the chinese effect

The Chinese Effect

Forex reserve shortages and the further devaluation of the Ethiopian birr against foreign currencies have been the usual inflation-causing suspects in Ethiopia. Additionally, in recent months, container scarcity is resulting in even more price hikes, especially of Chinese imports. Adding to an already strained global business environment faced with unprecedented challenges, China’s latest power cuts and moves to create a climate-change-conscious economy are felt far afield, writes Selome Getachew.

Hanna Behailu, Purchasing Manager for a manufacturing and import-export company, readily procures detergents, consumables, and big construction materials for ongoing projects. Price hikes for the past few months of these and other supplies are obvious to her, as a result.

“Every month, there has been a price increase of seven to 10Pct, amounting to a total of 30 to 35Pct surge in costs in just the past four months,” Hanna told EBR. Yet, even in these circumstances, her company has cut down one-third of its normal procurement of consumables. She shared her frustration of going out to collect quotations herself. All of her vendors cite the same reason for the condition—forex shortages.

“But, they are also saying some things these days about container shortages and consequent and substantial freight price surges,” Hanna said.

Abel Tsegaye, a computer Repairman in Hanna’s office, shared a story of his own when EBR visited. For the past 10 years, he has been providing IT-related services to many companies and individuals. With his assistant Abenu, he purchases materials on his customers’ behalf as he’s knowledgeable regarding originality and where to find the right products and specifications. He does this for computers, printers, network equipment, and various other tech gadgets.

Abenu acknowledges that slight price increases are always present in the market, but what happened in the past five months is unbearable.

“The printer that I bought 2 months back for ETB17,000 is now ETB22,000 while an ETB10,000 printer is now going for ETB12,500,” he told EBR, shaking his head in disbelief.
Suppliers tell that they are forced to import smaller volumes by air cargo which is very expensive compared to container shipping. However, even big exporters from China couldn’t get their hands on containers for their logistical requirements.

Ethiopia’s inflation slowed down slightly in October 2021 to 34.2Pct year-on-year from the previous month’s 34.8Pct. However, this doesn’t reflect on products imported from China; price increments are a constant every month on such imported goods.

Abraham, name changed upon request, has been an importer for a well-known brand for almost the past 20 years. He is one of those savvy importers with large deposits who get quick approvals of forex requests. But not in 2021, even such traders are feeling the pinch.

“I have been waiting for forex approval for four months,” Abraham told EBR.

Adding fuel to the already blazing fire, containers are not to be found. He had to wait for 90 days to secure a booking for four containers from China, which is the common commitment period of a letter of credit. Having finished his stock, Abraham had no option but to go under the table to book the container. With some black market dealers working in the underground, he was asked to pay around USD500 just to expedite his request and take him to the front of the long queue of importers awaiting containers.

Freight expenses from Chinese ports have doubled. They call it the ‘adjustment’ and ‘peak season’ charge—equivalent to double the previous freight charge. One can imagine how these factors affect the price of goods in the market. “I have no choice,” Abraham laments, “but I have to pass the burden over to the consumer by incrementing my selling prices”

“The main reason for the current global container shortage is mainly due to the pandemic and backlogs of containers at ports and in the seas,” according to Negash Daniel, Deputy General Manager of Freighters International, representative of A.P. Moller – Maersk, the giant integrated container and logistics company with operations in 130 countries. Additionally and currently, the increased movement of goods for the Christmas holiday season from China to Europe and the USA is adding further pressure on expenses. This is largely due to quite a large number of shipping companies providing chartered services to giant American companies for the Christmas and New Year business season. As a result, smaller shippers like Ethiopian Shipping Lines are running short of containers and leasable vessels to transport increasing imports and exports.

“Due to the shortage of cargo goods, there will be a general lack of supply relative to demand—causing a general mark-up in prices,” says Negash, certain that the container shortage has contributed to inflation. “Freight charges have increased by 265Pct on cargo from China.” Negash suggests increasing container supply and making ports more efficient by working for longer hours and speeding up vessel turnaround times.

What Happens in China Doesn’t Stay in China
The disruption in the global China-led supply chain may not only be attributed to the shortage of containers and the holiday season. It is also connected to China’s production cuts across its manufacturing industries as part of an effort to rein in pollution and carbon emission in the nation. Shanghai’s 22 coal plants cause 4,370 premature deaths per year, according to an interactive map by the non-governmental organization Greenpeace, while Beijing’s 10 plants cause 1,004 annual deaths. According to the US-based magazine, The Atlantic, a single coal plant in northern Shanghai kills 627 people in a single year.

China is also suffering from an energy crisis. Not only are major industries obliged to restrict production, but reports of candle-lit dinners, failing traffic lights, and people getting stuck in elevators have become common recently. The effect has been global, with Apple, Tesla, Microsoft, and Dell all saying that their supply chains are getting hit. China’s drive to cut coal has collided with a post-Covid resurgent demand and an unusually hot summer in the months of June, July, and August that battered wind and hydro generation, according to Jun Du, Professor of economics at Aston University of Birmingham, in England.

The good news coming out of this is that China seems serious about emissions reduction, aiming to cut energy intensity by 13.5Pct by 2025, carbon emissions per unit of GDP by 18Pct, and reach peak emissions by 2030. But for China, and no doubt other nations, cutting emissions too fast without alternative clean power production options can result in shut-downs, emergency policy reversals, and even more emissions, Jun Du argues.

As much as the global supply chain has been fighting to get back to normal after a Covid hangover, China’s power struggle illustrates how fragile it can still be. The three provinces of Guangdong, Jiangsu, and Zhejiang are responsible for nearly 60Pct of China’s USD2.5 trillion in exports. They are the nation’s biggest electricity consumers and are being hit the hardest by the outages.

So long as China’s economy, and hence the global economy by extension, is excessively dependent upon coal-fired power, the dilemma the world is increasingly finding itself in—between cutting carbon and keeping supply chains functioning—is direct, real, and very current. The net-zero agenda makes it very likely the world will see similar disruptions in the near future.

Even though the global supply chain is coughing following China’s intentional sneeze, the global manufacturing powerhouse seems serious about carbon emission reduction. Beijing’s unprecedented move, despite its absence from the COP-26 deliberations in Scotland, will bear significant results, both in production culture and climate change in the long term. In the short term, however, global trade might continue to see similar disruptions. For Ethiopia, further news about another cause for potential inflation is just terrible fire to the blazing flame. EBR

10th Year • Jan 2022 • No. 103

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