Latest concerns around the impact of China’s coronavirus outbreak on global supply chains suggests the continued production stoppage will create a backlog of shipments and cargo delays once restrictions lift.
Factories throughout China remain closed after the government extended the national Chinese New Year (CNY) holiday break in Shanghai and at least 23 other municipalities and/or provinces until 10 February, as part of efforts to control the spread of the disease.
Several passenger airlines – including British Airways, United Airlines and Cathay Pacific – have also suspended flights to and from locations in China, meaning belly cargo capacity is reduced. IAG Cargo has temporarily suspended all air cargo services as well.
The knock-on effect is that once operations get back up and running, the competition for capacity “will most likely lead to increased freight rates and cargo delays,” according to online international freight marketplace Freightos.
It explains: “Normally, ocean freight rates stay elevated and capacity remains tight immediately following CNY as carriers accommodate both the backlog of shipments that didn’t get moved before the holiday and new orders placed as factories reopen.
“Since the shutdown has been extended, the backlog will likely push freight rates up and lead to delays. Limited trucking capacity and disruptions could also cause some cancellations.”
Cowen research analyst Helane Becker also notes the extended shutdown “will likely have an effect on the supply chain and shipping manufactured goods out of China to the rest of the world. This will impact the ship owning companies, as well as the air freight companies.
“With the passenger airlines leaving the market until some time between the end of February and the end of March, there will be no belly capacity available to ship low value goods. As a result, the three integrated carriers (FDX, UPS & DHL) are likely to benefit. In addition, Atlas Air is likely to see some benefit from its clients trying to catch up on shipments later this month and next month.
“As workers return to work over the next two weeks, and manufacturers start to catch up, we anticipate they will need to use the integrated carriers to get stuff to market, especially if product shortages develop between now and when manufacturing starts up again.
“This affects high value goods more than low value apparel, but we continue to monitor the Ports of Los Angeles and Long Beach, CA, two of the busiest ports in the US to determine the level of imports.”
While Freightos acknowledges the situation is unpredictable, it advises companies to anticipate delays in getting goods out of China.
“If possible, book any upcoming shipments with an available ready date to get your goods moving as quickly as possible.
“Consider shifting some of your planned shipments from ocean to air. Note, however, that the extended shutdown could tighten supply and raise prices beyond the seasonal norm for ocean. This could ultimately affect air as some shippers choose to expedite the delivery of backed up orders.”
On the retail front, Cowen analyst Oliver Chen reiterates concerns that the coronavirus illness “will substantially curtail store traffic in China and neighbouring countries, may negatively impact incoming Chinese tourism, and is also likely to disrupt supply chains.”
Based on Cowen’s sensitivity analysis, “the earnings per share (EPS) impact on luxury companies with sales exposure of 6% to 20% in China could lead to EPS dilution of low to mid-single digits,” he notes.
“This assumes the outbreak is contained by mid-2020, and we note each incremental month could add 1% to 2% EPS dilution. We also note lower Chinese tourism globally as well as increasing concerns about the virus spreading in Asia-Pacific could potentially further pressure luxury sales in the Asia-Pacific region.
“Furthermore, both near and long-term supply chain disruptions could adversely affect supply availability, inflate the cost of producing goods, raise shipping costs, and cause other problems.”
Click on the following links for additional insight: