Scary spike in business costs is raising serious concerns for 2022

From small entrepreneurs to Malta’s major industrialists, talk of the 'supply chain' going awry is raising fears of a major economic upheaval in 2022

A different kind of Christmas for businesses: rising costs mean 2022 could be a challenging year
A different kind of Christmas for businesses: rising costs mean 2022 could be a challenging year

From small entrepreneurs to Malta’s major industrialists, talk of the “supply chain” going awry is raising fears of a major economic upheaval in 2022.

But it not simply chatter; the numbers bear it out. Costs for Maltese business – freight, local transport, industrial production – have been on an unprecedented steep climb since August.

Malta’s industrial price index monitors the selling prices of leading products from a sample of 80 large enterprises: in August, industrial prices for intermediate goods, which are used to manufacture final consumer products, shot up by a massive 8% over the same month in 2020; then 9.6% in September and 9% in October.

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Costs for non-durables – food, clothing, fuels – have been rising steadily all throughout summer by 4% to 6%.

“Unless things change in the market, for example, cheaper local transportation, we are going to have problems in 2022,” Brian Muscat, the general manager of carton producer Multi Packaging, told this newspaper. “I fear the worst: there is huge demand for goods, but very low supply – either because of high shipping costs or a lack of containers to bring goods here. These rising costs are going to go down to consumers. When it hits people’s pockets, what will happen?”

Whisper it softly, but inflationary fears and low supply today could mean a recessionary new year in the first half of 2022.

Businesses might rest easy that Malta’s fixed-price agreement on LNG has meant stable energy prices as gas prices rise elsewhere in Europe. But what happens when higher business costs translate into higher prices for consumers, and in turn, demands for higher wages in a market where employers are finding a myriad of recruitment problems?

“What we’re seeing now is higher supply costs and supply problems,” says Brian Muscat, a man with his feet at both the business and consumer end of production. “Shipping costs have risen, even due to a lack of containers. Yet we have high demand for goods, but no supply: that pushes the price of transportation up. But Maltese businesses also have high local transport costs as well… so I am seeing problems in the first half of 2022.”

It is not a problem felt only by industrial producers – the complaints are similar for Maltese food importers, pharmaceutical importers, and restaurateurs.

The root of this dislocation in the global supply chain is the COVID lockdown, but that disruption lingers on. It is just that government hand-outs on 2020 kept Maltese consumer confidence up. But the ‘new normal’ is about to get tricky.

The lockdown reduced spending on food and restaurants. That low demand dovetailed with the drain of foreign workers and the international slowdown on global freight shipping. Food producers limited operations to cut back costs.

When the lockdown was over and people wanted to get back to normal, the supply chain was overwhelmed. People wanted to spend money, but even Maltese restaurants were struggling to hire back the foreign staff they had at low costs.

Container shipping from China shot up too, especially for food which requires temperature-controlled containers – costs shot up 1,250% from China to North America, an average of $17,970; up 850% from China to Northern Europe. The containers that stayed behind in European ports rather than sending them back empty to China, are idle, slowing down the chain. The share of European companies which say they are suffering from lack of materials or equipment to manufacture goods, has shot up to 39% in the last quarter of 2021.

Brian Muscat told MaltaToday that Malta needs support from the EU, because the island cannot be competitive with the rest of the mainland.

“The next six months are crucial. Everyone knows food prices are increasing. How much more can they increase when consumers start reacting to the increases?

“And if there is pressure on wages, then it will be bad news. I fear the government does not have the tools to intervene in the market at this stage,” Muscat says.

Muscat’s concerns echo those recently made to this same newspaper from major manufacturers. In the furniture business, price quotes keep change due to exorbitant hikes in freight costs. Domestica CEO Chris Vassallo Cesareo said shipping from the Far East had risen by around 300%.

For a pharmaceutical firm like Aurobindo, which gets 15 containers every week from its parent company in India, the price of a single €4,000 container had almost trebled, managing director Frederick Schembri had said. “Containers are stranded around the world and to secure space we now pay for the round-trip, to get the container from Asia to Europe and send it back.”

But like Muscat said, a further problem for Malta are high tariffs at the Malta Freeport – which is where government could intervene to minimise costs. The Freeport increased its tariffs by 3.4%, causing consternation among industrialists and wholesalers, a rate hike linked to the inflation rate of the past three years.

And for export companies like beer producers Farsons, freight costs make Maltese companies uncompetitive. “The extent of these increases makes it impossible for our customers to absorb these freight cost increases resulting in some lost opportunities,” Aquilina had told this paper.