Warehousing & Logistics

Rabobank Reports on Supply Chain Challenge in Midst of Covid-19 Crisis

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Containment measures to avoid the further spread of the coronavirus (Covid-19) are affecting Chinese and global logistics supply chains. China’s domestic transport sector is disrupted, and global logistics operators are seeing their volumes reduced. It will be a challenge to contain the virus with as little interruption to supply chains as possible and to quickly revert to normal conditions, reports Matteo Iagatti, a supply chain analyst at Utrecht, Netherlands-headquartered Rabobank’s RaboResearch unit.

Matteo Iagatti

In the attempt to contain the spread of coronavirus, the PRC government enforced a series of stringent quarantine measures that are taking a high toll on domestic and global supply chains.

Hubei province, where the virus started, and Wuhan, its main city, have been on lockdown since January 23. The government extended the Lunar New Year holiday for an extra week, hoping to gain time to contain the disease. However, restarting an economy cannot be done on a dime and many factories did not reopen on the planned February 10 date.

The associated impact on the Chinese and world economy is still uncertain. It could add up to between 1% and 2% of Gross Domestic Product if the coronavirus is successfully contained by the end of Q1 2020. The world economy is facing yet another risk making global recession in 2020 more concrete.

The food and agribusiness sector is facing its own set of challenges. The pork and poultry sectors, for example, are seeing decreased demand from restaurants and road transport disruptions across the country. Restaurant closures have hit the consumer foods sector hard, but have also sparked opportunities for e-commerce to deliver groceries and food to Chinese families.

Distribution Disruption

Road transportation is the most affected component of Chinese logistics. Trucks cannot move from one region to another, and drivers have to undergo health checks when entering cities and logistics hubs. Roadblocks are also in place, and truck plates are checked before drivers can exit the highways.

Due to a lack of truck transport, cargoes cannot be processed in time at ports, so goods cannot be transported to their final destination on schedule. Therefore, finished products cannot be shipped timely throughout the country or exported globally.

Transport companies are trying to work around these constraints, but solutions are logistically complex to organize, which is made worse by the fact that authorizations and applications varying from province to province.

Disruptions in transport operations will pose an increasingly larger problem as more factories reopen. If the virus is not contained soon, the repercussions will be dramatic. China is the second biggest global economy (20% of the world’s GDP) and a crucial component of the global value chains for most goods. In Rabobank’s opinion, reestablishing a smooth flow of goods inside the PRC is the key issue to get the system back on track.

Global Trade to China Scaling Down

Data is not yet available to evaluate the precise impact in Q1 2020, but all transport types are reporting struggles in relation to China.

Airfreight cargo is often used as a barometer for issues in the global supply chain, due to its fast pace and global reach. The wave of suspended connections to Chinese destinations by commercial airlines and the scaling down of freight operators are indeed a sign that there’s more trouble ahead. The bounce back could be fast once production restarts, though. And operators that kept their connections to China alive can temporarily exploit the rise in traded volumes and new opportunities.

International rail transport to and from China is also on hold for the most part. Wuhan is a major automotive and hi-tech industry hub, connected to Europe via the Belt and Road Initiative (BRI). At the time of this writing, all departures are still halted in Wuhan. Other city platforms are slowly restarting train connections with Europe. Rail can bring temporary relief, keeping goods moving eastbound and westbound, but rates are forecast to adapt to the congestion, especially if the coronavirus impact keeps some of the lines closed.

For container shipments, lower volumes have been seen as a result of the prolonged holidays, which created a shortage of trucks and port personnel during a time in which activities should have picked up. Liners are reporting generalized shortages of reefer plugs at main Chinese ports. Delayed unloading schedules and understaffed port services caused carriers to increase the number of vessels skipping their call at PRC ports. The approach now is “wait and see” for long-term consequences while adapting to lower volumes.

Considering these factors combined, Alphaliner, a shipping market intelligence consultant, stated that 20% fewer containers will have been delivered at Chinese ports in January 2020 compared to December 2019. The total reduction for Q1 2020 vs. Q4 2019 is estimated at 10%, or 6,000,000 Twenty Foot Equivalent (TEU), provided that ports can pick up activities quickly.

China Logistics expects volumes transiting at Chinese ports to continue to decline in February 2020 and then pick up again in March 2020 (see figure below). The questions now are: will ports have sufficient personnel to service those ships? Will transportation to inland destinations suffice to service those extra volumes? The answers to these questions will determine part of the impact of the coronavirus on global supply chains.

Throughput in Chinese Ports Expected to Recover in March 2020

(Source: Alphaliner 2020)

Cold Chains: Uncertainties Over Exports to PRC

At the moment, Chinese-side cold storage at ports is congested, with Shanghai, Ningbo and Tianjin being the most affected hubs. Authorities are envisaging a congestion charge of more than US $1,000 per container for the use of reefer plugs, and are advising to use alternative locations at least up until February 28.

The US and European cold chain sector are closely following developments in China. When asked about the impact of the coronavirus, Lowell Randel, vice president of the Global Cold Chain Alliance, commented: “It is definitely an issue that is on our members’ minds. US members that were expecting to ramp up new shipments to China in response to the ‘Phase One’ deal are not yet seeing the anticipated growth due to the challenges from the coronavirus.”

Warehouses at port cities in the US are starting to feel the pressure and congestion is likely to happen in some cases.

The slowdown of exports to China is also affecting Europe. Given the relevance that food products (pork and other animal protein) have recently gained in trade with China, European cold chain operators might find themselves in the same situation as their US colleagues. Expected growth might not materialize and, in worse cases, congestion might arise.

If congestion in China persists in the coming months, the food distribution industry might see it reverberate even more throughout the whole cold chain in Europe and the US.

Contain Infection While Restarting the Economy

Containing the coronavirus while simultaneously allowing domestic and global supply chains to pick up where they left off is going to be a tough nut to crack, and the stakes of a malfunctioning Chinese economy are high.

China has to feed upwards of 1.5 billion people, which is impossible if trucks cannot simply go from one city to the other and food imports are halted. The recent African Swine Fever (ASF) outbreak showed how difficult it is to supply a market that big in case of major disruptive events.

The Chinese government has already taken measures to re-establish functioning transportation between regions and cities and help stabilize the economy. For example, as of February 17, all toll road charges (including bridges and tunnels) have been waived for all vehicles until the coronavirus outbreak is under control.

The Chinese economy is at the core of global supply chains. From giant corporations to small- and medium-sized enterprises, they all source raw materials and semi-finished products from the PRC. The world has now had a taste of the scale of the shocks that global supply chains will face if China does not manage to get its logistics system back on track soon. With shipments to China set to pick up, the capacity of ports to increase their throughput and transportation to reach inland China will determine much of the future impact.