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Pressure on Prices

The rise in CPI can mainly be attributed to increases in food prices  

The rise in CPI can mainly be attributed to increases in food prices (photo: EyePress)

 
Hong Kong manufacturers are facing a double whammy. With the European Union mired in its sovereign debt crisis and looming worries about a double dip for the United States economy, export growth is set to moderate in the coming months. 

Pressure on production costs, meanwhile, remains high. Export prices are rising, but they’re not keeping pace with rising production costs. The scenario translates into thinner margins for exporters. 

While certain material costs have been adjusted recently, they’re still much higher compared to a year ago. Furthermore, fluctuations in input prices, such as oil and cotton, may cause uncertainties to production plans. 

The Economist Commodity Price Index reveals that the general metal price level has fallen slightly after reaching a peak in mid-April and dropped more markedly in early August. At the recent low around mid-August, the index was still 27 per cent higher compared to the levels recorded in July. 

By mid-August 2011, the price of copper was some 44 per cent higher than the low level recorded in mid-June 2010. The aluminium alloy price level was about 26 per cent higher for the same period of comparison. 

The price of oil has remained volatile since the recent peak in April. After a major correction in early August, the price of oil was still 54 per cent higher than the trough in August 2010. The movement of oil prices has a direct impact on prices of downstream products such as plastics.

  Volatile prices for such commodities as copper
 

Volatile prices for such commodities as copper (photo: iStockphoto.com)

The average price of polypropylene (PP) has declined since May but rebounded in July before a major correction in early August. However, the price of PP in mid-August was still about 37 per cent higher than the low level recorded in July 2010.

The price of cotton surged markedly since July last year before plunging from an average of 149.3 cents per pound in July to about 100 cents per pound in August. 

The sharp swings in cotton prices over a short period may cause problems to manufacturers that cannot afford the pre-fixed prices and may also cause disruptions to supplies from upstream spinning mills. 

Labour Shortages Ease  

Garment factories are unable to operate at full capacity due to labour shortages  

Garment factories are unable to operate at full capacity due to labour shortages (photo: EyePress)

 

 
With highly volatile commodity prices now a worldwide phenomenon, other cost issues are more acute on the Chinese mainland. Manufacturers operating in the Pearl River Delta (PRD) region continue to face the challenge of labour shortages. However, according to a survey by the Chinese Manufacturers’ Association of Hong Kong, the rate of unfilled vacancies among manufacturers operating in the PRD moderated to 11.2 per cent in March 2011 from more than 20 per cent a year previously. 

To tackle the problem, the most commonly adopted tactics are raising wages and improving employee benefits. The continuing wage rise is partly a result of government initiatives. In 2010, 30 provinces and municipal cities raised the minimum wage levels by an average of 22.8 per cent. The trend continues into 2011, when 18 provinces and municipal cities have already raised minimum wages, most of them over 20 per cent in the first half of the year. 

The minimum wage in Guangdong increased by an average of 18.6 per cent in March compared to May 2010 when the previous increase was made. Shenzhen increased its minimum wage by 20 per cent, which is currently the highest on the mainland. 

A survey by the Hong Kong Trade Development Council (HKTDC) showed that 88 per cent of responding Hong Kong companies said they saw higher mainland labour costs during the third quarter of 2011 compared to the second quarter. The ratio is higher than the 79 per cent recorded a year ago. Among those experiencing higher labour costs, 47 per cent said the increase was more than 10 per cent compared to the past three months. 

Higher Food Prices  

China’s Consumer Price Index (CPI) has been on an upward trend since November 2009, reaching 4.9 per cent in January 2011 and going up further to 6.5 per cent in July 2011. The rise in CPI can mainly be attributed to increases in food prices, which accelerated from 5.7 per cent in June 2010 to 14.8 per cent in July 2011. 

Higher domestic food prices inevitably affect the operating costs of manufacturers in general, as most Hong Kong manufacturers operating on the mainland – especially in the PRD – need to provide dormitories as well as meals to migrant workers. Higher inflation also raises workers’ expectations of higher wages. 

Power Shortages Come Earlier  

The shortfall in electricity supply has hit many mainland provinces. This year, the problem of power shortages arose earlier than the normal peak period of summer electricity consumption. 

Power shortages have led manufacturers to rely increasingly on their own generators, while the cost of self-generated electricity is much higher than supplied electricity. This is especially so when retail prices of gasoline and diesel on the mainland are getting more expensive. 

The retail price of gasoline in Guangdong is now 17.3 per cent higher than the level in June 2010. The fuel price increases also have pushed up transportation costs. 

Rising Renminbi

  Stuck in the middle: Hong Kong manufacturers suffer from currency mismatch
 

Stuck in the middle: Hong Kong manufacturers suffer from currency mismatch (photo: iStockphoto.com)

While most Hong Kong manufacturers still receive US dollar payments for their exports, the appreciation of the renminbi means that the part of their production costs settled in renminbi will increase in terms of the US currency. 

Since mid-June 2010, when China engaged again in the reform of the renminbi exchange rate regime by allowing more flexible movement in its exchange rate, the exchange rate of the renminbi against the US dollar has risen steadily and jumped markedly in August, when the renminbi exchange rate appreciated by 6.9 per cent compared to mid-June 2010. 

According to the HKTDC survey, the local content (the part of production costs settled in renminbi) of Hong Kong companies producing on the mainland ranges from 34.4 per cent to 53.9 per cent, with an average of 49.8 per cent. This represents quite a marked increase from an average of 30 per cent a few years ago. Given the marked increase in local content, a seven per cent appreciation of the renminbi against the US dollar translates into nearly a 3.5 per cent rise in production costs. 

China’s Export Prices and US import Prices Move Up  

The rising input costs have put mounting price pressure on mainland exports as manufacturers operating in the region can’t absorb all the cost increases. 

While China’s Export Prices Index started to record positive increases in May 2010 and grew by more than 10 per cent on average in the first half of 2011, the US Import Price Index with China as origin has been rising since September 2010. 

Developments in both China’s export prices and US import prices indicate that overseas importers are willing to accept higher prices. That’s cold comfort for Hong Kong exporters feeling the pinch.

For more on international trade trends, please see the September issue of the HKTDC Trade Quarterly, which can be ordered at: http://bookshop.hktdc.com/.

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