Tuesday, 02 June 2020 | 21:43
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Unexpected consequences of Covid-19: Contagion headlines are masking critical shipping business interruptions

Saturday, 15 February 2020 | 00:00

Attempts to contain Covid-19 – the new World Health Organization designation for coronavirus – have been drastic and in many cases effective. However, those very same measures of containment and restriction are having unintended and severe consequences on shipping.

One stems from the industry’s reliance on paper documents. As Hubei province remains on virtual lockdown, travel restrictions are thwarting efforts to move original bills of lading and letters of indemnity around, leaving cargoes in limbo.

While delivery specialist Fedex is continuing to operate inbound and outbound flights to/from China on a regularly scheduled basis, it has confirmed that work and travel restrictions are affecting packages inbound and outbound to/from Wuhan and other impacted cities within Hubei province, as well as deliveries moving within those cities.

Speaking to Bloomberg, an unnamed trader said that he has had difficulty getting shipping documents needed for a cargo transfer for a ship travelling via river in mainland China. DHL’s pick-up, delivery and warehousing services in Hubei province were still suspended as of Monday, a spokesperson told Bloomberg.

Auto closures

A second consequence on shipping concerns the closure of car plants in China. The majority of the major car manufacturers with a presence in China shut their doors on January 24 for the start of the Lunar New Year holidays and have yet to re-open them.

Volkswagen, General Motors and Toyota are just three of the big names that have shuttered Chinese car plants citing travel restrictions and a lack of ‘supply chain readiness’ as a result of Covid-19.

The cascade effect is also a rising concern. Plants outside of China are now starting to feel the heat, with Hyundai shutting its assembly plants in South Korea because it cannot keep its plants operating without Chinese parts. Nissan’s plant in Kyushu, Japan said it is dealing with “production adjustments” due to a shortage of Chinese parts, while Renault has gone a step further and suspended production at a plant in Busan, South Korea, due to disruptions in supplies of Chinese parts, according to reports. And the problems are not restricted to Asia: Fiat Chrysler has confirmed that it has one European plant at risk from the lack of Chinese parts.

The obvious impacts on the global car carrying trade do not need labouring. But the knock-on effects on containerised movements of car parts are just as crippling to shipping businesses. Worldwide, car manufacturers depend on parts from China. According to UN data, China is a major supplier of parts to auto plants around the world, shipping nearly $35bn of parts in 2018.

In a third consequence, Citigroup analysts warn that the global commodity markets are underestimating the virus. Analyst Maximilian Layton and his team warned in a briefing note that commodity markets are barely reflecting the inevitable disruptions to supply chains.

The seven worst impacted Chinese provinces – by the level of confirmed cases – contribute 7% to 26% of China’s metal production. “Even if production is cut as much as consumption, those metals in which China is a major net importer will see major increases in inventories ex-China over the coming weeks,” said the analyst. Citi expects iron ore prices to drop further to $70 per ton, copper to $5,300 a ton, palladium to $2,100 an ounce and Brent oil to $47 a barrel in the near term.

Those falling commodity prices are a risk for emerging economies that rely on the production of raw materials, and investors in these markets should “be a little bit cautious,” Mubadala deputy CEO Waleed Al Mokarrab Al Muhairi told Bloomberg.

“Commodities are going to be impacted,” he added. “You see that in aluminium, you see that in iron ore, you see that in oil.” Manufacturers are already shifting some operations and supply chains away from China, he said.

Travel worries

A fourth hidden consequence is the impact that travel restrictions are having on crews. A number of countries have now placed quarantine-type restrictions on ships that have called at mainland China ports. Australia, the US and Singapore are just a handful that have issued directions to all ships that have called at or transited through mainland China that 14 days must have passed before they can dock. While in some cases ships can enter harbour limits before the 14 days have passed, crews are being issued with Not to Land status by immigration authorities.

For crew that have passaged for weeks, or in some cases months, without stepping foot off the ship, this restriction will be a blow to morale. There are further complications if crew members are due to sign on or off vessels at an international port after calling at China.

Add to this the lack of labour available at Chinese ports because of the enforced extension of the Lunar New Year holidays, according to GAC China, and concerns about availability of low sulphur fuel oil in Chinese ports with inventories reportedly running low. GAC China advises that “confirmation with local fuel oil suppliers and application to local regulatory authorities in advance is highly recommended”.

GAC’s dedicated coronavirus update page is a sobering reminder of the business impact an incident in one country can have on the global business such as shipping, and there is still some way to go before we can expect a return to normality.
Source: Baltic Exchange

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