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Coronavirus threatens freight demand slump and supply chain chaos

29/01/2020

Wednesday, 29 January 2020


This year’s Chinese New Year slowdown is set to be extended as China tries to limit the damage of the deadly coronavirus outbreak. Supply chain disruption, including more blanked container services and reduced air freight options, are already apparent

This year’s Chinese New Year (CNY) holidays have taken a deadly turn. Already 132 people are confirmed dead and thousands more in China and beyond have been infected by the outbreak of coronavirus which began in the city of Wuhan, in central China’s Hubei province, earlier this month. The impact on Chinese transport, industrial production and international trade looks set to be severe, causing tremors along global supply chains.

Peter Sand, chief shipping analyst at shipping association Bimco, said a combination of transport bans, reduced industrial production and protracted CNY holidays that keep workers away from jobs could extend the container shipping low season and seriously hurt the bulk carrier and tanker sectors that are heavy reliant on Chinese import demand.

“It’s a fast-developing issue and still not under control,” he added. “If it drags on, China’s status as a manufacturing hub for the whole world [could mean] we reach a point where stocks are run down and production is cut.”

Cathy Morrow Roberson, founder and head analyst at Logistics Trends & Insights, predicted the trade implications of the virus would be felt far and wide. 

“China is the second-largest economy and as the coronavirus spreads, countries are restricting access to China, thus shutting off trade and resulting in companies searching for alternative locations for manufactured goods,” she said. “Potentially, this can have a severe impact on the global economy and could be the catalyst for a recession.”

Transport shutdowns in China could be particularly disruptive for automotive supply chains. 

“China is now a major manufacturing hub for the auto industry, including electronic parts,” said a note from Japanese bank Nomura. “Restrictions on movement and other measures have raised the risk of disruption to supply chains, and we see potential for a stalling in automobile production in China overall – and not just at Honda Motor and Nissan Motor, which have assembly plants in Hubei province.”

This morning, British Airways announced it would suspend all direct flights to China, reducing overall direct China-UK air freight capacity significantly. Peter Stallion, aviation and freight derivatives specialist at FIS, said other airlines might follow suit, which could see Chinese carrier freighters becoming more attractive for China-Europe shipments. “The effect on [freight] prices is as yet unknown. Volumes are seasonally low and will be hit by factory closures and quarantine measures,” he added.  

The pneumonia-like outbreak struck in the lead up to Chinese New Year holidays just as many in China were embarking on long trips to visit families. Not only does the timing of the outbreak increase the risk of the infection spreading, the subsequent shutdown of air, rail and bus transport links in a bid to contain the virus looks certain to prolong CNY industrial and manufacturing closures. 

Already CNY holidays have been extended nationally until 2 February, while Shanghai and the coastal provinces of Zhejiang, Jiangsu and Guangdong, which are home to some of the world’s busiest ports and airports, have ordered all but essential businesses to remain closed until 10 February. 

Reduced imports and delayed exports 

As a result, reduced imports of commodities and delayed exports of finished products in ocean containers and by air are expected in February. Indeed, even if some manufacturers do open for business next week, restrictions on travel across China are likely to mean a lack of labour will put a ceiling on output. 

Wuhan, where the outbreak began, is the capital of Hubei province, which has a population of almost 60 million. The city itself has a population of 11 million and is a major industrial and transportation centre with its river port on the Yangtze handling around 1.5 million containers a year.

Barge traffic reduced

Barge traffic on the Yangtze river is also reported to be reduced and ship crews are being ordered to stay on board vessels.

A Lloyds spokesman stated railway services connecting Wuhan to Europe will be impacted. “There won’t be deliveries of rail cargo/e-commerce parcels, which will be a particular blow to Alibaba and JD.com,” she said.

Coronavirus infections have now been detected across China, including at many key ports. One shipping analyst said if workers in Zhejiang province, for example, were not allowed to go back to work until 9 or 10 February, this would likely affect manufacturing in that province as well as volumes and operations at the ports of Ningbo-Zhoushan, Taizhou and Wenzhou.

“Similarly, whether you’ll see disruption to port operations is essentially unknowable at this stage; but if, for example, you do see disruption at Ningbo, that’s the only port that features in all of the 2M Asia-Europe loops.”

Maersk, which yesterday announced an additional blank sailing – the AE7 service in week 7 from Far East Asia and the return voyage of the same vessel from North Europe in week 12 – said regular working schedules would resume on 10 February at Shanghai, Zhejiang, Jiangsu and Guangdong.

An advisory added that customer service teams were working to “mitigate any potential impact to our customers’ cargo plans.” 

A spokesman for Hapag Lloyd told Lloyd’s Loading List that staff in China were making use of video and telephone conferences wherever possible for the time being, while seafarers were being instructed stay onboard vessels and wear medical masks. “We will also not be having crew changes in China,” he added.

More blank sailings

MSI container analyst Daniel Richards predicted more blank sailings by lines later in February, with demand from China likely to be subdued.

Simon Heaney, container research manager at shipping analyst Drewry, noted: “If there is a significant reduction in manufacturing output as a result of the coronavirus, that would likely lead to depressed volumes out of Asia, to which I would expect carriers to respond with more blank voyages. We’re already seeing oil markets drop in response, which will feed into lower all-in spot market container rates. 

“Much will depend on how far this spreads and its longevity. The previous SARS outbreak damaged the world economy and trade, but it was quickly recaptured.”

 

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