Coronavirus Snarls Trans-Pacific Shipping and Ripples Through U.S. Business

Date: Thursday, March 5, 2020
Source: The Wall Street Journal

There are few China-bound vessels and an imbalance in shipping containers, especially the refrigerated ones used for farm products; ‘It’s cutthroat’

The coronavirus epidemic is upending the carefully calibrated logistics of global shipping, as plunging exports from China disrupt the trade of American goods, especially farm products such as fruit and meat destined for Asia.

Congestion at Chinese ports and interrupted sailings have squeezed space on China-bound vessels and created an imbalance of the 40-foot long refrigerated containers used to ship fruit, meats and other perishables on three-week voyages across the Pacific, with many stuck on the China side.

The traffic jam is pushing up transportation prices for U.S. exporters and sowing turmoil on the heels of a painful trade war.

Shipping volumes out of China plummeted in February as factory shutdowns in the wake of the epidemic crimped industrial production. Containership operators have canceled nearly 60 trans-Pacific sailings to the ports of Los Angeles and Long Beach, Calif., in the first quarter and more than 110 to all of North America. Normally there are about 200 sailings of container ships across the Pacific a month.

That means fewer ships are available to make the return journey east, and the normal turnover of containers has stalled.


“Right now empty [refrigerated] containers are in short supply,” said Peter Friedmann, executive director of the Agriculture Transportation Coalition, a trade group for exporters. “It’s harder to get on a vessel, and there’s not enough outbound capacity to handle all the cargo seeking bookings, particularly to China.”

It’s the height of California’s orange-growing season, but truckers for Fast Way Xpress Inc., who haul oranges and other produce from the Central Valley to the port of Oakland, have waited in line there for empty refrigerated containers for up to four hours. By the time the drivers reach the shipping terminal, they sometimes then discover all the containers are gone.

“The lines are so long it looks like the L.A. freeway,” said Carleton Booker, the company’s director of sales and operations.

The new coronavirus has infected more than 80,000 people in China since it emerged there in late 2019. More than 15,000 additional people have been infected world-wide. China’s quarantines and travel restrictions introduced in January to help curb the spread of the virus have delayed the reopening of many factories after the Lunar New Year holiday, disrupted transportation within the country and strained supply chains. That has backed up cargo at terminals and warehouses at big gateways including Shanghai, Tianjin and Ningbo.

A record two million containers of seaborne shipping capacity was idled in late February, according to Alphaliner, a Paris-based marine data provider. That is more than the 1.5 million containers of capacity idled in 2009 at the height of the financial crisis.

“There are a lot of ships that aren’t moving right now,” Michael Upchurch, the chief financial officer of U.S. railroad operator Kansas City Southern, told an investor conference on Monday.

The number of idled container ships in the Pacific region has reached 370, compared with about 230 at the beginning of the year, according to Jonathan Roach, an analyst at Braemar ACM Shipbroking. He said that, in addition to canceled sailings due to trade disruptions, about 100 of the ships have been pulled out of service to retrofit their exhaust systems to comply with new regulations.

Some shipping lines have levied surcharges as high as $2,000 per refrigerated container on voyages to China and other Asian destinations, roughly doubling the cost to ship a container of oranges. Other lines have warned exporters they will be saddled with costs if congestion at Chinese ports forces ocean carriers to divert cargo to other countries.

“Everyone is fighting for containers. It’s cutthroat,” said Dalton Dovolis, who handles China exports for International Produce Group, a Salinas, Calif.-based exporter of fruits and vegetables. The limited supply of refrigerated containers might cut his orange shipments to China in half this week, Mr. Dovolis said.

Roughly one-fifth of the hay that Anderson Hay & Grain Co., ships goes to China, where large dairy producers feed it to their cows.

“Changes in vessel schedules are the biggest mess we’re dealing with,” said Mark Anderson, chief executive of the Ellensburg, Wash., company, one of the largest U.S. hay exporters. His company moved some 10% less hay to China in February than expected.

“We’re constantly trying to rearrange the schedule to keep product going to our customers,” Mr. Anderson said. “The animals still have to eat.”

Snarled logistics have also caused headaches for the nation’s biggest meatpackers, who in recent weeks have jockeyed for space on outbound vessels, temporarily diverted China-bound shipments to nearby countries and dealt with domestic cold-storage facilities stuffed with unshipped pork, chicken and beef.

There are signs that broader trade flows could start to pick up: Chinese factories are resuming production as the spread of the virus abates in that country, and port congestion is easing as China’s dockworkers, cargo handlers and truck drivers return to work. Meat and citrus groups say Chinese demand for their products remains strong, especially as trade tensions ease between the U.S. and China. But it will be weeks before the full impact on U.S. factories and farms is clear.

There are thousands of empty shipping containers for goods that don’t require refrigeration at the ports waiting to be shipped back to China. “Right now, we’ve got to get a lot of empties and some backlogged exports out the door to Asia,” said Gene Seroka, executive director of the Port of Los Angeles.

Mr. Upchurch, of Kansas City Southern, said manufacturing data coming out of China has started to improve, and his company hasn’t seen any cargo declines at the Panama Canal, where it has a railway that links the Pacific and Atlantic oceans.

Since it takes most manufactured goods 25 to 30 days to come from Asia by sea, he said the company didn’t expect to see the full impact of the disruption on U.S. rail volumes until later in March or April. The most immediate impact is on trucking companies that ferry goods to and from ports to warehouses and rail connections.

Executives at Union Pacific Corp., one of two major U.S. railroads that serve West Coast ports, said the production delays in China are just starting to dent shipping volumes. First quarter volumes will suffer but the railroad is anticipating a snap back once imports from Asia resume.

“U.S. consumers are continuing to buy TVs, build houses, drive cars,” finance chief Jennifer Hamann told investors Tuesday. “When the impact of the virus is behind us and production ramps back up, we’ll stand ready to move the goods.”

In the U.S., the gridlock is cutting business for port truckers, the companies that move goods back and forth between ports, warehouses and rail terminals. Container terminals at the ports of Los Angeles and Long Beach, which together are the largest U.S. gateway for seaborne trade, are operating at about a third of their normal gate capacity, according to the Harbor Trucking Association, a Long Beach, Calif., group that represents port trucking companies.

It is taking drivers as long as six hours, instead of two hours, to drop off or pick up containers, said Claudia Geller, the Southern California regional manager for Pacific Coast Container Inc., known as PCC Logistics, a transportation and warehousing provider with facilities in Seattle, Tacoma, Oakland and Long Beach.

Her company has been stuck for weeks with loaded refrigerated containers, which are typically dropped the same or next day. The company has had one container of frozen meat since Feb. 14, Ms. Geller said, and the receiving date has been pushed back to March 12.

Trucking yards are filled with empty shipping containers that brought imports of car parts, televisions and apparel. “Our members are stuck with the empties because there’s no place to return them,” said the trucking association’s chief executive, Weston LaBar.

The drop in port volumes could also further depress shipping rates for truckload carriers that move goods long distances. Last year truckers were buffeted by weak freight demand as industrial growth faltered.

Typically demand ticks up in the coming weeks, as the California produce season and normal port activity create opportunities for truckers to raise rates, said Jeff Tucker, chief executive of Haddonfield, N.J.-based freight broker Tucker Company Worldwide Inc.

Right now, “the lack of imports is creating overcapacity,” Mr. Tucker said. “When it does pick up, this port area is going to slammed and freight is going to be really hard to move.”

Similar distortions are hitting the transportation business in China, where travel restrictions have kept half of China’s 30 million truck drivers off the road.

“So many drivers are still at home,” said Robin Zheng, the owner of Circle Logistics, a Chongqing-based firm that employs about 100 truckers. Mr. Zheng estimated that national trucking capacity was at a third of normal levels at the end of February. “They can’t leave; they’re just waiting for their local government to give them the green light.”

The trucking system moved about 73% of all goods in China in 2019, according to the National Bureau of Statistics. In the U.S., about 70% of goods are moved by road.

Inside China, logistics costs have soared. Transporting a shipping container 1,000 miles by road from Chongqing to Shanghai normally costs around $1,500; now, if you can find a truck, it will cost you $3,000, said Mr. Zheng.

For the agricultural industry, the shipping difficulties come on the heels of a trade war that hit U.S. farmers hard, slashing U.S. exports of farm goods to China and sapping prices farmers fetch for their products. China in 2018 imposed retaliatory tariffs on U.S. agricultural products including oranges, reducing shipments while citrus from Egypt and Spain gained a stronger foothold in China.

 

On Wednesday, Mr. Dovolis, the California exporter, told a packing house to hold off packing oranges because it was unclear whether he had enough containers to collect the fruit for transport.

Fruit that doesn’t make it onto boats bound for overseas markets in time can wind up selling at a loss in the domestic market, according to Casey Creamer, chief of California Citrus Mutual, a trade group for the state’s citrus growers.

 

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