China says almost all of its major industrial companies have resumed production and that its ports are again running at near-full capacity after a two-month Coronavirus-linked shutdown.
The revival comes, however, as Western countries lock down their societies and economies in a bid to contain the pandemic, sparking disruption at key international seaports and airports and a fall-off in demand in China’s traditional markets.
Although the situation on the ground is changing day by day, some trends can be identified which are likely to continue, or in some cases be exacerbated, for as long as the COVID-19 pandemic continues to take its toll.
Measuring the Imbalances*
The huge build-up of containers at China’s docks has created a major ocean freight imbalance, with a shortage of cargo in US and European ports and a shortfall in boxes needed by Western exporters to ship products to other parts of the world.
When it comes to air freight, global capacity is down 22 percent compared to last year, with further declines expected.
To gain a better insight into the shipping imbalance and the extent of air freight disruption, we need first to look at the situation as it now exists in China and then refocus the telescope on markets in other parts of the world.
In China, a Two-month Lockdown begins to Ease
After almost 100 blank sailings in each of January and February, the number of cancellations decreased in March and even fewer are expected in April, according to global logistics company Agility.
However, the company, headquartered in the Middle East, expects blank sailings to increase again as Western demand falls due to the global spread of the virus. It does not anticipate a quick return to normality.
- According to figures released by the government in Beijing, container volumes at China’s eight largest ports fell 19.8 percent in February from a year earlier.
- Loading and discharging operations at the ports of Shanghai, Jingtang, Lianyungang, Tianjin, Caofeidian, and Huanghua are slow due to lack of stevedores, while a shortage of licensed trucks and drivers is restricting the transport of cargo to the ports.
- Crew changes on ships arriving from countries where there have been “severe” outbreaks of COVID-19, such as South Korea, Italy, Iran, Japan, France, Spain, Germany, the US, and the United Kingdom, are forbidden at Chinese ports except under strict quarantine conditions.
- Exports from China to North Europe and the Mediterranean region are at about 85 percent of normal, with blank sailings expected into April and beyond.
As China ramps up production, the pressure is being placed on available air freight capacity. Belly space in passenger airliners, already in short supply, has been drastically constrained by restrictions on flights into and out of China, which came into effect on March 29.
Under the new rules, Chinese and foreign airlines can only operate one international flight each per week. In response to the constraints on belly capacity, outbound cargo-only flights from China are increasing and are above 2019 levels.
In the United States, the Pandemic has yet to Peak
According to the Wall Street Journal, trade research group Panjiva reported that US seaborne imports fell 15 percent in the first half of March, including a 44.9 percent dip in goods from China and a 6.5 percent slump in exports from Europe.
This decline follows a bleak performance in February, when container volumes into the Californian ports of Los Angeles, Oakland, and Long Beach from were down 35.2 percent from February 2019.
However, sea freight operations between the US and Europe have been only slightly impacted.
- The ports of Los Angeles and Long Beach, which together comprise the main US gateway for imports from Asia, handled 132,564 fewer containers in February than they did the same month a year ago.
- The Port of Seattle has closed operations at two of its four container terminals due to a lack of shipping demand.
- The Port of Houston suspended operations at two container terminals after a staffer tested positive for COVID-19.
- The main CFS gateways in the US are operating normally but with reduced hours.
Global capacity, already down 22 percent in February compared to last year, is expected to fall further. Belly capacity worldwide dropped some 35 percent in February from January, as governments imposed strict travel bans and closed their borders.
- Freight costs are up five-fold as exporters/importers scramble for space on remaining cargo runs.
- Seabury says the shortfall in belly capacity is equivalent to the capacity of 400 Boeing 747-8 freighters a day.
- The sharpest declines in overall capacity have been on the Europe-US Transatlantic lane and Intra-Asia, both of which rely heavily on belly capacity.
- Goods from Europe are being re-routed through places including Mexico and Canada to the United States but at a much higher cost.
In Europe, Lockdowns Are Biting
European markets are experiencing demand-side shocks due to the sudden lockdown of ports and cities. Goods are arriving from China and being offloaded expeditiously, thanks to the high level of automation at European ports.
But lack of truck drivers—many of whom are under quarantine or unwilling to drive into areas badly affected by the virus—has constrained onward delivery.
Adding to the delivery delays is the fact that many European countries have reinstated border controls, resulting in very long queues of trucks forming along land borders.
- Ports in Europe are short of containers, as many as tens of thousands of them, due to the holdup in Chinese ports.
- Some ports are quarantining arriving ships for 14 days.
- With the European Union officially closing its borders, no crew changes are allowed for non-EU crew members in EU states.
- Ships from countries hard hit by COVID-14, especially Italy and Spain, are being denied entry at some European ports.
- Major car carrier Wallenius Wilhelmsen of Norway pulled 14 ships from its fleet and sent half its 2,500-strong workforce home after automakers in Europe and the United States suspended production at assembly plants.
Substantial capacity constraints are being experienced in both directions between Europe and North America, Latin America, China, and the Middle East. Capacity is substantially reduced along all trade lanes and rates are at a premium.
Cargo airports in Europe have been significantly affected by belly capacity losses due to flight bans. Italy, with more than 2,100 flights cancelled, has been hit the hardest.
An Update on Australia, China’s Largest Trading Partner
ABC News reports that container trade is estimated to be down 30 to 40 percent. The decline results largely from a result of lack of ex-China flow-trade, according to Neil Chambers, director of Container Transport Alliance Australia.
Some Transport Workers Union members say that there has been a whopping 80 percent drop in the number of containers arriving from China.
Shipping has been affected by strict border controls which Australia has applied to all vessels entering its ports. Under the restrictions, crews are not allowed to disembark within 14 days of their ship leaving its last port.
In Queensland and Western Australia, restrictions are even tighter, with port authorities demanding that ships spend 14 days at sea before docking is permitted.
The additional restrictions and the “piecemeal approach” have been slammed by the deputy CEO of Shipping Australia, Melwyn Noronha, who called for a national standard to be accepted by all port authorities.
“Cost of freight is going to blow out enormously and everyday Australians are going to be impacted by goods not being on the shelves,” Noronha told Hellenic Shipping News.
Passenger flight cancellations have significantly constrained international air freight to and from Australia, reducing belly capacity by 80-90 percent. When it comes to China, Australia’s main trading partner by far, the picture is slightly brighter, with capacity reduced by 70-80 percent.
However, new rules introduced by China that limits Chinese airlines and foreign carriers to one international flight to and from China per week are expected to cause further disruptions.
The Outlook – Perhaps a Little Brighter?
The global free flow of goods was severely constrained in the first three months of 2020 by a shutdown in China followed by lockdowns in countries across the world, an imbalance in container stocks, a falloff in consumer demand, cancelled passenger and freight flights, blank sailings, a shortage of truck drivers, and quarantines.
However, going into the second quarter of the year, the outlook is brighter, with China apparently having defeated the virus and getting back to work, freight is starting to move, fewer blank sailings are being recorded, air freight is picking up, and containers are starting to reach US and European ports.
The signs of revival are there. Rather than giving up in despair, now is the time to focus on redesigning your supply chain to ensure its resilience in the face of future shocks, and to address vulnerabilities exposed by the Coronavirus crisis.
The rebound will come, probably later than sooner and possibly smaller than desired. Make sure that your supply chain is ready to catch and ride the wave when it reaches you.
*Data for this article is drawn from a welter of reliable sources, including Agility, global marine insurer North, logistics company Kuehne + Nagel Group, Hellenic Shipping News, and media groups The Wall Street Journal, The Financial Times, The New York Times, and The Guardian.