Summary:
Ambrose Evans-Pritchard believe the outsourcing game for China and Asia is over. It's not just about cheap labour anymore, but distance. Distance now cost money. The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. Due to the rise in energy prices, however, the cost of shipping a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded. This monumental energy price increases will be a 'game-changer' for Asia. China's use of energy per unit of GDP also far exceeds that of all other major economies. Energy subsidies merely are delaying the trouble. Low-tech product plants are shutting down and are re-openining in the US. Oil prices may come down, but will only be temporarily. According to Evans-Pritchard, globalisation has passed its high-water mark and the pendulum will now swing back from China to America. The Asian economies will have to reinvent themselves. (Published: 08/07/08)
Notes:
- manufacturing revolution of China and her satellites has been built on cheap transport over the past decade
- great oil shock of 2008: st a stroke, the trade model looks obsolete
- Shanghai's bourse is down 56pc since October
- one of the world's most spectacular bear markets in half a century
- "Asia's intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin."
- Products are sent to China for final assembly, then shipped again to Western markets
- snag is obvious: cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded.
- Stephen Jen, currency chief at Morgan Stanley
- "The monumental energy price increases will be a 'game-changer' for Asia"
- the region's trade model is about to be "stress-tested".
- energy subsidies
- have disguised the damage
- China has held down electricity prices, though global coal costs have tripled since early 2007
- Loss-making industries are being propped up
- This merely delays trouble.
- Stephen Jen: "The true impact of the shock will only be revealed over time, as subsidies are gradually rolled back"
- China's use of energy per unit of gross domestic product
- three times that of the US
- five times Japan's
- eight times Britain's
- Stephen Jen: "China's factories were not built with current energy levels in mind"
- outsourcing to Asia
- Jeff Rubin, CIBC World Markets:
- "The Asian outsourcing game is over. It's not just about labour costs any more: distance costs money."
- Any low-tech product shipped in bulk - furniture, say, or shoes - is facing the ever-rising tariff of high freight costs
- 2,331 shoe factories in Guangdong have shut down this year, half the total
- North Carolina's furniture industry is coming back from the dead as companies shut plant in China.
- three effects crunching China
- commodity costs
- 20pc wage inflation
- sagging import demand in the US, Canada, Britain, Spain, Italy, and France.
- critics:
- Beijing has repeated the errors of Tokyo in the 1980s by over-investing in marginal plant
- Communist Party banking system has let rip with cheap credit - steeply negative real interest rates - to buy political time for the regime.
- clear that Beijing's mercantilist policy of holding down the yuan to boost exports share has now hit the buffers
- foreign reserves have reached $1.8 trillion
- playing havoc with the money supply
- declared inflation is just 7.7pc, but that does not begin to capture the scale of repressed prices, from fuel to fertilisers.
- Stephen Green, from Standard Chartered:
- "There is a lot more bottled-up inflation in this economy than meets they eye"
- "Inflation merely steals growth from the future. It defers monetary tightening until matters get out of hand, which is where we are now. "
- Vietnam: has already blown up at 30pc.
- India: 11pc
- Indonesia: 11pc
- Philippines: 11pc
- Thailand: 9pc
- oil prices may fall again
- they plunged to $50 a barrel in early 2007 after the Saudis raised production
- the scissor effect of slowing global growth and extra crude later this year from Brazil, Azerbaijan, Africa, and the Gulf of Mexico may chill the super-boom
- US Commodities Futures Trading Commission is on an "emergency" footing, under orders from the Democrats on Capitol Hill to smash speculators
- if it is really true that investment funds have run amok, we will soon find out
- those who claim that derivatives (crude futures) cannot drive spot prices have overlooked a key point:
- the Saudis and others use the IPE Brent Weighted Average of futures contracts as their pricing mechanism.
- Futures now set the spot price
But: even if oil comes down for a year or two, the mid-term outlook of the International Energy Agency warns that crude markets will be tighter than ever by 2012
"Come what may, globalisation has passed its high-water mark. The pendulum will now swing back from China to America. The mercantilists will have to reinvent themselves."
