My friend David sends along this Financial Times story about how various factors are forcing a fundamental shift in supply chains. Excerpt:
Manufacturers are abandoning global supply chains for regional ones in a big shift brought about by the financial crisis and climate change concerns, according to executives and analysts.Companies are increasingly looking closer to home for their components, meaning that for their US or European operations they are more likely to use Mexico and eastern Europe than China, as previously.
"A future where energy is more expensive and less plentifully available will lead to more regional supply chains," Gerard Kleisterlee, chief executive of Philips, one of Europe's biggest companies, told the Financial Times.
The story goes on to talk about how the economic downturn, plus concerns about climate change (and resulting new government regulation) are driving this. What seems implicit in Kleisterlee's remark, but doesn't get mentioned in the FT piece, is peak oil.
[An aside -- last week in Alaska, I met an oilfield worker from the North Slope, who asked me what I thought about peak oil. I didn't want to get into an argument, so I gave a noncommittal answer. "Well, up on the slope, we all know it's real," he told me. "Alaska is screwed." We had an interesting conversation from there.]
Anyway, David says that the point I raised in the earlier post about how the military accepts climate change as a clear and present danger, even as many conservatives deny it, might also, per this FT story, be made about business.
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"Manufacturers are abandoning global supply chains for regional ones in a big shift brought about by the financial crisis and climate change concerns, according to executives and analysts."
Showing once again, as those of us in the logisitics business know, that manufacturers don't have a clue about how much it does or should cost to move things from here to there.
There is no cheaper way of moving goods than by water. It costs less to send a container across the Pacific from China to Los Angeles than it does to send it from Los Angeles to Chicago. This is why low value by weight goods are transferred to barge or ship as soon as the most marginally navigible waterway is reached.
There is no more expensive way of moving goods than regional trucking.
If manufacturers are giving up on the China-trade to "save" money on shipping by sourcing production in Mexico, they are in for a rude result.
Andrew -- as I said, there are exceptions. But look at it this way, in context.
--> MS has the ability to store 20 million BBLs of oil, as a one-off. So, say that they fill that inventory over, maybe, a month which would represent taking up to 1 million BBLs/day offline each day. That would last for a month, and then their facility would be maxed out. So whatever price effect taking that extra million barrels a day offline from the global supply would last a month...
...meanwhile, global refiners are processing 81-82 mm BBLs/day, EVERY DAY, day in and day out. So MS's facility is a bit like the tail wagging the dog, in my view. Production costs, taxes and royalties (and political risk) were all rising for the entire period from 2000-2008; this forced oil companies to demand higher prices from refiners; which then demanded higher prices from the end user for refined products. This reached a pitch last summer before the US consumer blinked, cut demand, and sent the whole thing unraveling. (Because the "marginal oil producer" was not longer necessary to set the price as demand fell.)
--> Secondly, the stored 20 million BBLs of oil, at approximate current levels, is worth maybe USD 1.25 billion, which of course sounds like a lot of money. But it really isn't much in the context of the oil/energy market -- futures contracts alone are worth 4-5 trillion USD, and probably more but I am too lazy to look it up. But again, these are the futures market, rather than spot, which is where the liquidity is.
--> The cost of carry on that USD 1.25 billion worth of physical oil is significant: you've got insurance, storage, shipping, foregone interest on the asset, shrinkage, etc. You could post the same USD 1.25 billion and get maybe 10-20x leverage in the futures market depending on your balance sheet strength, with practically no trading costs because the market is highly liquid and there is almost no trading friction. Even if you didn't want the leverage from a risk profile, you could dial down the leverage but still keep the trading costs at near-zero.
--> Finally, if Goldman, or MS, or whoever buys companies which control sales to the end user, that is not really the definition of speculation. That's a financial investment. Speculation is to buy or sell something in the hopes that the price moves in your favor, usually n a short period, so that you can reverse the transaction profitably. Controlling the end of the supply chain is a financial investment, where you have the risk associated with operations as any other business.
So I have no doubt that a firm like MS has some physical oil trading arm because they are smart guys and always have an angle on things, including holding spare storage capacity for some one-off situations; but put it in the context of their entire balance sheet of USD 700-800 billion...
Again my point is not that there is no speculation -- there is, and I actually believe it is a good thing. But the speculation is a symptom of the market volatility, rather than a cause. Just my view, of course; others can disagree.
Thanks Turmarion: I did say these organisations denounced the language Al Gore and public personalities use to push their agenda. The APS statement:
“Emissions of greenhouse gases from human activities are changing the atmosphere in ways that affect the Earth’s climate.”
is measured as the observations demand. I'm critical of the sociological and political abuse of the science.
Paraphrasing Freeman Dyson: coal is cheap, it is the best means of bringing poor people to the middle class. This is one of the great goods of the century. Even if it is not conscious (though to some it would be privately admitted) developing countries and their traditional societies are a threat to the world. So population myths and resource depletion fancies are necessary means to these group's good ends.
Pollution is bad; energy and resource exploitation is bad; fealty to nasty oil producing regimes is bad and therefore energy independence is good. But a lie has the veneer of truth and this very good attention to the environment has now been hijacked.
A similar mechanism happened during the Reformation. It cost alot of blood, and divided nations. We are much more exposed to the violence this politicking could bring than 500 yrs ago.
Slowly slowly please. Financial audits please, paid independent scientific assessments please. This is very dangerous stuff - legislation that taxes every industry and service in the economy and collects massive amounts of revenue and entrusts its redistribution to whom?
The difference between the APS language and Mr Gore's, who stands to make billions from his various investments, is large. But it is Mr Gore's preaching that is affecting the public's thinking most of all.
For those whose skepticism is applied only to orthodox Christianity we sure could use some consistency 'round about now.
Sir, I may not entirely agree with all the points you make on this blog, but I must say that you have proven to be steadfastly thought-provoking and informative, even when championing - perhaps ESPECIALLY when championing - viewpoints which I may be tempted to reject out of hand.
Manufacturers are abandoning global supply chains for regional ones...
Really? I see just the opposite happening.
If this does become true, it will not be due to energy costs or global warming. It is much more likely to be driven by this:
http://www.washingtonpost.com/wp-dyn/content/article/2009/08/07/AR2009080702043.html
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