Supply chain cost crunch likely to linger, says Nufarm boss Greg Hunt

Nufarm CEO Greg Hunt: ‘I don’t believe that global freight costs are going to go back to pre-Covid levels.’ Picture: Yuri Kouzmin

Nufarm chief executive Greg Hunt has a number of insights into global inflationary signals from his company’s global role in the agricultural chemicals business – all of them pointing upwards.

In an interview with the Australian on Wednesday after the company’s annual results, Hunt says he expects that higher global sea freight costs will be around for some time – a factor which will continue to push up prices of imported goods into Australia.

“I don’t believe that global freight costs are going to go back to pre-Covid levels,” he said.

“We are going to see higher logistic costs, particularly sea freight costs for several years.”

As Reserve Bank governor Philip Lowe point out in his speech on Tuesday – and Hunt agrees – Covid has seen a cutback in global shipping capacity over the past two years.

What is happening now is that as demand is going up, as economies are emerging from Covid lockdowns and slowdowns, while the supply side of the economy has been struggling to keep up. This puts pressure on inflation.

The real question is how much is a short-term adjustment issue to a range of supply side issues – the position which Lowe takes – or how much it may flow into the longer term.

“Margins are very tight,” says Hunt, whose company imports a significant amount of agricultural chemicals from China. “It is going to take two or three years to rebuild that (shipping capacity taken out of service over the last two years).

“We are going to see higher sea freight rates well into 2023.”

In short, Hunt believes that higher prices due to sea freight are going to be with us for some time, flowing through to the broader Australian economy.

The issue of sea freight is one microcosm of the current debate over the future of inflation – how much of the current spike in inflation, particularly in the US, is a short-term response to supply shocks and shortages and how much is due to more long-term, more structural changes?

A presentation given this week by AMP Capital addressed this issue, honing in on the issue of higher freight costs.

Higher freight costs are being met with a big rise in orders for extra container ships.

But the key question is how long it will take for supply (in this case of sea freight) to catch up with demand?

Lowe’s argument is that the current inflationary pressures are due to short-term events that will work their way through, heading off the need for interest rate rises until maybe as long as 2024.

As someone who has a low margin business which is sensitive to higher import costs, Hunt is a little more worried that higher import prices and freight costs will be around for some time.

Hunt also points out that while the debate in Australia has tended to focus on the fortunes of Australian exports to China, imports from China have also increased significantly as a result of the China Australia Free Trade Agreement of 2015, which cut tariffs on Chinese imports into Australia.

Australian agriculture, he points out, is now highly dependent on imported agricultural chemicals, particularly herbicides, insecticides and fungicides.

Nufarm itself is now getting out of the production of insecticides and fungicides in Australia as they can be imported more cheaply from China.

But the issue is that while imports from China have gone up significantly across the board in Australia in the wake of ChAFTA, the cost of goods from China has also been rising.

Hunt points out that the Chinese government has been cracking down on domestic manufacturers to improve their environmental standards – including around water treatment and air pollution – and increasing standards on worker health and safety.

Add this to higher wage pressure in China, and it is an ongoing force for higher global prices.

The global shift to having products made in China was a significant deflationary pressure in previous years.

This saw the world, including Australia shift its buying power to lower-cost China products.

But the increasing cost base from imports from China is a long-term structural change feeding into the inflationary outlook for the world.

The third factor which Hunt discussed is the wake-up call Australia was given as a result of Covid in terms of domestic manufacturing capacity.

While it can be cheaper to import goods from China, Covid has been a reminder of the need to have a domestic manufacturing industry as well – even if it costs more – to allow for security of supply.

Australia got a sharp reminder of this with the shortage of locally made personal protective equipment when Covid broke out early last year.

Australia now realises we need more critical goods manufactured locally – even if that involves higher prices.

In the case of agricultural chemicals, Hunt points out Australia’s heavy reliance on China is a broader security issue for the Australian agricultural industry.

He argues that Australia is going to have to learn to become more self sufficient – or less dependent on imports – for its own domestic security of supply.

While he is focusing on his area of agricultural chemicals, the issue of Australia needing to become more self-sufficient in some key areas is a long-term structural change which will feed permanently into higher costs.

Higher inflation – short term or long term? This is the question.

The answer will lie in studying the many different forces at play – company by company, supply chain component by supply chain component.

Hunt is right – Australia loves to focus on its export successes, but it is import costs that will help answer the question and which are still on the way up.