Coronavirus Rattles Shipping Industry as Supply Shock Moves to Demand Decline
Date: Friday, March 27, 2020
Source: The Wall Street Journal
Japanese carrier Ocean Network Express is bracing for weaker orders and stranded cargo at U.S. and European ports
Container ship operators that canceled more than half their sailings to China, as coronavirus-driven restrictions froze work at its ports last month, are bracing for a second wave of disruption.
Now that China has resumed exporting, shipping companies expect thousands of shipments to be stranded at seaports as the pandemic engulfs the U.S. and Europe.
“In China we had a supply shock, a production shortage from closed factories and reduced truck numbers,” Jeremy Nixon, chief executive of Japan’s Ocean Network Express, the world’s sixth biggest container carrier by capacity, said in an interview. “Now we are looking at a demand side shock which is impacting North America and Europe by the sudden lockdowns of cities.”
Container ships move the vast majority of manufactured goods, from medicine and food to clothing, electronics and cars. Shipping executives expect volumes to decline about 10% this year because of the spreading Covid-19 crisis, similar to the decline in the aftermath of the 2008 financial crisis.
China accounts for an estimated 40% of business for container shipping companies. Supply chains were rattled as Beijing shut down factories, roads and ports in the second half of February, including a broad lockdown in the industrial Hubei province at the center of the outbreak. Cargo containers piled up at terminals and on vessels for weeks as operations ground to a near standstill.
Container volumes from China into California’s three largest seaports—Los Angeles, Long Beach and Oakland—were off 35.2% in February from a year ago, according to trade data research group Panjiva.
More recent figures suggest the downturn is deepening. Panjiva, which tallies information on goods entering U.S. ports, said overall U.S. seaborne imports fell 15% in the first two weeks of March, including a 44.9% decline in imports from China and a 6.5% slide in goods from Europe.
“China makes up 30% of our global business and we saw a 25% reduction in volumes and sailings in March and a 15% reduction in our overall business globally,” said Mr. Nixon.
He believes the experience of watching how Chinese terminals handled the outbreak and the automation at Western ports will help prevent serious bottlenecks and widespread infections of terminal workers and truck drivers.
“Ports in Europe and the U.S. are highly automated and the level of manning is limited,” Mr. Nixon said. “The truck drivers are a priority. In Germany they are prioritized across its borders. We’ve had talks with other governments and they are prioritizing train and road logistics so products can move.”
There have already been some disruptions at Western seaports.
The Port of Seattle closed operations at two of its four container terminals earlier this month because of diminished demand. The Port of Houston shut operations at its two main box terminals after a worker tested positive for coronavirus but is now back at full capacity. Italian operators say their cargo ships have been blocked from entering some ports around the world because of fears of spreading the virus.
Cargo terminal operators at the ports of Los Angeles and Long Beach, which together make up the largest gateway for U.S. seaborne imports, said Tuesday they would cut the operating hours at their gates by an hour each day to thoroughly clean terminals and equipment there.
Corporate purchasing and shipping patterns are changing, meanwhile, as spreading lockdowns in Western cities trigger steepchanges in consumer buying patterns. Demand is soaring for some household goods as consumers strip shelves of products like toilet paper and cleaning supplies, while there is a sharp falloff in demand in sectors like apparel and automotive parts.
Senior shipping executives say some big retailers are negotiating up to 30% more space on ships over the next three months.
Retailers don’t comment on shipping contracts and Mr. Nixon wouldn’t give any numbers, saying only that ONE’s clients who sell online “see strong demand, and those who don’t will see a fall.”
The shipping industry overall is looking at deep losses this year. Some big operators are tapping into revolving credit facilities and many are idling ships to match capacity to waning demand.
“Our focus going forward will be costs, further deleveraging, and [to] make sure that we keep enough cash, and then we will adjust as things come by,” Rolf Habben Jansen, chief executive of Hapag-Lloyd AG , said in a March 20 investor conference call.
The German container line earned a $418 million net profit in 2019, but Mr. Jansen said that last year now seems “a very long time ago.”
Norway’s Wallenius Wilhelmsen, one of the world’s biggest car carriers, this week said it would furlough about 2,500 workers—half of its staff in the Americas—and pulled 14 ships from its fleet. The moves came as auto makers suspended production at assembly plants in Europe and North America.
Mr. Nixon said shipping lines have gained some relief from tumbling oil prices, while falling demand for fuel as ships have been idled has minimized concerns about the availability of low-sulfur fuel to meet new environmental rules.