Client alert (4)

While Coronavirus-2019 (COVID-19) has most recently spread to other parts of the world including South Korea, Italy and Iran, latest reports from China are showing a decline in both new cases and deaths. This could mark the beginning of a “V” shaped recovery for cargo moving to and from China, which is the best outcome to hope for. Still, it is predicted that return to normal production in China could be anywhere from 3 to 10 weeks out and will vary by province. Those who traveled away from their work cities—very typical for Chinese New Year holiday—are having difficulty returning to work due to travel restrictions and areas that are maintaining border restrictions.

Those who are successful in returning may find local quarantine regulations that prevent them from working for another two weeks. This has hurt the supply chain in two ways. One, there are fewer factory laborers on hand to receive raw materials or produce finished products. Two, there are fewer truck drivers to bring those materials to the factories and the finished goods to the ports. The movement of cargo is further hampered by highway closures and restricted zones.

Reduced Capacity

Carriers typically pull vessels out of trade for the week of Chinese New Year by announcing void sailings. This year we are seeing an unprecedented number of void sailings through February and expect a few more to come in March, as carriers attempt to match up capacity with demand during the recovery. The slowing number of void sailings optimistically anticipates an increase in demand but there is a chance for further withdrawals, if volume is not there. Carriers have made these cuts across all trade lanes amounting to some 1.7 million TEUs (twenty-foot equivalent units) and a collective $1.7 billion dollars in lost revenue per Sea-Intelligence. They have also become more adept at calling for void sailings even as close to a week before the departure date, based on empty equipment availability in the area and the number of bookings in the pipeline.

Similarly, for air freight, capacity has been greatly reduced in and out of China. Large amounts of belly cargo have been removed from the market due to cancellation of many passenger flights. This, coupled with several freighter companies that pulled out of China at the onset of the crisis, sent air freight capacity to record lows during the last week of January. Except for belly space, air freight capacity is rebuilding, but at a high cost. Charter prices for freighters that once ran about $400,000 are now soaring to $800,000 and higher due to continue shortage of commercial space.

Operational Recovery

Ocean carriers and marine terminals are open for business, but their efficiencies depend on cargo flow. Without the normal amount of truck drivers available, cargo inbound to China has piled up during the extended holiday weeks. Some cargo had to be offloaded in other ports before even reaching China, all of which must still move. Delivery is needed all over China in order to turn those containers back out as exports once manufacturing resumes.

The protracted delay may result in an outbound surge that has implications of its own. We are seeing the potential for announcement of a Peak Season accompanied by the possibility of rate hikes by the carriers. Given enough cargo on hand, they have the ability to deploy extra loaders, if enough empty equipment is staged to coincide with the spike we anticipate during the months of April and May. Currently we hope for a V-shaped recovery which is the best-case scenario. U-shaped (slower recovery) or W-shaped (secondary wave or global outbreak) can push the timeline back. The next couple of weeks are critical in determining the course and ultimate impact of COVID-19.

Meanwhile we ask that you stay close to your supply chain in evaluating their abilities to complement your needs. We also ask that you communicate all issues, problems, or concerns to us so we can help you address solutions.