China sourcing and procurement threw some huge curve balls at importers all over the world in 2020, starting with an extended closure of manufactures after the Chinese New Year during the ‘China lockdown’ and an unexpected demand in many sectors whilst most of the world was suffering with COVID-19 hitting.
By the end of 2020, while some manufactures were struggling due to their affected customer base, many others had their production at full capacity for months ahead and to add to that, material prices started to rise.
An imbalance of containers, from containers leaving China and not returning, also meant December/January saw a historical high freight prices.
So what does 2021 have in store?
We are going to look at the key areas of ‘concern’ that are making trading conditions extremely challenging right now for many China importers.
- Product price increases
- Production lead-times
Product Price Increases
We will start with price increases, what’s behind this and what’s driving it? There are two factors driving China prices up, the first is the exchange rate. Factories quoting in USD ultimately have their costs in Chinese Yuan. At the end of 2020, for various reasons including the amount of USD the US Federal Reserve was printing and the lack of confidence in the US elections results, the Chinese Yuan appreciated over 8% from July 2020 until today (12th of February 2021) against the USD.
This means for the same USD price, for a manufacture to make the same margin they were before, they would have to put the price up by 8%. Generally, manufacturers will factor in a small margin for exchange rate fluctuations or lock in rates with their banks to protect them from risks, but this was quite a big move in the currency and at some point manufactures and exporters had to adjust their prices to reflect that.
Material Price Increases
Again, in the last quarter of 2020 raw material prices began rising, and so most manufacturers and exporters held their prices in the hope that post-Chinese New Year 2021 prices would relax, or further drop. What actually happened was the opposite, part of this is down to supply and demand, and the other part is a global phenomenon of the amount of money being printed around the world by central banks!
In a few words, from October to now, almost all raw material prices have shot up dramatically. Here are a few examples of approximate price increase from September 2020 – March 2021:
- Pulp (raw material used for cardboard boxes and packaging) up 55%
- Iron Ore (raw material to manufacture steel) up 25%
- Foam (used to make upholstered furniture) up 50%
- HDPE (raw material of plastic) up 25%
The combination of price pressure on both the currency and material prices means manufactures/exporters across the board have no choice but to raise prices. Of course, they all want to remain competitive. Most are, of course, not wanting to lose customers and have, where possible, tried to control their cost of purchasing materials so that they can to an extent, shield their customer base. Typically at Easy Imex we are seeing price increases anything from 4% – 15%.
Naturally at some point this will settle and find a new equilibrium, maybe raw material prices are lower in 3 months time than they are today, but we certainly would not want to predict that. If you are renegotiating prices with your manufacture, be very wary to lock in new prices for orders months ahead based on today’s raw material prices.
Feel free to talk to us at Easy Imex about how to negotiate prices with a raw material and the exchange rate mechanism.
Production Lead Times
COVID-19 has affected consumer purchasing around the world. Consumers are now spending less time travelling and socialising, meaning they have more disposable income and have even switched their regular purchases to physical products bought online. As a result, certain manufactures in China have seen a huge influx in demand.
In 2020 this caught out a lot of importers who could no longer get production as and when they wanted it. In the first half of 2020, understandably many importers reduced their purchases, not knowing how COVID-19 may affect their business. When the demand for physical products boomed, during the second half of 2020 importers couldn’t get stock fast enough! In turn, many manufactures that had a 30-day lead time went to 60/90/120/150 days or more.
In 2021 we have seen many importers place and commit to orders 6 – 12 months ahead just to secure production space. This is surely another factor driving material prices up.
It also means there are many manufactures who now have their order books and production full until the end of 2021, further exasperating the supply/demand imbalance.
Freight prices continue to be at record highs in China, driven again by a fundamental supply/demand imbalance. There have been more containers leaving China than returning, causing a ‘bidding’ effect.
As foreign countries slowed down or even stopped production and exporting, the demand for physical products from China has continued strong, causing the lack of containers coming back into China. There have also been many ports around the world that have suffered various levels of congestion and a lack of trucking/man power further exasperating the ‘normal flow’ of containers returning to China.
Whilst the situation is slowly improving, freight prices from China to ports all over the world remain at historic highs.
In January, 40ft containers from most ports in China, to the UK as an example were approx. $12,000 USD, as of early March (post-Chinese New Year) an average price of a 40ft container from most ports in China to the UK is approx. $10,500 USD.