Houthi missile. The Francis Scott Key Bridge crumpled into Baltimore’s harbour.
The effects of these supply chain difficulties, as we learned in 2021 and 2022, aren’t dramatic. They’re grim, they’re grinding, they’re frustrating, they’re costly.
We thought we’d come through the supply chain crisis but now there are signs of renewed woes. In his New York Times newsletter this week, the Nobel laureate economist Paul Krugman says: “Supply chains are making me nervous again.”
He points to the New York Fed’s widely cited index of global supply chain pressure, which has worsened significantly over the last six months.
“If you think supply-chain disruptions were the main driver of inflation and the easing of these disruptions the main driver of disinflation, you have to be worried about the effects of a renewed worsening of the supply-chain situation.”
‘Supply chain disruptions are a key area of concern, with many businesses nervous about shipping costs and timelines given recent geo-political events.‘
Satish Ranchhod, Westpac NZ
The Houthi attacks on Red Sea shipping made it onto the agenda of Foreign Minister Winston Peters’ talks in Cairo this week, with Egyptian Foreign Minister Sameh Shoukry and Arab League Secretary General Ahmed Aboul Gheit.
According to this morning’s Westpac Regional Roundup, trading conditions around New Zealand are “tough”.
In Auckland supply chain disruptions are a key area of concern. Westpac senior economist Satish Ranchhod reports that many businesses are nervous about shipping, given recent geopolitical events.
We can see that reflected in quiet warnings from importers.
Freedom Furniture has reported a $9.2m loss in New Zealand, partly because of the troubles in the Middle East. The Baltimore bridge collapse is expected to affect shipments of US cars. And Pharmac is notifying supply problems with drugs including Flixonase, Omeprazole and Oxycodone, blaming Red Sea shipping problems.
The Ministry of Foreign Affairs and Trade says at least 30 Houthi attacks on Red Sea shipping have prompted some major shipping companies to avoid the Suez Canal and take a much longer route around Africa, adding two to five weeks to the voyage. This, at a time when Panama Canal shipping also faces capacity constraints.
‘Any additional costs imposed on our imports as a result of these shipping disruptions could risk further adding to current cost of living pressures on New Zealanders and squeezed business margins, at a time when inflationary pressures, although cooling, still remain very high.‘
Ministry of Foreign Affairs and Trade briefing
The European Union, the UK and North Africa are big sources of goods trade for New Zealand. In the year to September 2023, 11 percent ($7.7 billion) of goods exports and 20 percent ($15.7b) of goods imports were traded with these regions.
Some exporters are already reporting shipping delays, rising transport costs, and in some cases cancelled export orders. These impacts are likely to worsen as we move into New Zealand’s peak exporting period to Europe, this month and next.
Europe is a major source of machinery, vehicles, retail medicines, and vaccines, with North Africa a key fertiliser provider, Mfat says. As a result, the disruptions could also affect New Zealand households and businesses with price rises for some imported goods. “Any additional costs imposed on our imports as a result of these shipping disruptions could risk further adding to current cost of living pressures on New Zealanders and squeezed business margins, at a time when inflationary pressures, although cooling, still remain very high.”
Supply chain experts Dave Christie (Tainui Group Holdings) and Hayden Cook (Mainfreight) delivered a webinar last week for New Zealand Trade and Enterprise, noting supply chains are being affected by current shocks and will be again in the future. “Building and strengthening the resilience of your supply chain in the face of unexpected shocks, whether geopolitical (eg, Red Sea) or climate change crises (eg, Panama), is critical for exporting businesses,” they say. “It is also something most companies struggle with, and are unprepared for.”
Closer to home, container shipping giant Maersk says limited berthing availability and productivity at New Zealand ports is hampering the efficiency of its ocean network. “The New Zealand supply chain is complex,” regional head My Therese Blank tells the NZ Herald.
“We have seen increased impact from weather events and natural disasters in the past 18 to 24 months, having a devastating impact on the supply chain. The development of an efficient and resilient inland transport network is key to connect ports with the land-side supply chain, as well as enabling alternative transport routes in case of supply chain disruptions.”
In its last report before the Government shut it down, the Productivity Commission said New Zealand needed to prepare its economy to cope with more big supply shocks in coming years. Stress modelling assessed the impacts from three representative disruptions: a trade war in Asia, a new technology making our dairy industry largely obsolete, and a massive rise in the price of oil.
These disruptions could reduce GDP by up to 7.5 percent, and lead to the loss of 24,000 to 112,000 jobs, the report says. New Zealand’s reliance on food commodity exports to China and a few other markets may be more concentrated than direct trade statistics suggest, because of indirect exposures through other trading partners.
The report argues for focused innovation policy to support firms to export high-value products at scale, enabling them to diversify export markets and increase resilience towards trade shocks. And developing a strategic focus on long-term economic resilience.
These may seem like extreme scenarios, but forward-thinking business leaders are preparing their companies for more tough times. A new paper from Boston Consulting Group says the scarcity of critical assets such as vaccines and ventilators during Covid-19 clearly demonstrated how countries might make distribution decisions along geopolitical lines.
“Now, rather than returning to pre-Covid levels of global integration, geopolitical forces are reconfiguring supply chains for resiliency in a tri-polar world. Those focused on the US (and allies), those focused on China, and those trying to stay neutral.”
Key examples include the US CHIPs Act, which provided about US$280b to boost domestic research and manufacturing of semiconductors, and the Li-Bridge initiative to develop a domestic supply chain for lithium batteries. Both aim to reduce US reliance on supply chains connected to China.
Similarly, many companies in the European Union are moving manufacturing from China to Eastern Europe.
The paper, The ‘Top 10’ Focus Areas for New Zealand Executives in 2024, is by the consultancy’s Auckland managing directors Phillip Benedetti and Kelly Newton, with support from Melbourne-based Bill Kelsall and Grant McCabe.
“New Zealand is in a particularly precarious position, as it has limited large-scale manufacturing capability and is geographically isolated from the rest of the world,” they write.
This country can’t onshore end-to-end supply chains for many important products, and must rely on other countries for critical goods and services – so government and business leaders must actively consider geopolitical forces.
“Importers need to fully expose their supply chain and understand its resiliency in a less globally connected world. This means assessing where components along the supply chain originate, any associated risks (eg, natural disasters, health incidents, geopolitical risks), and where they sit in the hierarchy of customers if demand outpaces supply, as it did during the pandemic.”
For New Zealand’s exporters, there is one respect in which the BCG partners say our distance from the world’s hotspots may be advantageous.
“Exporters should assess potential customers and the importance they place on reliability,” their paper advises. “This allows traders to monetise the guarantee of supply, in which New Zealand organisations may be globally competitive given the relative isolation of the country.”
A broader conversation about the impact of climate change and global ecological decline on supply chains and economic projections is needed. If countries respond as required to climate adaptation, reducing emissions, and ecological restoration, the global economy will shift dramatically and NZ will be significantly hit. If countries don’t respond adequately, the impacts will be even more profound. We are planning on the basis of a modified business-as-usual model, whereas those exposed to biophysical risk, such as those cited in this article and the likes of the insurance industry, are planning for significant change as countries priorities their own needs and reduce risk, leaving NZ exposed.