The outbreak of the novel coronavirus Covid-19 has caused massive disruptions in movements of goods and services in and out of China, threatening to disrupt global supply chains.
The shipping and aviation industries, in particular, are bracing for the impact of the epidemic, which originated from the central Chinese city of Wuhan in Hubei province and has spread worldwide in a matter of weeks, halting flights and pushing portions of shipping to a standstill.
BIMCO, the largest international shipping association, controlling around 65% of the world’s tonnage, has already sounded the alarm, saying that the impact of coronavirus could be felt across the board from cars and machinery to apparel and other consumer staples that are shipped in containers.
Disruption to the industry — and a prolonged shutdown of a large fraction of the Chinese economy — could spread far beyond China as that country seeks to contain the coronavirus outbreak that has killed more than 2,000 people and recorded more than 75,000 cases worldwide.
“The outbreak of the novel coronavirus has dented market sentiment and spooked markets around the globe. When China sneezes, we all catch the flu. This especially holds true for the commercial shipping markets, which remain heavily reliant upon China, both on the import and export side,” said Peter Sand, chief shipping analyst at international shipping association BIMCO in Bagsværd, Denmark.
While the outbreak initially coincided with the Chinese Lunar New Year holiday, the low season for seaborne demand, it has also led to the shutdown of at least 15 cities and 50 million people, essentially disrupting production and the supply chain.
“Advanced economies’ imports of manufactured goods from China remains the main driver of container shipping with seven out of the 10 largest container ports located in China. Widespread factory shutdowns result in a slowdown of manufacturing and industrial production,” Sand said.
Prolonged shutdown will further deepen the slump in dry bulk shipping, while in liner shipping, it could lead to lesser container exports from China and eventually more blank sailings.
“The intra-Asian container shipping market, the largest in the world, will be the first trades to feel the fallout from the coronavirus if intra-Asian supply chains are disrupted.
Secondly, the long-haul trades to North America and Europe will be affected,” he added.
The impact of the coronavirus was heavily on the minds of attendees and speakers during the Georgia Foreign Trade Conference in Saint Simons Island, Georgia, earlier this month. China’s decision to extend the Chinese New Year until February 2 will have an impact on imports to China. “There’s been a lot of news about holding vessels out that come from China and having a 15-day waiting period before then can call a US port,” stated Tim Haas, senior vice president and chief operating officer of CMA CGM America.
“Everyone is taking a lot of precaution,” said Uffe Ostergaard, North America president at Hapag Lloyd. “The quarantine topic will be somehow clarified and modified in days to come, but the extension of the Chinese New Year will have an effect. We will prepare for whatever comes and take precautions.”
Overall, speakers and attendees emphasized that while there will be delays in production, and possibly and even slower ramp-up to production than initially anticipated as many workers in China are restricted from moving between provinces, they remained optimistic. “The sky is not falling,” Haas said.
Another area of concern, however, is the impact the coronavirus is having on scrubber retrofits for vessels to meet the IMO 2020 regulations.
Hua Joo Tan, executive consultant at Alphaliner, pointed out how a number of ships are currently out of circulation because of scrubber retrofits – especially ships that are in China. While the biggest rush for ship retrofits was in November and December 2019 so that ship owners could meet the requirement as close to January 2020 as possible, not all are complete.
“As a result, we are seeing a large amount of container capacity taken out of the market for this purpose. It will taper down in the second half of this year,” Tan said.
Slowdown expected in the short-term
Taiwanese carrier Yang Ming Marine Transport said that current quarantine policies at various ports are already causing delays in shipping schedules.
“With regard to the direct impact in shipping industry, we could expect the disruption of factory production and supply chain in coming weeks, as well as the weak demand in holiday period, will be longer than usual [due to] the extended Lunar New Year holidays,” Yang Ming told Asia Cargo News in a statement.
“The impact of the coronavirus outbreak, in the short term, is likely to bring some slowdown. Moreover, the quarantine policies in more and more cities also impact the operations at the ports and delay the dry dock or scrubber installation schedule,” it added.
Yang Ming noted that it still needs to assess the long-term impact of the infection and consider how quickly and effectively actions taken could contain the spread of the coronavirus but, so far, it has already implemented initial measures to deal with the outbreak.
Wuhan, the epicentre of the outbreak, is strategically located on the Yangtze River, one the world’s busiest waterways through which more than 2 billion tonnes of cargo pass every year. More than 80% of China’s inland waterborne traffic also moves on the Yangtze.
A prolonged disruption in the supply chain will have a grave impact on China and countries that do business with China — especially those sourcing goods and raw materials there.
“Medium-term implications are hard to forecast at such an early stage, but with past virus outbreaks, the markets have typically rebounded in a matter of months. The outbreak of the coronavirus adds yet another layer of massive uncertainty to the shipping markets,” Sand of BIMCO said.
“Naturally, shipyards, repair yards as well as ships in transit are also indirectly affected by this issue,” he added.
The Port of Oakland said separately that the impact of the coronavirus could temper growth despite the rebound seen at the start of the year.
The US West Coast port said its containerized import volume jumped 7.3% last month over January 2019 totals and that exports were also up, lifting hopes for recovery from the lingering US-China trade war.
“The uptick in January was encouraging but we’re hearing from shipping lines that cargo volume could moderate over the next few months,” said John Driscoll, Port of Oakland maritime director.
The port noted further that quarantines and other emergency measures have slowed Chinese manufacturing output – resulting in shipping lines cancelling some springtime voyages to the US – but that it could take several months to determine the impact of the contagion on global supply chains.
Asia Cargo News correspondents have reported that The Alliance members Hapag Lloyd, Ocean Network Express and Yang Ming Marine have voided at least nine sailings from Asian ports between late January and early April due to decreased demand. Ocean Alliance member companies CMA CGM, COSCO, OOCL, APL and Evergreen have voided nine sailings in February alone.
‘Negative demand shock’ should disruptions persist
In aviation, several international airlines have already announced reduction or total suspension of flights to and from China, including Hong Kong and Macau, in response to the coronavirus outbreak.
Jan Krems, President of United Cargo, noted that the outbreak is affecting its operations, prompting the carrier to “explore routing and transport alternatives” for customers impacted by recent flight suspensions.
United flights between its US hub cities to Beijing, Shanghai and Chengdu are suspended until at least March 28, while flights to and from Hong Kong are suspended until at least February 20.
“The coronavirus is having a major impact on United Cargo’s Asia operation,” Krems told Asia Cargo News. “We were looking forward to an easing of trade tensions between the US and China and a return to more normal levels of business in 2020, but the virus outbreak has thwarted those positive expectations.”
Flexport said in a statement that a squeeze in supply due to recent disruptions in Chinese production would push air freight rates up, although how long factories remain shut and the extent to which cargo movement is interrupted will be determining factors.
“A supply contraction like this is likely to cause volatile air cargo rates on multiple trade lanes, although the cancellations follow a period of excess capacity and low prices in air cargo. That alone will likely push up air freight prices,” said Phil Levy, chief economist at Flexport.
“A prolonged delay in production would cause a negative demand shock. With that in play, this would give us a clear indication of a decrease in trade volume, with ambiguity about the price movement,” although it remains to be seen when Chinese travel restrictions will be lifted and when factories will resume operations.
While unclear how the coronavirus outbreak will play out, Levy said estimate of the immediate economic impact of the 2003 SARS outbreak was a cut to Chinese GDP of just over 1% and a hit to Hong Kong GDP of over 2.5%.
CAPA says impact of coronavirus ‘vastly larger’ than SARS
Meanwhile, the Centre for Aviation (CAPA) warned that the impact of the new coronavirus outbreak could ultimately be bigger than SARS, noting that China’s aviation industry “has tremendously grown its influence.”
“China occupies a far more important position [now] than it did in 2003,” a CAPA statement said. CAPA said that unlike the quick recovery seen post-SARS, it could be a different story for the novel coronavirus due to the slowdown currently seen in the Chinese economy.
“In 2004, when travel bounced back so quickly the global economy was thriving and China was experiencing near-double digit economic growth. Today, that economic growth is flagging and there are questions about where the economy is heading,” it added. “If the virus continues to spread, the negative effects on the national economy could be proportionally more marked as a result.”
Swiss WorldCargo said separately that as a response to the coronavirus outbreak, it also cancelled all its flights to its two Chinese gateways – Beijing and Shanghai – until at least February 28th.
“Shifts in the Chinese market will, of course, have ripple effects throughout the industry,” said Alexander Arafa, head of global area management at Swiss WorldCargo.
By Charlee C. Delavin
Asia Cargo News | Hong Kong
Additional reporting by Karen E. Thuermer in Saint Simons Island, Georgia, and other Asia Cargo News correspondents.