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A cascade of curious shortages – from pallets to shipping containers to urea used in fuel – is complicating the government’s positive economic outlook. By Karen Middleton.

Strange forces holding back the economy

They’re wary of sparking panic but Australian food, grocery and alcohol suppliers have bad news for consumers: some products will be harder to get than usual this festive season, and even into next year.

It’s not a production problem. It’s logistical. The ongoing shortage of wooden pallets means goods and their components can’t physically be shifted as readily from ship or plane to factory, warehouse and shopfront.

Product is backing up, limiting capacity to store more. Some manufacturers have been forced to pause production, unable to get their products onto the shelves. And it’s getting worse, not better.

“It’s a bit like toilet paper,” says Angus McPherson, managing director of beer and spirits producers Diageo Australia, suppliers of popular brands including Guinness, Bundaberg Rum, Johnnie Walker whisky, Tanqueray and Gordons gin, Smirnoff vodka and Baileys Irish Cream.

“Once some people start hoarding pallets, there’s only so many out there. The system breaks down and then it gets its own life.”

Pallets are a curious commodity. They are not owned by the people using them. Producers, suppliers and retailers pay subscription fees to central pallet providers, who make an Australian version that is a different size to those used elsewhere. The pallets rotate through the hubs, are refurbished when necessary, and sent back out. The circular system works well until other supply chain bottlenecks prompt somebody to panic.

“Traditionally, you’d have great confidence that the amount of pallets you need each week would arrive on time,” McPherson explains. “And you could set your production schedule – what you need to make week in, week out – with confidence of pallet availability. The challenge for it is … you’re not sure how many pallets you’re going to get. And as a result, at times when you don’t have pallets available, you are having to stop production because the system has fundamentally broken down.”

The problem may also limit availability of other products such as wine and supplies of food and general consumables. Businesses are doing side deals, trying to guarantee access for their own products while leaving others short. Pallets aren’t returning to be reconditioned so they deteriorate more quickly. The system is like a roundabout on a busy road: when users don’t observe the rules, there’s a traffic jam that may take intervention to untangle.

Australian Food and Grocery Council Australia chief executive Tanya Barden says it’s affecting beyond this sector, too.

“Whether it’s finished goods or it’s ingredients or inputs – people are holding more stock on pallets,” Barden tells The Saturday Paper. “And then you’ve also had the effect of the lockdowns, so general retail hasn’t been open and selling through, so products have been building up. And then you’ve had timber shortages, which has impacted on how many more new pallets you can bring into the market.”

If equilibrium isn’t restored soon, she wants the federal government to prioritise the food and grocery sector for access to the pallets, as providers of essential goods.

The pallet problem is among a series of issues affecting the broader economy. At the most lucrative time of the year, producers and suppliers of goods and services are as desperate as consumers to put Covid-19 lockdowns behind them and ride the reopening wave. But there’s an undertow of complicating challenges.

“I would say that supply chains in manufacturing are now under more strain than they have been at any point through the pandemic,” says Barden. “I have been getting daily calls from CEOs that have needed to stop production, and it could be anything within the supermarket … I think this problem’s actually going to go beyond Christmas into early next year because those production stoppages now, I think, [are] going to have a lingering effect.”

Businesses had hoped the issue would rectify itself once people were out shopping again. “But it hasn’t,” Barden says. “It is still continuing to deteriorate, and companies are still scrambling every day to decide whether or not they run their production, based on whether or not they have access to any pallets to put their product on.”

Barden warns that the price of goods may also be affected, as production costs increase – a separate, pre-existing pressure. She says wholesale prices have risen 25 per cent over the past decade, costs by 50 per cent. “We’re really at a point now where we’re very constrained in ability to further absorb and needing to pass that on to consumers.”

There are other factors, too, threatening to make the recovery less smooth than it may seem from the headline figures in this week’s midyear budget update.

Shipping containers are at a premium, with bulk vaccine deliveries and general demand in high-consuming parts of the world distorting the usual pattern of movement and pushing up the price.

Chronic staff shortages from the closure of borders to migrants, soaring transport costs, one-off component issues affecting diesel fuel and fertiliser, and fears of a new Omicron Covid-19 wave are all affecting the otherwise strong prospects heading in to 2022.

Former Turnbull government minister Craig Laundy, of the Laundy Hotels group, is bullish about the economy but acknowledges that labour force, logistics – primarily transport – and procurement issues are impacting his family’s business.

Difficulty in sourcing materials for refurbishments have delayed reopening two of his pubs. “That’s about 150 staff in Woollahra that won’t be working for three months and about 220 staff in Penrith,” the Sydney-based Laundy says. “That’s money in people’s pockets that would be spent in the local economy.”

While he queries reports of casual staff earning $90 an hour to wash dishes, Laundy says the staffing shortage is forcing changes in hospitality, including shrinking menus and replacing waitstaff with table-based food-ordering QR codes. “It’s impacting trading hours,” he says. “It’s impacting operational style.”

Council of Small Business Associations of Australia chief executive Alexi Boyd suggests the government is not responding fast enough to the problems business still faces.

“Yes, there are things that are out of our control, but frustratingly there are things that should be within the government’s control to try and at least answer some of those questions,” she says. “But it’s just not happening.”

She says some business owners are filling the staffing gaps themselves, leaving no time for the planning required to grow an enterprise.

“It’s almost like small business is running around putting out spot fires and not being able to look at the bigger picture,” she says. “So when we talk about ‘What does ’22 look like?’ – everybody’s still in a holding pattern.”

Unveiling his budget update on Thursday, Treasurer Josh Frydenberg was celebrating an unemployment rate below 5 per cent and forecast to fall to 4.25 per cent. “This result belongs to all Australians,” he said, “who have sacrificed so much over the last two years.”

While the political assessments are upbeat, at ground level they’re more cautious. “Everything just seems to be, for small business, on a bit of a knife edge and the smallest thing can be disruptive at the moment,” Alexi Boyd says.

She says the challenges no longer arrive one at a time but all at once, “pushing people into that limitation of what they can cope with”.

Some are unrelated to the pandemic. A worldwide shortage of the chemical compound urea, primarily from China, is seriously affecting both transport and agriculture. It is a key component in fuel additive AdBlue, which enables diesel vehicles to meet emissions standards. It’s also in fertiliser. The trucking industry is feeling it most.

“Urea manufacture is at the end of the food chain,” says Australasian Convenience and Petroleum Marketers Association chief executive Mark McKenzie.

“China decided to stop exporting in early November. At that point, we had about three-and-a-half months of supply.”

Any further pressure and he says they’ll have to “park up” the trucks. “It’s a supply chain that operates a lot like a sushi train,” McKenzie says. “If it opens, it doesn’t mean we’ll have AdBlue straight away.”

The managing director of Queensland’s Wessel Petroleum, Paul Wessel, is still receiving deliveries to his 21 petrol stations, most between Bundaberg and Townsville. But anxiety around AdBlue availability is high. Without it, most diesel-fuelled vehicles can’t operate legally.

“There’s been a lot of hoarding and panic-buying,” Wessel tells The Saturday Paper. His company introduced a 100-litre purchasing limit after a local council bought 4000 litres. He understands why they needed it. “They can’t run out when you’re looking after sewerage plants and garbage trucks.”

Fertiliser uses a lower grade of urea but farmers are also short. In a cruel coincidence, it’s a bumper year for crops. “It’s a combination of two things – supply is a bit short and farmers are wanting more chemicals, more fertiliser,” says National Farmers Federation chief executive Tony Maher. “The conditions are right this year.”

Already well documented, the impact of a shortage in seasonal workers is evident again as summer fruits and salad vegetables hit their peak. Some producers of short-term crops, such as lettuces and carrots, reduced their plantings, anticipating the harvest shortage. For mangoes and other longer-term crops, that’s not an option.

“They’re on the tree and if they don’t get picked, they drop on the ground,” Maher says.

Other sectors are also being hit hard by the labour issues, and by the requirement in some states that staff be vaccinated.

Beautician Sue Johnston, who owns Skin Therapeia in Sydney’s inner west, lost staff who refused. “Just trying to get staff is really, really difficult at the moment,” she says.

Paul Wessel’s petrol stations are also about two staff short each. “We’re not going to cut hours back, but it’s the service element – keeping toilets cleaned and keeping shelves stocked,” he says.

With other jobs available, turnover is high. Training each recruit costs about $1000. “They’re just coming and going.”

Wessel’s company has joined the government’s Pacific worker scheme and is interviewing would-be staff from Fiji to fill 12 positions from January. Despite the pressures, he’s optimistic. “We’re still in a lot better position than a lot of countries,” he says. “It’s going to be interesting to see the next six months – how we get out of it.”

On Thursday, Frydenberg acknowledged the ongoing hangover from border closures. “We expect some 200,000 people to come through our doors, now that we’ve lifted that pause, over time,” he said.

The government’s new budget forecasts are built on some key pandemic assumptions, including that borders stay open. It assumes there won’t be any more lockdowns but also says a “temporary strengthening of activity restrictions may be required” if case numbers rise or outbreaks emerge. It insists these “are not expected to materially affect the economic outlook” and that the new Omicron variant also is “not expected to significantly alter” reopening plans or see restrictions reimposed.

Overall, the numbers as published are reasonably positive. The government has revised down the 2021-22 deficit forecast in the May budget from $106.6 billion to $99.2 billion – an improvement of $7.4 billion, though rising again in two years. But its forecast for growth this financial year has been revised down from 4.25 per cent in May to 3.75 per cent. And it has also squirrelled away up to another $16 billion in decisions taken but not yet announced – a pork-barrel war chest for the election.

Moving into an election year, the Coalition government is under pressure to do more for business. Big and small business is urging Frydenberg to make at least one concession permanent, the temporary instant asset writeoff.

“Sit down and look at what has benefited different industry groups as a result of Covid,” Alexi Boyd says. “And don’t suddenly turn it off because we no longer have a pandemic at our feet.”

Frydenberg is non-committal. “We’ll make decisions about various tax measures and spending measures at the appropriate time as we lead into the budget at the end of March.”

Big business appears optimistic, although perhaps not as confident as Frydenberg about ongoing investment, fearing capacity constraints. Andrew McKellar, chief executive of the Australian Chamber of Commerce and Industry, says there is an “underlying robustness” to the economy and that business has “weathered the worst of the storm” and is primed to “bounce back”.

But looking further ahead, McKellar argues a future government must overhaul the tax system, beyond just lowering the company tax rate to 25 per cent.

He points to federal–state relations as ripe for reform. Likewise the thorny issue of indirect taxes, especially payroll tax and stamp duty.

That inevitably leads to the goods and services tax. McKellar says the next government should look again at increasing the GST and broadening its base. “Those things have to be on the table,” he says. “Absolutely. The scope of it and the rate absolutely at some point have to be on the table.”

He and others emphasise the need to continue to address the skills shortage. In the manufacturing sector, Ai Group’s head of policy, Peter Burn, says educating and training workers is most important in driving productivity and growth.

“They’re more resilient,” Burn says of upskilled workers. “They’ve got higher incomes and higher productivity. So it’s win, win, win, win.”

While some small businesses are reporting a dip in trade over the past fortnight, possibly due to nervousness about the Omicron variant, overall consumers are buying again.

Diageo’s Angus McPherson says the recovery looks “lumpy” but consumer confidence seems good. “They’re out there and they’re spending,” he says. “The challenge towards that is supply chain. And multiple aspects of supply chain are probably more challenged than they’ve ever been.”

Alexi Boyd calls it “a quagmire”.  She says it hasn’t all been bad and that small business is looking forward to next year to see what happens.

“And we know that there’s an impetus,” she says. “But trying to find that knife edge of competition and find the right staff – it just feels like everything that is a normal business issue is ramped up to become, now, a normal business problem … And there’s a lot of them.”

This article was first published in the print edition of The Saturday Paper on December 18, 2021 as "Strange forces holding back the economy".

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Karen Middleton is The Saturday Paper’s chief political correspondent.

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