The impact of that decision on business around the world is profound. Just how profound is still up in the air according to David Jackson, president and owner of Brampton-based RM Ferguson & Company. His company which has been importing chemicals for the rubber, coating, plastics and adhesive industries from China for about four years was given one week’s notice that they had to submit all orders for the remaining eight months of 2008 by day seven. “When we tried to place an order on the eighth day, we were told we weren’t even close to getting it,” says Jackson.
The Olympic shut-down to lower pollution in China has had a domino effect on shipping coming from that country. “There are thousands and thousands of factories within the 300 km area around Beijing that are being shut down,” says Jackson. “Everything with a stack is being shut down.” But it’s not just the factories. Trucks are being banned from roads and even ports will be closed to limit emissions. Right now roads, rail and ports are clogged as months of product are being shipped out to beat the clock.
While the shut-down hasn’t gotten a lot of press, Jackson says the “world reacted quickly – panic. The tire market [which is about 70 per cent of the rubber industry world-wide] bought humongous orders – they gobbled up any capacity for product that was available within seven days.”
He says ports like Tianjin, Shanghai and Qingdao have been choked with orders for the past month and the trickle-down effect has resulted in a shortage of shipping containers in China. And he says the shipping disruptions will have long-term effects for a lot of business sectors. “The Christmas season shipping rush starts in May and June,” says Jackson. “All the ports are clogged now and they’re shutting down soon. People are panicking.”
Carrying excess inventory is expensive and in these days of lean manufacturing, it’s a business sin. But Jackson is using external warehousing to hold supplies that won’t be shipped to local manufacturers for months. At the beginning of June he said he was expecting 17 containers, and had room in RM Ferguson warehousing for six.
That is happening across the board. Quing Zheng is president and owner of Cambridge-based NewTek Automotive Inc. – one of the continent’s top manufacturers and distributers of brake parts. Zheng says he has been stockpiling parts in advance of the factory shut-down in China. NewTek manufactures parts locally, but also imports and two of the Chinese factories they use are within the shut-down zone around Beijing.
Zheng started NewTek in 1997 as a one-man operation while he was still a student.
Jackson says that doing business with China has some uniquely challenging aspects. “The advantage of a Communist government is that once they make a decision, it happens fast,” says Jackson. “You’re lucky to get two weeks notice of major changes.” When the Chinese government withdrew the tax rebate for businesses exporting from China, Jackson and the rest of the world got three weeks notice of a change in policy that increased their costs eight per cent across the board.
But he doesn’t have a lot of options. Not that many years ago he bought most of his chemicals from North American producers. Gradually they “backed out of the game” and companies like RM Ferguson had to look farther afield. Jackson started looking at China about five years ago. First he made a short list of possible suppliers in China, and then did due diligence and chose two companies that met the production, quality and environmental standards required by his company. After shipping several million pounds of product from China, he has received only one complaint and that wasn’t about the quality of the product. The client complained there was a two-centimetre piece of cloth inside one of the bags of chemical.
Jackson notes that doing business with China requires fast reflexes - something for which the rubber industry is not known. When notified about the summer shutdowns in China, Jackson immediately contacted clients and told them they needed to place all their 2008 orders based on their best forecasts. He says, “we’re getting phone calls left, right and centre from the most surprising candidates who have not prepared or were not aware of the coming shutdown, for quantities of material that we don’t have.”
“This isn’t the same business my father founded and ran,” says Jackson. His father founded the company in Brampton in 1947 to distribute chemicals and raw materials to the rubber and plastics industry. In the 1980s they took on warehousing and storage services for clients, but this wasn’t an industry sector that saw lightning change. Now RM Ferguson has 16 employees with annual revenue around $25 million and ships their products to companies throughout southern Ontario and east into Quebec.
This latest shutdown in China means committing millions of dollars for future shipments, with no guarantee about price. Jackson says when he asked about a price commitment, he was given the price as of the next container. Business is still about supply and demand, and maybe when production ramps up in China in the fall, prices will level off, but nobody’s betting on that.
Jackson says it comes down to global capacity and an international phenomenon that is unique in his experience – the decoupling of pricing between oil and goods. Traditionally the price of product moved up or down in tandem with the cost of oil. But this time, Jackson says, “as crude prices come down, we won’t see a reduction in the cost of products – there’s no longer any direct correlation anymore.”
That is disconcerting because “In the polymer world outside of China, producers are running full-out and nobody’s breaking ground for new facilities,” says Jackson.
Certainly the cost of oil is having a very direct impact on the cost of shipping – on average it’s a 30 per cent surcharge.
And the shortage of product, especially synthetic polymer needed by producers and mixers of rubber is a continuing issue. Jackson says it’s tough to get enough synthetic polymers now, but with China’s current eight to 10 per cent annual growth rate, the shortage can only become more severe. “The trend now is that business is slow in North America, healthy in Europe, and China and Asia are consuming more as they grow. The next three to four years will be challenging for the North American market. We’ll be tap-dancing to keep ahead.”
