Global supply chain issues are having a major impact on many businesses in Papua New Guinea. Business leaders tell Business Advantage PNG that delivery delays and higher costs are causing some projects to be slowed or even postponed in key sectors. There are signs, however, that the global situation is improving.

Construction workers. Source: Anitua

Supply chain issues are a talking point for business in PNG right now. As the world has bounced back from two years of COVID-19 lockdowns and constraints, demand has risen ahead of supply, causing shortages and driving up costs. This year, the supply situation has been made worse by two further factors: Russia’s invasion of Ukraine and extended lockdowns in the world’s factory, China.

‘There is evidence that global supply challenges are slowly resolving themselves’

It’s causing all businesses to review the costs of their existing and planned projects, and the prices of the goods and services they provide – a reason why inflation has been rising almost everywhere (the Bank of PNG’s prediction of five per cent annual headline inflation this year is modest by comparison with some countries.)

In PNG, one example of the impact has been the recent suspension of two key mining projects, Geopacific Resources’ Woodlark Island gold mine and St Barbara’s project to extend the life of its Simberi mine. Both developers cited rising project costs as a key reason for placing their projects under review.

Construction

Monier’s George Constantinou

PNG’s construction sector more generally is also affected, as are the country’s manufacturers, particularly those reliant on imported inputs.

‘Delays in delivery of material are critical to any company. Without the materials we cannot deliver or progress a project,’ explains George Constantinou, CEO of building supplies company Monier and Managing Director of Hebou Constructions.

‘We have had to adjust our operating procedure and increase our inventory levels to allow for the delays.’

While Hebou and Monier are able to source much of their building materials locally, they have experienced cost escalations on imported items such as fuel, cement and bitumen.

‘We are reviewing our costing more frequently, as it does affect our selling price. We were reviewing our costings every six months, depending on the company and division. We are now reviewing our costing quarterly to monthly,’ says Constantinou.

‘Shipping container costs are coming down. They’re still elevated by historical standards but not as high as they were in January.’

Rising costs put pressure on construction projects for which contracts have already been signed, especially if they are fixed-price or fixed-term contracts.

‘I personally feel that building contractors are at the biggest risk at the moment, as there is a need to procure a wider range of material internationally,’ he says, noting the need for understanding between client and contractor, given ‘some of these delays and/or cost escalation are out of the supplier or contractor’s control’.

Manufacturing

Nihal Shah, Chairman of manufacturer Pacific Foam, tells Business Advantage PNG that his business has also been forced to increase its inventory in the face of delays and longer lead times from its overseas suppliers.

‘We are expecting supply constraints of barley malt in Q3 and Q4 this year’

In turn, he says, this puts greater financial pressure on the business.

‘It puts pressure on your working capital. There’s a limit to how much you can spend on increased inventory before you’re making decisions about which parts of the business to prioritise. It’s a vicious spiral.

‘This is not a temporary situation – we need to bake it into our thinking and processes.’

Nevertheless, Shah says there have been a positive developments – the company has re-engineered some of its furniture designs to use more local components.

Storm brewing

SP Brewery’s Ed Weggemans

Given malted barley does not grow in the tropics, PNG’s largest brewer SP Brewery cannot avoid importing one of its main raw materials.

Managing Director Ed Weggemans tells Business Advantage PNG that his company’s situation is directly affected by the situation in the Ukraine, as Ukraine and Russia are two of the world’s major cereal exporters.

‘We are expecting supply constraints of barley malt in Q3 and Q4 this year,’ he says, noting that both the cost of international shipping and transport within PNG have also gone up ‘dramatically’ in recent times.

After a recent rise in the price of the beer due to continuous increases in excise duties, a further increase would be unpalatable for both manufacturer and consumer, but may prove necessary.

Better supply chain outlook?

Drewry’s World Container Index shows container prices have fallen significantly since peaking last year.

The supply chain situation globally may be easing, according to Saul Eslake, Principal of economics advisory and consultancy service, Corinna Economic Advisory.

‘There is evidence that global supply challenges are slowly resolving themselves,’ he tells Business Advantage PNG.

‘Shipping container costs are coming down. They’re still elevated by historical standards but not as high as they were in January. Upstream prices have started to fall too, especially in China’.

While oil and gas prices are still volatile, steel and iron ore prices have started to fall.

In good news for PNG’s miners, Eslake also notes a fall in mining-related costs globally.

However, he warns there is a ‘non-trivial risk’ of China going back into lockdown if its COVID numbers rise again.

Saul Eslake and George Constantinou will both be speaking at the 2022 Business Advantage Papua New Guinea Investment Conference, taking place on 15 and 16 August at the Brisbane Convention and Exhibition Centre, Brisbane. For further information and to register, visit www.pnginvestmentconference.com.