Zooming rise in cost facing economies
Zooming rise in cost facing economies

Zooming rise in cost facing economies

When COVID-19 struck China, the benchmark Containerised Freight Index fell off the cliff; it was an indication of the pain to come and the Baltic Dry Index followed suit. The world over, the experts predicted the collapse of trade and as a result the fall in prices in commodities that would have spillover effect across the board in everything we buy.

It was a very short term view of things, sparked off by the spread of COVID-19 around the world; the Purchasing Managers Index also did not reflect the slightly long term view which is supported by data and evidence on the ground. Let me start with shipping itself.

If one looks at shipping costs, we cannot de-link this with the discussion on the shipping industry as a whole, which was suffering in the last several years due to excess capacity. The COVID-19 brought them to the doorsteps of collapse, but little did we know that the preparations they had taken rightly in the last three years, through consolidation and through alliances of all kind, was just the response the industry as a whole needed to survive and prosper. It also included the alliance on data sharing, block chain introduction and a host of other things that would enable the industry to avoid any empty space on a ship and maximise back-hauls and also optimise milk runs. The result of all this is that the industry as a whole is profitable at the end of third quarter this year and the global shipping prices have zoomed in this last quarter. The Shanghai containerised freight index or the Baltic Dry Index is back in business, shooting up closer to all time highs.

The increase in cost of all kinds is now facing us all in every economy. This is majorly driven by fuel, quite contrary to the popular belief that the fuel prices will remain low driven by low demand of oil. But conventional thinking is wrong as every refinery moved to curtailing its production as it could not create wastes that could not be evacuated. So pet coke was the first item that got produced the least and the prices zoomed in no time. This was already competing with coal in related markets and the coal prices hardened, which was also driven by the strike in the Colombian mines.

In every segment, the industry could not afford a price drop for long. It took some time to actually fructify but by the end of the last quarter, almost every price has crossed the levels seen before COVID-19, whether fuel, raw materials, equipment and consumable, and this list is long for the industry. For the common man the gradual rise in inflation was always being felt, but in some countries there were other contending factors. In India for example CPI has steadily moved to 154.7 from 151, Inflation is at 6.69 per cent from 5.84 per cent in March 2020, which is also ticking up. The import price index is moving up steadily from 517 to 569. The food inflation is steady at 9.05, which is where we would have to watch out for. Inflation versus un-employment Phillips curve seems to be taking a breather in many economies.v

The industry cannot take the brunt of cost increase in its inputs and is passing it through to the consumers. This will have spillover effects in every market. While all this happens, the interest rates trajectory cannot stay in the same direction, which would create further pressure on prices.

ABOUT THE AUTHOR:
Procyon Mukherjee is an ex-Chief Procurement Officer at LafargeHolcim India
. The ideas presented are his personal and have no connection to the beliefs of the company where he works.

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