On 16 January 2020, China agreed to purchase an additional US$200 billion worth of United States (US) products over the next two years as part of the Phase One Trade Deal, which includes purchases related to manufacturing, agricultural, energy and services. The agreement over the Phase One Trade Deal sets the world economy to a much-relived environment to investments and trade activities.
Just about two weeks before the Phase One Trade Deal being signed, the new coronavirus disease, also known as the COVID-19, was first reported from China’s city of Wuhan (Province of Hubei) on 31 December 2019. The outbreak of COVID-19 has first led to factory closures caused by an extended Chinese New Year holidays (an extra 10 days) to the employees from returning to work to lower the risk of further transmission.
Concerns by the authorities that returning workers may increase the spread of the virus, led to a delay in factories and industrial activity returning to full production. This situation resulted in an exponential fall in domestic production and international trade.
Moreover, the government had to lock-down provinces and ban all flights to and from China to mitigate the risk of spreading the virus and adding pressure to the already overloaded healthcare system.
As the virus spread throughout China in February, the impact was most keenly felt in the manufacturing and export-led industries, as a programme of government-sanctioned factory closures accelerated.
This decline in exports affected total container volumes handled at China’s coastal ports, including Hong Kong. Box throughput fell almost 16 percent in February year-over-year, according to Alphaliner. China’s ports volume, for January and February, declined 10 per cent when compared to the same period in 2019.
Apart from ports in Hubei Province, all other Chinese ports have resumed normal operations since the end of February, but to date volumes have not fully recovered to their pre-holiday levels.
Through into March and the pace of blank sailings declined reflecting a return to post Chinese New Year levels, according to SeaIntelligence. Lloyd’s List Intelligence reported that in mid-March, Yangshan and Shanghai ports were recording container handling volumes in line with 2019 figures.
The China Ports & Harbours Association reported that for the first week of March container throughput of the eight major container ports increased 9.1 per cent. Among them, the growth rate of Dalian, Tianjin, Qingdao and Guangzhou increased 10 per cent. The overall growth rate of Bohai-rim ports is faster than other coastal ports.
China’s central government estimated that more than 60 per cent of small and medium-sized enterprises and 95 per cent of large companies outside of Hubei had restarted operations. More than three-quarters of key foreign trade enterprises in China have recovered by at least 70 per cent of their production capacity, said Ren Hongbin, Assistant Minister of Commerce.
As the world reels from the spread of the virus, the impact on the supply chain has also been significant as trade flows to and from China, which were reduced during the first 10 weeks of the year and now the focus is shifting to the rest of the world.
On April 13, the World Health Organization reported that the COVID-19 pandemic is affecting 213 countries, areas or territories. While global supply chain has been severely disrupted by the COVID-19 pandemic lately, China’s production, freight transport and ports are seeing a gradual increase in volume. Whereas, in North America and Europe, governments are now moving quickly to control the spread of the virus.
As of April 11, the total number of blank sailings in 2020 totalled 384, due to the pandemic with an additional 83 blank sailings recorded April 4-11 on various deep-sea trades, according to SeaIntelligence.
The count of blank sailings includes both from China and other countries affected by the global spread of the virus.
On Asia-Europe and Transpacific combined, the carriers have now removed 3 million TEU of capacity. To put this into perspective, this equals 2.4 times the normal removal seen during the Chinese New Year holidays.
Comparing the blank sailings over the pandemic to the Chinese New Year holidays shows there is a potential demand decline of roughly 6.4 million TEU globally.
With an optimistic outlook, if world trade returns to ‘normal’ after the second quarter and the carriers do not cancel any further sailings, this would still lead to a demand decline of 4 per cent full year in 2020, reported SeaIntelligence.
The COVID-19 pandemic is currently disrupting the world economy and supply chains and the World Trade Organisation is forecasting a 32 per cent fall to world trade this year.
As China’s exports start to move to Europe there have been a series of announcements from European ports that they will stay open for business despite strict measures being undertaken by governments to reduce the spread of the COVID-19.
In Italy, the first European nation to be affected by a lockdown and the country with the one of the highest mortality rates, ports and freight transport were exempted by the Italian government.
Contship Italia Group, Italy’s container terminal and intermodal operator, said facilities at La Spezia, Ravenna and Melzo/Milan were operating as normal, and had implemented deep cleaning and distancing by staff to minimise the risk of infection.
There was a similar message from Genoa, Pra’, Savona and Vado Ligure, operated by the Western Ligurian Sea Port Authority, claims that “guarantee the smooth movement of freight across the country, without disruptions to the supply chain,” according to a report in Lloyds List.
Northern Europe’s largest port, Rotterdam, issued a statement that despite the far-reaching social impact of the COVID-19 outbreak, the Port of Rotterdam will remain operational. Cargo handling and production will continue unabated. The Harbour Master Division will continue to monitor safety and public order.
Allard Castelein, CEO Port of Rotterdam Authority said, “The Port of Rotterdam and industrial complex are vital to Rotterdam, the Netherlands and Northwest Europe. We are proud of that fact. We will do our utmost to be the safest, most efficient and most customer focussed port business area to the users. Not just in good times, but also now. Rest assured that we will be doing everything we can to minimise the impact of COVID-19 on the port. Obviously, we cannot do this on our own. We will continue to nurture our alliances with all our partners, clients and stakeholders.”
Germany’s main import hub in Hamburg is also seeking to calm fears of disruption to the supply chain. The Hamburg Port Authority said it was a “top priority” for the port to remain fully operation “in the best interest of the population”.
Hamburg terminal operator Hamburger Hafen und Logistik AG (HHLA) said the supply of the population and companies with cargo and goods via HHLA’s terminal facilities was ensured, “regardless of the measures in force to protect against the spread of the virus”.
“We are aware of our special responsibility as a service provider for Germany as an industrial nation,” said Angela Titzrath, Chief Executive of HHLA. “Our employees will contribute to maintain Germany’s supply is secured.”
In Belgium, port is officially classified as ‘essential national infrastructure’. Many regions and economic activities in the rest of Europe are dependent on supply chains from Belgium and vice-versa. The continuity services of Port of Antwerp will remain assured, as will the logistics chain and the transport of goods from Belgium to the rest of Europe. The EU also decided to create ‘green lanes’ for trucks meaning that crossing the border should not take more than 15 minutes and the green lanes will be open to vehicles carrying any type of goods. (source: portofantwerp.com)
In China, all major international ports are operating with health precautions and procedures in place due to COVID-19. At Wuhan port, there are restrictions on the movement of transhipment cargo by inland river feeder vessels in and out the city’s ports on the Yangtze River.
In Hong Kong, all port facilities and terminals are working as normal with COVID-19 health checks taking place at all berths.
The Port of Singapore remains open for cargo operations and marine services, including shipyard repairs.
The Middle East & South Asia
At Oman’s Port of Salalah Container Terminal operations: Manning, vessel and gate operations continue as normal.
In Pakistan, all ports and terminals are operational and working with essential staff deployed to comply with the government’s COVID-19 response plans for ports to ensure business continuity. However, delays in operations may be expected.
Operational vessel movements are regular at all ports managed by Sharjah Ports Authority, measures have been introduced for vessels at Sharjah ports to prevent and control the spread of COVID-19.
Egyptian ports are open but are implementing precautionary and preventative measures. So far there have been no reports of disruption to shipping through the Suez Canal. The east side of Port Said is closed, while the west side remains open with limited operations.
The port of Alexandria is only accepting vessels to discharge cargoes and the port of Damietta is restricted to container ship activity only.
Due to the COVID-19 outbreak and a reduction both in vessel calls and port staff, Durban Container Terminal Pier 2 in South Africa will be reduced to two berths.
At Durban Container Terminal Pier 1, Ngqura Container Terminal (Coega), Port Elizabeth Container Terminal and Cape Town Container Terminal all will operate a single berth with approximately half of the current staff complement.
Cape Town Multi-Purpose Terminal will handle containers on a single berth. Durban Point will operate on a single berth for both containers and essential breakbulk goods, while East London will not handle containers.
The ports of Warri and Port Harcourt in Nigeria continue to operate normally and are open but manpower challenges in complying with ‘social distancing’ and free movement for logistics workers. There are sufficient stevedores for the time being.
The Nigerian Ports Authority announced a suspension of demurrage/terminal storage fees and charges with effect from 23 March 2020.
The Port of New York and New Jersey is open and operating normally.“Our supply chain partners from the marine terminal operators and longshore labour to truckers and warehouse and distribution centre operators are working hard to help sustain our economy and support the 28 million consumers in the local region that are dependent on the port during this difficult time,” the port authority said.
On the West Coast of the US Port of Oakland, Maritime Director John Driscoll said: “Ports including Oakland have been declared essential infrastructure and must keep operating for the public good and the future of trade.”
In Argentina, the Government has considered that those activities which are urgent to enable international trade are exempted, therefore, ports and ships are operating.
In Brazil public and private ports and cargo handling facilities continue without disruptions other than a reduction of the labour force, particularly those on administrative duties.
In the Panama Canal all vessels with confirmed or suspected cases of COVID-19 are prohibited from transiting the Canal and must comply with the required quarantine period.
In the port of Freeport, Grand Bahama – including Buckeye, Bahama Rock, Freeport Container Port (FCP), all are open for business, but subject to restrictions imposed by the Government to prevent the spread of COVID 19.
(Source: North – a UK-based global marine insurer)
The fall in the price of crude oil will provide a short-term cash boost from bunker surcharges implemented based on fuel prices in January, while paying much less for fuel now, according to Sea-Intelligence. The global surplus of oil is a result of an increase in production by Saudi Arabia and Russia.
The fall in oil prices should also be beneficial for shippers as the cost of very low sulphur fuel oil dropped 35 per cent between January and March, according to Drewry.
“The good news is that the fuel part of ocean freight rates paid by shippers will fall and that the underlying bunker costs of shipping lines will also be much lower than previously expected,” Drewry wrote. “The extra cost of the IMO 2020 rule will be deferred until the global economy normalises.”
OPEC and ten other oil producing countries (known as OPEC+), met on April 12 and reached agreement to cut 9.7 million barrels per day, due to a significant drop in demand due to the fall in economic activity caused by the COVID-19 pandemic. The main immediate reason for the cut in production was that global oil storage facilities were reaching capacity.
As the oil surplus is utilised there will be a gradual increase in the cost of fuel including bunker oil.
Freight train schedules with westbound departures are resuming service across China, and several trains have departed, fully loaded on their way to Europe, according to RailFreight.com. From Xiamen, much of the rail freight cargo originates in Japan and South East Asia for transportation to Europe.
“Some customers, such as car manufacturers, are changing sourcing to other parts of China or even Korea and Vietnam. That is already happening and proves to be a good solution. A car manufacturer in Europe cannot afford to wait for its car parts from China to finish a product, it will look for other sources,” said Igor Tambaca from Rail Cargo Bridge told RailFreight.com.
Services are also resuming from Chengdu and Chongqing which run services to Poland, Germany and the Netherlands. Other hubs such as Zhengzhou, Xi’an and Yiwu also resumed services in late February. Rail freight services to and from Wuhan are expected to be suspended for the coming months.
Foreign brands and retailers operating in China are reporting a gradual return of shoppers to high street stores and malls.
The latest data from AutoNavi, a Chinese web mapping, navigation and location-based services provider operated by Alibaba Group Holdings, has also shown that road traffic around major shopping districts in China picked up by an average of 30 per cent on the weekend of 14-15 March compared to February past month, according to a report in the South China Morning Post. This is seen as an indication that consumers are returning to the shopping malls in China as infection rate appears to have peaked in the country and seemingly under control.
A report by Bain Consulting said that the trend in consumer spending in China is likely to mirror the SARS epidemic in 2002-03, with a slow but sustained return to shopping.
However, there are indications that there will be a knock-on effect, as vessels have to be relocated to serve Asia-Europe and Transpacific routes now as China ports have reopened again. The disrupted round-trip cycles have created shortages of both vessel capacity and equipment availability.
Due to the dearth of capacity there has been a rate increase by carriers, and for some back-haul shippers the coming weeks might well be a matter of whether they can get their cargo moved at all, almost irrespective of the price they are willing to pay.
Carriers are favouring empty repositioning for the limited back haul sailings, to get into position for an expected peak in Chinese exports in the remaining quarters.
Carriers had shown discipline in blank sailings when the COVID-19 was at its peak in China and which means that they were able to maintain freight rates.
“Until now rates have been relatively stable despite the COVID-19 impact from China and might well also be through the coming period if we see a new raft of blank sailings,” Alan Murphy, CEO and Founder of Sea-Intelligence said.
The net effect in Europe over the coming weeks or months will be a slow-down in the turn-around speed of containers,” Lars Jensen, CEO of Sea-Intelligence Consulting wrote on LinkedIn. “This in turn will mean a slow-down in the repositioning of containers to Asia – and hence further increases the likelihood that we will see container shortages in Asia when volumes begin to pick up.”
The TT Club has issued advice to the freight community to the ongoing challenges around the world due to labour shortages at ports and cancellations of inland transport links in different regions/countries. Constraints in the supply of goods due to factory closures and reduced schedules of air, ocean and rail carriers may expose forwarders to claims arising from delivery delays and cargo deterioration.
“Up-to-date status reports on their cargo’s progress, or lack of it, are vital to shippers,” emphasises TT Club’s Risk Management Director, Peregrine Storrs-Fox. “Forwarders and logistics operators will certainly prove their mettle if they can consistently make customers aware of the ongoing attempts to problem-solve.”
In attempting to deliver such solutions, however, a forwarder may need to use routes, carriers or modes that are less familiar, or to partner with other actors, of whom he has no experience. Such ‘workarounds’ are common at times of crisis when pressure from customers to deliver freight by whatever means can be intense. Additional care and due diligence must be taken when working in unfamiliar environments. It might be necessary to take extra precautions in employing bills of lading, standard trading conditions, letters of indemnity and other means in order to protect the stakeholders from unforeseen costs and liabilities.
As Europe and the US now face fall out of the COVID-19 virus there are now estimates that could see a loss of 17 million TEU of cargo or 10 percent of total cargo capacity for shipping lines globally in 2020. This level is similar to those seen during the financial crisis in 2009. (source: Sea-Intelligence bulletin)
“The real underlying problem is the impact this will have in the longer term in 2020 and possibly beyond, on not only consumer spending but also on the willingness of companies to order goods in the first place – as well as their ability to do so, as we are also seeing a possible financial liquidity problem begin to appear,” said Alan Murphy.
Similar to SARS and the Financial Crisis in 2003 and 2009 respectively, there is a potential for a dramatic increase in cargo volume in the middle of the second quarter, creating a soaring stronger-than-normal peak season and a stronger second half compare to a regular year.
Shipping lines may add additional capacity to carry delayed goods and freight rates may get a boost in the second half of the year.
Already we are seeing an uptick in production in March and which is expected to continue through into the second quarter.
Although there are some concerns about falling consumer demand from the US and Europe as countries go into lockdown mode, threatening to offset some of the rebound growth in container shipping.
Despite the resumption of production in China the pandemic has led to many brands and retailers looking to mitigate the risk of future ‘Black Swan’ events by diversifying their sourcing to other countries outside of Mainland China.
“I think from now on, our business will grow faster because of the virus,” Arturo Velazquez of T-shirt manufacturer Hockey Exportprint told Sourcing Journal at a fashion and footwear conference in Las Vegas in early February 2020.
His company supplies many retailers in Los Angeles from his factory close to Mexico City with a three-day turnaround. Many Mexican manufacturers now see their proximity to US markets as a distinct advantage over imports from Asia. Velazquez said that he can deliver within two weeks of an order from existing stocks and quick turns.
One of the main areas of trade that has been affected is China’s leading global role in providing components or intermediary products to electronics, automotive machinery and textile companies, according to Stephen Olson a research fellow at the Hinrich Foundation (Source: South China Morning Post).
Mainland China also relies on importing electronic integrated circuit boards for its local computer and mobile phone manufacturing sector predominantly from Taiwan and South Korea, this has also affected production.
As industry moves quickly to find alternatives to source products and components from other countries, these solutions may also be temporary and more expensive. The result could be higher supply chain costs and inflated prices for the industry and consumer.
There is also the potential for emerging Asia Pacific countries such as India to increase its share of the fashion garment business.
“Some of our existing clients have increased the business they give us,” said Harsh Agarwal of Suditi Industries, a shirting company based in India, told Sourcing Journal.
He added that he thought that many fashion buyers in the US would look for a second source outside of China to mitigate the risk of another hiatus in the supply chain.
China’s position as the world’s major sourcing nation cannot be replaced overnight and it will take time for other countries to build up their own manufacturing infrastructure to provide the volumes that China produces.
Although retail brands have reported a plunge of sales, the extent of total losses remains unclear. Ralph Lauren estimates that its fourth-quarter guidance will be negatively impacted by US$55-70 million in sales as well as US$35-45 million in operating income in Asia, it was reported in the textile and garment trade publication Fibre to Fashion.
China is the world’s leading sourcing country and cannot be replaced by other countries in the short to medium term, because of the complex clusters of sub-contractors, suppliers and support of multiple industry sectors it has developed in cities throughout the country over decades.
China’s established supply chains from raw materials to finished product are highly efficient and difficult for other countries to replicate in the short to medium term.
However, there will be a great deal of analysis, post-coronavirus, in the fashion world on how to mitigate the risk by developing a broader geographical sourcing model.
“Some companies will certainly consider in the future how they can make their highly developed supply chain insensitive to disruptions like this”, Thomas Lange, CEO of GermanFashion told Fashion United.com.
The Spring and Summer 2020 fashion season has been relatively unaffected but second half of the year, however, fashion companies will have to prepare themselves for considerable market disruptions, reported by Fashion United.com.
As the great and the good of the maritime industry try and plot a course through the worst disruption to world trade since the financial crisis of 2009, the question is when will the recovery be underway. History suggests that shipping is one of the first to benefit from any uptick in the global economy as demand increases for goods and materials when industry and consumption resume.
The SARS epidemic in 2003 and the Asian currency crisis in 1997 also caused tectonic shocks to business and trade, but recovery came quickly and was sustained in the following years.
We are now living in an era with improved communications widely available and technology more reliable, the tools to aid recovery is around us and it also opens opportunity for us to work smarter and better. Digitisation and automation will be at the heart of this new era as the industry embraces solutions that save time and costs and ultimately improve supply chain efficiency and working environment.