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Floods in Europe and China disrupt global shipping, supply chains

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The floods in China and Europe are yet “another body blow” for global supply chains, the CEO of a shipping firm told CNBC on Monday. 

“Rarely does a week go past without something new,” says Tim Huxley, CEO of Mandarin Shipping. 

Shipping has already seen massive disruptions this year. As parts of the world rebounded from the pandemic, increased spending led to a shortfall of containers, creating delays and driving up prices.

Then in April, one of the world’s largest container ships became wedged in the Suez Canal, halting traffic for nearly a week. The waterway is one of the busiest in the world, with about 12% of trade passing through it.

In June, an uptick of Covid cases in southern China caused more delays at ports in the region, again jacking up shipping prices.

‘Broken railway links’ caused by floods in Europe

Heavy rainfall and flooding have devastated parts of western Europe. Some of the most severe flooding happened in Germany and Belgium. Parts of Switzerland, Luxembourg and the Netherlands have been affected as well.

“This is really going to disrupt the supply chain because the railway links have all been broken,” Huxley told CNBC’s “Squawk Box Asia.”

He said that includes railways coming from the Czech Republic and Slovakia into the German ports of Rotterdam and Hamburg, which have been “seriously disrupted.”

“And so that’s going to delay cargo movements in and out,” he said. “It’s gonna really disrupt the industry.”

Huxley pointed to Thyssenkrupp, noting the German steel making giant could not get raw materials due to the flooding.

“That ultimately will have a knock on effect on industries such as the motor industry, domestic appliances and things like that,” he said.

S&P Global Platts reported, citing a letter to customers, Thyssenkrupp declared force majeure on July 16. A force majeure event occurs when unforeseeable circumstances, such as natural catastrophes, prevent one party from fulfilling its contractual duties, absolving them from penalties.

A source at the firm’s mills told S&P Global Platts that parts of the railway in Hagen are “missing,” adding it’s even more difficult than before to get trucks for delivery. Hagen is a city in Western Germany that is among the worst-hit by the floods.

Flooding in landlocked Henan disrupting supply of wheat, coal

Meanwhile, the disruption caused by the flooding in the Chinese province of Henan is made worse by the fact that the province is landlocked, said Huxley.

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The disruption of railways is, again, going to cause a “big impact,” he said. 

“Obviously, that will have an impact on shipping, that will force shipping rates up,” Huxley said. 

The distribution of wheat and coal has been affected, according to Huxley, who pointed out that Henan is the “bread basket” of China and has produced 38 million tons of wheat this summer. 

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China Evergrande says property sales drop, warns it could default

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A banner promoting the Emerald Bay residential project outside the China Evergrande Centre in the Wan Chai area of Hong Kong, China, on Friday, July 23, 2021.

Lam Yik | Bloomberg | Getty Images

Embattled developer China Evergrande on Tuesday said its property sales will likely continue to drop significantly in September, resulting in a further deterioration of its cash situation.

The firm reiterated it could default on its debt, repeating a warning it issued two weeks ago. Evergrande has been trying to sell some assets to ease its liquidity crunch, but said those efforts haven’t yielded anything yet.

Evergrande’s stock tumbled nearly 10% in morning trade. So far this year, it has plummeted nearly 80%.

Evergrande’s sales have been steadily dropping since June. The Chinese property giant said in a filing with the Hong Kong stock exchange it expects a “significant” continued decline in sales this month.

That, Evergrande said, would lead to “the continuous deterioration of cash collection by the Group which would in turn place tremendous pressure on the Group’s cashflow and liquidity.”

“The month of September is typically when real estate companies in China record higher contract sales of properties. However, the ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group,” the firm said in the filing.

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Ratings agencies have repeatedly downgraded Evergrande since last year as the world’s most indebted property developer struggles to remain liquid. The firm’s financial position eroded especially after the Chinese government outlined rules to rein in the borrowing costs of developers. Those measures place a cap on debt in relation to a firm’s cash flows, assets and capital levels.

‘Uncertain’ if Evergrande can sell its assets

The units Evergrande has been trying to sell include China Evergrande New Energy Vehicle and Evergrande Property Services. But so far, it hasn’t entered into an agreement with any investors and it remains “uncertain” whether the firm will be able to confirm any sale.

It also said it was actively exploring selling its office building in Hong Kong, the China Evergrande Centre in Wan Chai. However, that effort hasn’t borne any fruit either.

Evergrande said it would continue to take measures to ease its liquidity issues, including “strictly” controlling costs, promoting sales and disposing of assets.

Evergrande warns of ‘cross default’ risks

Evergrande also warned its escalating troubles could also lead to broader default risks.

“In view of the difficulties, challenges and uncertainties in improving its liquidity as mentioned above, there is no guarantee that the Group will be able to meet its financial obligations under the relevant financing documents and other contracts,” it warned investors.

It said that if it was unable to repay its debt, it may lead to a situation of “cross default” under its existing financing arrangement and relevant creditors demanding payment.

A cross default means that a default triggered in one situation may spread to other obligations. That could lead to broader contagion in other sectors.

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Early predictions call for fewer deals, delays

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A person wears a face mask while carrying shopping bags in Columbus Circle on November 28, 2020 in New York City.

Noam Galai | Getty Images

Shoppers have shown an eagerness to spend on new clothes, electronics and jewelry, in recent months — and retail analysts are betting that splurging will fuel the holiday season.

Holiday forecasts from three different firms have predicted a sharp jump in year-over-year spending. Sales in November and December are expected to grow 7% compared with a year ago and reach $800 billion, according to Bain. Deloitte sees holiday retail sales climbing 7% to 9%, better than the 5.8% increase it tracked in 2020. A forecast by Mastercard SpendingPulse said holiday retail sales should rise 7.4% from a year earlier and climb 11.1% on a two-year basis, fueled by a rebound in in-store shopping and persistent consumer demand.

Retailers echoed similar expectations. Home Depot, for instance, said it sold out of an early release of Halloween decorations — an indicator that shoppers may have a big appetite for Christmas decorations, too.

Dick’s Sporting Goods said Monday it would hire the largest number of seasonal associates in the company’s history for the 2021 holiday season.

Walmart CEO Doug McMillon said the pandemic may inspire families to look forward to the holidays even more. The big-box retailer said early this month it would hire 20,000 supply chain employees, such as freight handlers and lift drivers, to keep up with demand during the busy shopping season and beyond.

“Customers, families want to celebrate Christmas,” McMillon said at a virtual conference hosted by Goldman Sachs. “They want to have a Thanksgiving, and if this situation with the virus enables it — or maybe even if it doesn’t — we’re going to see strong demand through the rest of the year.”

Here’s an early look at what shoppers and retailers may see this holiday season, based on CNBC’s interviews with retail analysts and comments from industry executives:

Supply chain complications will lead to delays

Businesses, meantime, are trying to ensure there is enough merchandise on hand to meet the predicted heightened holiday demand. Most categories of goods, from consumer electronics to toys to sneakers, are being impacted in some way.

Gap chief financial officer Katrina O’Connell said Thursday at the Goldman Sachs Global Retailing Conference that the apparel company expects the supply chain issues to persist deep into 2022.

“We’ll do our best to get units here as fast as possible,” she said. “The inventory might be lumpy.”

Lululemon‘s solution has been to charter extra air freight in an attempt to avoid backlogged ports. This is a strategy a number of retailers are employing, but it adds to transportation costs.

Salesforce estimates the costs of goods sold for U.S. retailers will rise by more than $223 billion this holiday season from a year ago, driven by jumps in freight, manufacturing and labor costs. 

Hiring challenges will compound retailers’ woes

Retailers want to move goods quickly from ports to stores to customers’ homes, but that will be hard if they’re not fully staffed. Aaron Cheris, head of Bain’s Americas retail practice, said the tight labor market is the single-biggest factor to watch this holiday season.

There are about 10 million job openings in the U.S., roughly 1 million more than unemployed people in the U.S., according to data from the Department of Labor and job placement site Indeed. Several million workers have stayed on the sidelines for reasons that range from child care challenges to a lack of needed skills.

Across the entire supply chain, companies will be stretched thin as they try to limit out of stocks and speed up delivery times, Cheris said. That means they will be in a tough spot if shoppers insist on getting goods delivered or have a strict timeline.

An employee outside a Target store in Clifton, N.J.

Adam Jeffery | CNBC

“For the last-minute purchases that I really wanted to get before Christmas, am I going to bother if you tell me the delivery window is eight days and it’s 3 days before Christmas?,” he said. “They may say, ‘Forget it. I’m not going to bother.'”

Retailers will miss out, too, if they don’t have salespeople available to find or suggest items and make sure popular purchases are quickly replenished in aisles, he said.

Deals? Don’t expect to see as many

At the Goldman conference, Macy’s chief financial officer Adrian Mitchell said markdowns have been lower than historical levels this year, in part because of rising costs due to inflation.

Macy’s said it is less concerned about having enough stock in jewelry, beauty items and home goods during the holidays. But it is being more cautious about apparel and footwear, due to sourcing constraints.

Shoppers are heading back to stores

Hurricane Ida could be a spoiler

Hurricane Ida flooded homes and damaged cars. AccuWeather estimates the storm caused more than $95 billion in damages, which makes it the seventh-costliest hurricane to hit the U.S. since 2000.

For some families, that extreme damage will mean thousands of dollars of unplanned expenses that range from repairing a roof to replacing washers and dryers. In the near term, the purchases could boost sales at home improvement retailers, such as Home Depot and Lowe’s, or appliance sellers like Best Buy. But Bain’s Cheris warns it might bust the budget for holiday gifts.

“That’s another place where my dollars are going to go where they may not have normally gone,” he said.

Shoppers may also put their money toward other channels, such as booking trips and hotel rooms at a higher rate, he said. Travel websites and hotels are reporting that the pace of bookings for December has been robust, and in many cases it is outpacing the levels seen in 2019. People are planning far in advance, which could drive up prices for procrastinators. The stepped up spending on travel could mean less money on tangible items.

Shoppers will be disappointed: Successful retailers will figure out how to manage through it

Shoppers are more likely to face headaches such as impossible-to-find items, weeks-long shipping delays and unattended cash register this holiday season, and that will shape how they feel about retailers, according to Bain’s holiday report.

Cheris said companies must find a way to turn around a frustrating or disappointing experience, so they don’t permanently lose a customer. They can also try to get ahead of those moments to blunt the impact, such as broadening a delivery window to leave buffer time to having substitute items to suggest if popular ones are unavailable.

“Those are sort of the moments of truth that really matter,” he said. “Those are the emotional moments that if you can find a way to do better on those, that’s what makes a big difference.”

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Solar prices jump as supply chain issues and raw material costs weigh

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Peter Cade | Stone | Getty Images

The solar industry is among many sectors feeling the pinch of higher prices, according to a report released Tuesday by the Solar Energy Industries Association and Wood Mackenzie.

Prices rose quarter over quarter and year over year across every solar segment during the period. It’s the first time that residential, commercial and utility solar costs have risen in tandem since the energy consultancy began tracking prices in 2014.

The most-significant cost pressures came from a jump in prices for raw materials, including steel and aluminum. Elevated shipping costs also played a role. The bulk of these impacts will likely start to show in 2022, since many companies have enough inventory to see them through the end of the year, according to the report.

Overall, the U.S. added 5.7 gigawatts of solar capacity during the period, a record for second-quarter installations. That also marks a 45% jump over 2020’s level as the pandemic roiled the industry.

“The solar industry continues to demonstrate strong quarterly growth, and demand is high across every segment,” Wood Mackenzie principal solar analyst Michelle Davis said. “But the industry is now bumping up against multiple challenges. … Addressing these challenges will be critical to expanding the industry’s growth and meeting clean energy targets.”

A separate report from Rystad Energy released Friday said global solar panel prices have jumped 16% this year compared to 2020’s levels. Overall costs, which include soft costs like labor, are up 12% in 2021. Rystad said this could potentially hurt the demand outlook for the next few years.

In the U.S., the industry is also facing regulatory overhangs and policy uncertainty. In June, U.S. Customs and Border Protection issued a Withhold Release Order on silica-based products from Hoshine Silicon Industry due to forced labor concerns in China’s Xinjiang region. Separately, some U.S.-based companies have filed a petition with the Department of Commerce asking that tariffs on imported solar goods be extended to Malaysia, Vietnam and Thailand, according to SEIA.

All this comes as lawmakers debate the $3.5 trillion spending package, which will have significant implications for the solar industry.

“What the industry needs is certainty,” SEIA President and CEO Abigail Ross Hopper said. She believes the most-important provision is an extension of the Investment Tax Credit, which has been instrumental to solar’s growth. The ITC, which was extended in December 2020, was included in The American Jobs Plan, but did not make it into the infrastructure bill’s final iteration.

Hopper said support for domestic manufacturing is another priority for the trade group, noting that incentives around U.S.-based production could alleviate some of the supply chain bottlenecks the solar industry is currently facing.

Rising costs and a lack of clarity for the industry could harm President Joe Biden’s ambitious climate goals. Solar costs have dropped more than 70% over the last decade, according to the Department of Energy, but they need to decline further for increased adoption.

The department issued Wednesday a blueprint detailing how solar could go from around 3% of electricity generation today to 45% by 2050, but it will be nearly impossible without supportive policies. The study said the U.S. installed a record 15 gigawatts of solar during 2020.

Installations will need to double each year through 2025, before quadrupling from 2020’s levels annually between 2025 and 2030 if the U.S.’ climate goals are to be met.

“This is a critical moment for our climate future but price increases, supply chain disruptions and a series of trade risks are threatening our ability to decarbonize the electric grid,” Hopper said.

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