As the coronavirus (COVID-19) has spread around the globe, so has the impact on the economy and international commodities. Recently, global equities fell sharply due to the spread of the virus, causing the S&P 500 to experience its largest one-day decline since 2011. To try to contain the fallout, the Federal Reserve cut interest rates by 50 bps and based upon current Fed Funds probability, the Fed is expected to cut rates by at least .75 percent at its next scheduled FOMC meeting, scheduled for March 19, 2020.
The coronavirus is first and foremost a health issue and our thoughts and concerns are with those impacted around the globe. Because the recent economic events impact many of the businesses we serve at FNBO, we wanted to share how the virus is affecting global trade, transportation and the automotive industry.
One of the key shifts we’ve seen since the outbreak of the coronavirus is reduced production from China, which is causing maritime traffic to fall at most Western U.S. ports, resulting in more idle containers than during the financial crisis. Many U.S. ports are expected to handle 20 percent less cargo this quarter, according to the American Association of Port Authorities.
Containers are also becoming more difficult to move. In China specifically getting freight to the ports has been hindered by roadblocks and quarantines. Additionally, many Chinese ports are short staffed, making it hard to transport goods. According to Adam Baumgartner at Vantec Hitachi Transport System, this has led to a spike in air cargo rates to and from China as carriers rush to address backlogs.
Many container lines have canceled routes into China to avoid the spread of the virus to other ports. This has exposed some containers to losses, which makes a big impact on reefer containers carrying perishable cargo. Reefer containers that do arrive in China may also come across the issue of a shortage of electrical units due to the large number of idle containers. This is causing many shipments to be re-routed to ports with capacity.
In the U.S., the coronavirus has yet to have an impact on trucking rates. Many of the products that are being received today were produced prior to the shutdown for Chinese New Year. However, we will see over the next few weeks how much of an impact the shutdown in China has on trucking volumes in the U.S. The lack of demand at the ports will likely cause downward pressure on rates.
When it comes to rail, volumes are still down 6.4 percent year over year as of February 2020. The industry appears to be taking a “wait and see” approach while closely monitoring maritime activity as an indicator for future demand.
Due to the auto industry’s global supply chain and lean inventory practices, it’s experiencing significant disruption due to the coronavirus. Moody’s Investor Service recently cut its 2020 outlook for global auto sales, citing coronavirus-related supply chain disruption and a drop in vehicle demand. A 2.5 percent drop is now expected, which is up from a previous forecast decline of 0.9 percent. China is also the second largest market for automotive sales by volume. In the first half of February, car sales in China fell 92 percent, according to the China Passenger Car Association.
Wuhan, the city at the center of the outbreak, has shut down automotive factories. The city is home to auto plants for General Motors, Honda, Nissan, Peugeot Group and Renault. In 2019, Hubei Province, where Wuhan is the capital, accounted for around 10 percent of China’s car-making capacity in 2019. Major automotive manufacturers and suppliers have created task forces to assess the situation and are working to find substitute factories for parts previously manufactured in Wuhan.
The hope is that these impacts will be temporary and things will stabilize. Cargo volumes appear to be rebounding at Chinese ports as those who were quarantined return back to work, which could give trucking and rail rates a boost. Additionally, ocean carriers characterize their operations in China as beginning a “recovery phase.”
According to Baumgartner, if you’re a U.S. importer or exporter, you should communicate closely with your suppliers to ensure you are given a realistic timeline to fill orders. It’s also recommended to keep in close contact with your logistics provider so they are aware of your supply chain need.