Coronavirus inventory shock looms for US, European plants

Source: Journal of Commerce

There are growing fears that the full impact of the coronavirus disease 2019 (COVID-19) on the supply chain in the United States and Europe will be felt from mid-March, when inventory at manufacturing and assembly plants that depend on inputs from China begins to deplete.

Forwarders and shippers told JOC.com in Long Beach, California, where health concerns over the coronavirus forced the annual TPM conference to be canceled, that temporary shutdowns of plants in the US and Europe were just weeks away. The container shipping industry is still assessing the impact the event cancellation will have on trans-Pacific service annual negotiations, because it has been the setting for contract talks for the last two decades.

The shock to inventory was coming as retailers and businesses that traditionally build higher stock levels to carry them over the Chinese New Year holidays were about to run low, said Akhil Nair, vice president of global carrier management and ocean strategy at SEKO Logistics.

"Given that the recovery for China production is only expected to return back to 100 percent by mid- to end-March, it's fair to assume that this will have a knock-on impact well through May, which is when these orders will begin to arrive in the key markets of the US and Europe," Nair said.

Delayed, but imminent impact

Chinese New Year began on Jan. 25, but the spreading coronavirus caused the week-long factory closures to be extended for another two weeks. Travel restrictions prevented migrant labor from returning to work, keeping manufacturing facilities closed for most of February. With factories closed and an unprecedented number of blank sailings implemented by ocean carriers, very little has been shipped out of China in the past month.

A shipper who did not wish to be identified said although manufacturing activity in China was slowly returning, the last of the containers shipped ahead of the Chinese New Year shutdown had arrived in the US and Europe, and nothing had been produced in China since those shipments left.

"Companies have increased the amount of inventory they keep on hand, but they still only hold 15 to 20 days' worth of stock," the source told JOC.com "It is possible the Chinese New Year holiday motivated some companies to increase their inventory coverage by another week, but that still means most companies will only be able to match supply with demand for two to four weeks. After that, manufacturing will have to stop."

He said complicating matters further was that most global companies had no idea of their risk exposure in Asia and few, if any, had complete knowledge of the locations of all the companies providing parts to their direct suppliers.

The shipper said the shutdown of production lines would be temporary, but unavoidable, pointing to the manufacturing issues currently being experienced by carmakers and electronics companies in South Korea and Japan as examples of what's to come.

"They are much closer to China and are feeling the effects sooner, but their problems are a precursor to what we will see at our plants in the US and Europe," he said.

Johannes Barthels, managing director/Germany and director/European ocean freight for ProTrans Global Forwarding, agreed that a temporary shutdown would occur at companies that relied on just-in-time production, such as the automotive business.

"A lot of customers increased inventory before Chinese New Year to around 20 days or more because, as we know from past years, sometimes it takes longer before production in China starts running again," he said. "But after Chinese New Year, we always have a weak period with low volumes in the market. This will affect the just-in-time production."

Gradual return of capacity expected

With so much capacity withdrawn from service, the market is expecting a capacity crunch, but BIMCO's chief shipping analyst Peter Sand said idle capacity will only be reactivated once demand improves.

"We are not expecting a huge order backlog to deliver a swift boost to demand," Sand said. "Our scenario points more in the direction of a more steady return. Right now, most retailers around the world are simply running down inventories. We believe it will take a significant amount of time before supply chains are fully back in operations - May or June, all going well."

Sea-Intelligence Maritime Consulting estimates that the impact of the huge numbers of canceled sailings on global container volume will be about 1.9 million TEU, which would affect round-trip dynamics and create shortages of both vessel capacity and equipment availability.

"Carriers are already pushing rate increases on account of this, and for some back-haul shippers the coming weeks might well be a matter of whether they can get their cargo moved at all, almost irrespective of the price they are willing to pay," Sea-Intelligence noted in its latest Sunday Spotlight newsletter.

According to Alphaliner, 30 to 60 percent of weekly outbound capacity has been withdrawn from the Asia-Europe and trans-Pacific trades over the past three weeks, as well as from the intra-Asia routes. The reopening of factories in China would see a gradual return of demand, but Alphaliner noted in a recent newsletter that cargo volume recovery was expected to take a few weeks, and until normal volume was reached, carriers would continue to selectively implement blank sailings, likely until the end of March.

Photo credit: Pixlr