See today's daily for more on this, but while the freight rate moves are more than likely going to correct to a degree at some point, their continual escalation has multiple implications for the chemical and plastic industry as they are most impactful on cheap imports from Asia targeting low-cost furniture, appliances, toys, and household goods where the base cost of the product is low and the move from $3,000 to $10,000 per container wipes out any advantage of manufacturing offshore.
Source: Freightos Index, C-MACC Analysis, June 2021
The US Administration as well as state and local municipalities are being handed a unique opportunity here as it would only take an inexpensive nudge to drive significant investment in on-shore manufacturing to offset some of the imports. The cost advantage of importing from Asia for many products has been decimated by the freight increase and when this is added to the logistic constraints (speaking as someone waiting for AC parts from Asia), the stars are aligned to get the manufacturing investment needed in the US. What will be holding potential investors back would be the following:
- The very poor state of US infrastructure and extends beyond road and rail delays to labor shortages in key areas such as truck drivers.
- The labor shortage in general – could the higher import costs be offset by higher US labor costs both in the construction of new facilities and in operations
- The lack of clarity around environmental standards – how much new permitting would be needed and what would that cost both in terms of dollars and timing?
- Raw material costs, especially for polymers. With the huge gap in pricing between Asia and US polyolefins pricing today you can afford to pay the higher freight rates for products with significant polyolefin content. It is in the best longer-term interest of US polymer producers to have more domestic consumption and being greedy today may be the wrong medium-to-longer-term strategy
Most of these issues would not be that hard to solve with an aligned US Congress and similar collaboration at the state level, but we fear that is not the case and unlikely to be the case. We do believe that we will see heightened investment in the US and we have written in the past about the opportunity to build Enterprise Zones in the US, targeted at creating efficient opportunities to build.
Source: Baltic Exchange, Bloomberg, C-MACC Analysis, June 2021
