The following is a roundup of recent meetings and commentary regarding COVID-19 impacts on global shipping and trade. If there is time on tomorrow’s 9am video-conference call we may be able to elaborate on some of this detail. If you’re unable to make the call, please don’t hesitate to forward me any queries directly. I’ll be sending a summary of the discussion out following the call – and if there’s sufficient interest we’ll repeat the forum in the next week or so.
In the meantime, take care everybody – the global commentary makes for very grim reading! Jo
Update – NZ Government Response
Late last week MFAT had the second of its weekly calls with other agencies and industry to discuss the impact of COVID-19 and the government response for the non-primary manufacturing sector. Vangelis Vitalis (Deputy Secretary, Trade & Economic Group, MFAT) was joined by Paul Stocks, Deputy CE of MBIE; and Peter Chrisp, CE of NZTE). Melissa Trochon of NZTE also spoke.
Key points from the comments and ensuring discussion were:
- The economic situation remains serious: the World Trade Organisation (WTO) has issued an assessment of the global trading situation which predicts a fall in trade this year of between 13-32%; a recovery is predicted in 2021 but that depends on the duration of the existing crisis. The hardest hit businesses are those engaged in complex supply chains. (see WTO commentary below for more detail).
- Vangelis reported that officials had heard the concerns of industry loud and clear last week (including in relation to the definition of essential services, and maintaining competitiveness in overseas markets). They have passed the messages received onto Ministers.
- The question of whether exporters who are not considered essential in New Zealand can supply overseas customers remains a live question. Paul Stocks said that they genuinely do not know when a decision will be made. They had expected Cabinet to make a decision earlier in the week but it didn’t happen. He stressed that this is a health crisis first and foremost, and that health considerations will be dominant for a whileyet. There is a cautious optimism given the results of the lockdown to date, but the government doesn’t want to bring into play new tracks of economic activity that will change the epidemiological curve and require us to be in Level 4 for longer than necessary.
- Paul Stocks, MBIE, emphasised that officials are very conscious of the cost to Zealand of the Level 4 Lockdown. The Government is very much focused on a principles-based, public health perspective. They have heard many firms say that they can start up and maintain safe processes, but there are many issues to work through including the impact on supply chains, and the ability to maintain physical distancing on public transport if people are travelling to work.
- Peter Chrisp, NZTE, reported that three-quarters of the manufacturing sector is heavily compromised. He has been advocating strongly on the sector’s behalf. In particular, he has been involved in discussions on how manufacturing can restart. There is a team being led by Work Safe, along with MBIE, MPI, and NZTE that – along with industry – is
looking at developing appropriate safe work protocols that will allow manufacturing to operate in Level 3. Advice will be provided to Ministers over the next couple of weeks. It was mentioned in relation to Level three that people will still have to try to work from home if possible, and that workplaces with high levels of social engagement and interaction (such as bars and restaurants) may not be able to open.
• Melissa Trochon of NZTE reported on freight arrangements. MOT is currently running an EOI process to get an alternative freight cargo system operating for the medium-term. In the meantime, NZTE has been working with Air NZ, exporters, freight forwarders and government to operate an Interim Air Freight Scheme. In the last week, Air NZ has made 17 flights available to Australia, LAX, Shanghai, Hong Kong. Further flights are planned over the next 10 days, including to Houston, Vancouver, and Taipei. Information is available on NZTE’s website.
WTO predicts world trade could fall by up to 32%
A recently published report by the World Trade Organisation (WTO) says that world trade is expected to fall by up to 32% this year due to the disruption of economic activity caused by the Covid-19 pandemic.
In an optimistic scenario, global trade would decline by 13% year over year (YoY) — about the same as the drop seen during the Great Recession, the WTO said. In a pessimistic scenario, trade would drop 32% or more YoY, similar to what occurred during the Great Depression over three years. The wide margin between scenarios is due to “the unprecedented nature” of the coronavirus pandemic, the WTO said.
The report predicted that nearly all regions will suffer double-digit declines in trade volumes, with reports from North America and Asia hit hardest. In terms of sectors, the biggest falls are likely to be in areas with complex value chains such as electronics and automotive products.
While the WTO expects a recovery in 2021, the strength of the recovery is uncertain and outcomes will depend largely on the duration of the outbreak and the effectiveness of the policy responses. The report concludes that decisions taken now will determine the future shape of the recovery and global growth prospects. “We need to lay the foundations for a strong, sustained and socially inclusive recovery. Trade will be an important ingredient here, along with fiscal and monetary policy. Keeping markets open and predictable, as well as fostering a more generally favourable business environment, will be critical to spur the renewed investment we will need. And if countries work together, we will see a much faster recovery than if each country acts alone.”
The following market updates have been reported by the FTA:
- Imported or related COVID-19 case numbers are still increasing in China. Currently Heilongjiang province, in N/E China, is facing a big challenge with most cases coming from the border with Russia. Other provinces are under control at this stage, with only 17 cities still having confirmed cases under treatment out of total 337 cities in China.
- Hubei province has been able to start business activities. According to Wuhan International Container Co., Ltd (April 8), Wuhan port was back to normal operational level.
• Shanghai Yangshan Port has confirmed effective March 2020 they were back to 95.3% volume, the same as this period last year.
- The main ports continue to operate albeit with reduced hours days as is dictated by vessel volumes.
- Blanked sailings announced by trans-Pacific carriers demonstrate the steep decline in consumer demand for northern summer and back-to-school merchandise, and raise a stark warning of a possible peak-season bust later this summer.
- Some fear that widespread business shutdowns will plunge third-party logistics providers into “trench warfare” over pricing and contribute to bankruptcies that could threaten capacity.
- Not dissimilar to the USA, ports operational in most countries but processing is slow.
- Italy most impacted as reduced working hours compounding the issue, and ban on non-essential operations in both Italy and Spain impacting factories, warehouses etc.
- In parts of Europe, Austria and Czech Republic, restrictions are being lifted on small shops, garden centres and DIY stores.
- The U.K. looks set to extend its lockdown measures into early or perhaps even late May, just as other European coronavirus hotspots start to lift some restrictions on businesses.
- Non-essential businesses are closed with the public advised to stay indoors unless they need to buy food or fetch medicines or to exercise once a day. The supply chain is
still operating but a number of businesses are working from home which is impacting cargo delivery.
European and American ports ready for congestion
European and US ports and warehouses face a logjam of manufactured goods in the coming weeks as container ships which set off from Asia before the coronavirus pandemic spread reach their destinations only to find that demand has evaporated.
The Financial Times reports that “merchandise which retailers ordered in the brief period when the Chinese economy was grinding back into gear, but before European countries went into lockdown, is starting to land at ports such as Rotterdam, Antwerp and Hamburg. But swaths of Europe are at a virtual standstill because of restrictions on movement and business activity which aim to stem the spread of the virus.”
There are also bottlenecks on the return route: for European exporters to Asian markets there has recently been a shortage of containers for the backhaul leg. While a dip in container shipments always occurs around Chinese new year, the normal weekly capacity of 450,000 units from Asia to Europe was down by 20 to 30 per cent in February and March, according to Sea- Intelligence.
In the US the volume of inbound unwanted containers is triggering forecasts of congestion in port stacking yards and sparking debate about demurrage charges and storage policies.
Warning that the world’s supply chains will break down if ports become congested, the World Shipping Council (WSC) has urged local and national governments to support policies that ensure a fluid flow of cargo through container terminals. Arguing that this is not business as usual the WSC has highlighted the importance of keeping goods moving amid tightening measures to combat COVID-19.
Plunging consumer demand is a global phenomenon
Sea-Intel reports that since mid-March carriers in the two largest trade lanes, Asia-Europe and Asia-North America, have cancelled or have scheduled 384 blank sailings into June. Echoing these figures Alphaliner is reporting that in the coming weeks the inactive fleet of container ships could climb to more than 3 million teu; marking the worst capacity crisis ever for the container sector.
Bigger ships will be deployed on smaller routes, replacing the smaller ships, while shipping companies will be forced to idle significant portions of their operated tonnage. Some of the idle ships will have scrubbers installed during their downtime, with ships corresponding to 1.02 million teu currently at yards to have this done. There will however be significant involuntary idling for a large part of the carriers’ operated fleets, as according to Alphaliner, up to 30 percent of total capacity is being removed from some of the most badly affected routes.
Concern for container lines’ financials and fear of another Hanjin
COVID-19 has hit rates with freight rate benchmarking platform Xeneta seeing a dip of 0.5% in rates for March after a sustained period of growth. And they see worse to come – leading several commentators to voice fears for the financial state of container lines once the world is past the corona crisis. Some fear that a new Hanjin situation will emerge.
Sea-Intel paints a dark picture of the scale of losses the world’s top liners could suffer this year thanks to the spread of COVID-19. The volume loss alone from blanked sailings will cost the top 15 carriers more than US$6bn in 2020.
The report gets worse however with Sea-Intelligence warning that a failure to prevent a simultaneous rate collapse could lead to the liner industry losing a “staggering” US$23bn in 2020.
In Sea-Intel’s worst case scenario where the 10% volume loss for the full year is combined with the same level of losses on rate levels as the carriers themselves reported in 2009, liners could lose an unprecedented US$23.4bn in 2020. By comparison, the combined profits for the top 15 carriers for the past full eight-year period was $20.9bn.
European shipping requests a targeted rescue and recovery plan
European shipowners have called on governments and Brussels to urgently adopt a targeted rescue and recovery plan for the maritime sector, with the European Community Shipowners’ Associations (ECSA) issuing a strong statement on the perilous state of the continent’s shipping community.
“European shipping has reached a breaking point – on the surface, trade continues to flow. Below the surface, our crews are being challenged enormously.”
ECSA said that the unprecedented crisis brought about by the coronavirus lockdown requires unprecedented reaction – financing must be kept open for shipping companies in order for them to cope with immediate liquidity problems to avoid redundancies, to help refinance their loans, or have the possibility to suspend their loan installments and interest, and in parallel extend the term of their loans. “Without the authorities and banks stepping in on this, many companies will not survive the crisis and Europe’s share of global shipping is going to plunge,” ECSA warned.