We Are Not Out Of The Woods Yet

Having hopefully survived the pandemic, many people are talking a return to the "new normal”. Unfortunately, in terms of businesses, the new normal is a very scary place. It is a very well used phrase, but as we come out of the pandemic, businesses large and small are being buffeted by the outlying winds of a "perfect storm”. A combination of factors conspiring to make the post-pandemic business landscape very difficult for businesses large and small.

Many UK businesses took advantage of a number of government schemes design to help them through the pandemic. Bounce Back Loans, CBILS, BBILS etc have added billions to UK plc’s balance sheet. These loans must be paid back. The support provided by the government was predicated on very low interest rates. However, all these support measures do not have fixed interest rates, they are variable. So, if the Bank of England interest rate increases, so do the repayment schedules.

But that’s okay because interest rates are at an all-time low and they’re going to stay there stay there, right?

Wrong.

Because of the pandemic and other issues, things that we took for granted have changed significantly. Due to the insatiable desire for cheap sparkly, new products, UK manufacturing has been progressively hollowed out by governments of all political hues. Companies have off-shored, predominantly to Asia for their consumer and business-to-business products. The supply chains supporting this business model, have been developed and honed into a very slick, low-cost operation resulting in these products being readily available.

During the pandemic the worldwide availability of containers used to bring the shiny products to the UK effectively halved. Now, as economies recover from the pandemic, global demand for sea-freighted product has escalated to the extent that more than 99% of the world’s fleet of container vessels are in operation or under repair. There simply is no spare capacity. As a result, a container, which pre-pandemic might have cost £800 to £1600 to ship from China to the UK, is now costing between £10,000 and £16,000. These costs inevitably have to be passed on to consumers.

In our business we must compete with imports brought in by our competitors from Asia. This is where most fasteners used in all sorts of manufacturing in the UK and worldwide come from. However, the cost calculation these importing companies now have to make has changed dramatically.  On a container containing, perhaps, £30,000 worth of fasteners, with relatively low margins, can their business stand an on-cost of £10,000 to £16,000 for transport? I suspect the answer is no. It’s not just fasteners. This calculation has to be made in boardrooms up and down the UK, in businesses as diverse as supermarkets to clothes stores. Due to the low margins many of these work on in order to compete, even if the container has £100,000 worth of product on it, the transport inflation is between 10% and 16% – on products where these businesses may only be making a 5% margin.

In addition to these cost increases, the actual time from shipment to arrival has increased significantly. This has been exacerbated in recent months due to the problems with the Suez Canal, which have been well documented in the press. Containers used to seamlessly go from say a Chinese manufacturer to the port and were then loaded within a few days and arrived in the UK four weeks later. Those days have gone. Many Chinese manufacturers cannot get their products booked into the shipping port for between two and four weeks. When they are loaded, the transit and offload time can be up to six weeks, so the supply chain time is doubled, playing havoc with just in time deliveries. While the transport issues and their stealth inflation on input costs are being wilfully ignored by economists, advisors and mainstream media (wilful as these costs are hiding in plain sight) they will undoubtedly start having real-life impacts, which will apparently come as a surprise. But unfortunately, this is just part of the storm.

Due to the effects of the pandemic and lockdowns, many steel manufacturing plants either closed or were running at very low capacity. As we started to unlock across the world, these plants were not able to keep up with the increase in demand. The costs of raw materials for steelmaking – iron ore, coal and steel scrap – have also increased massively, a combination of demand and the impact of the pandemic on their supply chains. The result is steel shortages worldwide and when there are shortages prices go up – and they have at a pace that is unprecedented. This issue has been made even worse in the UK and therefore the on-cost implications even greater, by Steel Safeguarding measures. These have meant UK manufacturers importing steel grades they are unable to source from UK mills are faced with the risk of 25% import tariffs, if the quotas set by Government are exceeded. To make matters worse Liberty Steel, a UK steelmaker, is struggling to stay afloat, creating supply uncertainty which means manufacturers need to obtain supplies from abroad, using up the quotas much faster, potentially obliging the manufacturers to either swallow or pass on the tariff cost on top of the increased cost of the material itself.

All of this would be bad enough, but again, as a result of the pandemic and lockdowns, and particularly the ban on air travel, many integrated petrochemical plants worldwide had to reduce their throughput drastically. These plants convert crude oil into vehicle and jet fuel, but also provide the basic materials for products we directly or indirectly rely on every day, such as plastics, fertilisers for farms. As planes aren’t flying, and vehicle mileages have fallen radically, these secondary products are in short supply, again driving major price increases, and also compromising production and supply chains.

Automotive companies worldwide are struggling with lack of supply of semiconductors – the ‘chips’ that today are critical to all vehicles, as well as phones and computers, and myriads of the systems we don’t even think about. With this crisis has come the realisation that a huge proportion of the global supply of these vital components is concentrated in a handful of geographic areas, most notably Taiwan. Vehicles are being manufactured and parts then retrofitted or worst of all not being manufactured at all, hence the reason many new vehicle deliveries are being put back.

These broken supply chains are going to have to make companies and governments think very carefully about the strategic position of manufacturing in the UK and its value, as opposed to its cost.

The results of all of the above is that there is an inflationary shockwave heading our way, which no one seems to want to talk about. When the full effect of these inflationary pressures start hitting businesses, already hobbled by the loans they have taken out in order to survive, they will be faced with increasing costs of financing existing loans and the near impossibility of getting new ones.

Business’s ability to fight back against the above issues, will be further compromised by the UK Government’s decision to remove the trade credit insurance safety net at the end of June, which means that businesses relying on invoice discounting for their cash flow are going to find their availability severely compromised.

This is the business version of a pandemic, and it is coming to a High Street near you.