Importers still facing significant challenges
• It’s a changed trading environment for businesses, amid rising interest rates and inflation
In the aftermath of the Covid-19 pandemic consumer demand for products has grown. Supply chains globally, however, remained in disarray with a significant shortage of container vessels on many major routes. As a result, sea freight prices skyrocketed. The majority of importers took a view where stock is king and elected to move to an overstock position based on the assumption that coupled with post pandemic surging consumer demand, supply chain disruptions and high freight charges would continue.
However, rising interest rates and higher inflation have resulted in softer consumer demand leaving retailers in an overstocked position with a significant amount of their working capital tied up in inventory, reveals Dr Greg Cline, head of corporate accounts at Investec for Business.
DIFFERENT FACTORS
“This trend is not unique to SA,” he says. “We’re in a fundamentally different environment now compared to 2021. Around the world GDP indices are slowing, the war in Ukraine has impacted the cost of energy, the cost of money has become more expensive and many suppliers are pulling back on the open payment terms they were providing to importers and are instead now requiring payment by the time a ship sales, instead of the usual 30 or 60 days.”
This, he adds, has increased the demand for working capital to fund stock. At the same time, debtors days are starting to creep, finance costs are rising and stock days are moving out. In this environment, companies need to increase their funding levels with a banking partner that allows for a higher collaterised position.
The good news for importers is that sailing schedules and on-time reliability globally is improving, port congestions are easing and sea freight rates are coming down. In SA, more than half of Transnet’s workers are back at work after an 11-day strike in October.
Cline says that while it will take some weeks still for port operations to completely normalise, there are ways to prioritise and fast-track urgent imports, including by redirecting to alternative ports in neighbouring countries, albeit this may prove a more expensive route.
While festive season trade is not expected to be impacted by Transnet’s October strike, it may be a different story for Black Friday trade unless logistics are able to normalise quickly.
Another challenge for importers is rising inflation and interest rate hikes. “Importing has become an exponentially more expensive exercise in recent years and importers are either having to compress their margins or pass on these higher costs to the end consumer,” concedes Cline.
RAND VOLATILITY
Currency fluctuations and rand volatility don’t help. Some importers try to hedge the rand with forward contracts for supplier payments. The other consideration for high duty categories is the option to hedge the customs duty portion where the rate of exchange for custom duties is only determined at ship on-board date. This is often weeks after the order is placed with the supplier due to production lead times.
The current rand-dollar exchange rate adds to the cost of importing and, given that inflation is not yet under control, importers need to brace for further rate increases.
“There are numerous risks a business takes when they are importing products and it’s almost impossible to factor in all the unknowns,” says Cline. “The supply chain is made up of many components including ports, roads and transporters, among others. As has become clearly evident, weather can significantly disrupt business operations. The political climate also has a material impact on currency fluctuations.”
There are strategies to mitigate currency volatility, says Cline, advising importers to talk to their banks.