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How the Coronavirus May Affect Your Supply Chain

Posted - February 10, 2020

Mollie Bailey, Transplace-2By: Mollie Bailey, VP, International, Transplace

Since news broke out that a mysterious strain of coronavirus was affecting residents in Wuhan, the capital of Hubei Province, Chinese New Year celebrations and global travel and business operations have been significantly impacted. Coronaviruses are part of a strain of viruses that can cause the common cold or other respiratory illnesses, including the SARS outbreak of 2002. This new type of coronavirus appeared to be spreading quickly, causing panic right before the new year celebrations began.

As the number of new cases and deaths grew each day, the Chinese government took actions to limit the spread. With the culmination of these actions, and the timing of the new year, global supply chains have been affected.

Air Freight Impacts

Air export cargo to China is critically impacted due to the cancellation of many commercial airlines flying in and out of the country. Air imports from China to the United States is equally affected for at least two months as major airlines such as Lufthansa, British, United and American have halted passenger flights. This stoppage means that even if Chinese plants return to normal operations, air shipments are affected and may be more expensive.

Typical freight on suspended passenger flights may include pharmaceuticals, high-value automotive parts, high-value garments and high-tech devices, preventing U.S. manufacturers from continuing production of smart phones, automobiles, appliances and drugs to treat many medical conditions.

Ocean Impacts

Ocean vessels that loaded the week of January 20th have sailed and are arriving now on the West Coast of the United States. Currently, normal pre-CNY volumes are expected. Holiday travel and the virus outbreak displaced Chinese workers and sailings and loading volumes for the next few weeks are affected.

Container loading and unloading will be delayed due to the lack of workers available causing congestion at Chinese ports. High container volumes are also expected at these ports due to loaded import containers and empties sitting at port terminals.

Ocean carriers have announced additional blank or void sailings on certain lanes not only between Asia and the U.S. but to Africa and India / Pakistan trades due to reduced demand at origin and to avoid extra operating costs. Blank sailing can cause an artificial demand when carriers skip ports for a few weeks and carriers could raise spot pricing in response.

Effects to China and United States Supply Chains

Carriers are actively monitoring the port situation and assessing the need for potential network adjustments for short-term changes in demand out of China or the inability to offload cargo for imports into China. Chinese importers may be impacted with additional port demurrage and container detention fees due to inability to receive and unload containers at their facilities however many carriers are extending container detention free time in China based on local government regulations. Chinese exporters may face an equipment shortage situation depending upon how quickly empty containers become available.

In the U.S., export equipment could become scarce due to the inability of Chinese shippers to load containers at their plants. Container inventory may  shift  to an imbalance due to inactivity in China. As of this writing, we have not received any updates from U.S. Customs that cargo imports are currently impacted by the Coronavirus nor are there any restrictions on packaging from China.

The U.S. Coast Guard announced new U.S. port arrival procedures effective immediately for vessels that have called Chinese ports (excluding Hong Kong and Macau). The incoming vessel must report to the U.S. Coast Guard Captain of the Port on the crew’s health. As long as there are no sick crew members onboard, vessels will be allowed to berth normally.

What Happens Next

The World Health Organization (WHO) declared the coronavirus outbreak a “global health emergency” as it continues to spread across the globe. The United States has urged Americans living in China to leave immediately.

The majority of Chinese provinces extended the Lunar New Year holiday through February 9th with businesses reopening on February 10th or 13th. Workers and truck drivers that did travel for the holiday are sheltered in place as the government attempts to slow down the spread of the virus. Chinese manufacturing facilities that would normally be closed around the new year will now be closed for almost four weeks. There is still uncertainty about when and how quickly Chinese manufacturers will come back online.

Apple recently shut all of its stores in China, as have other global manufacturers that have been doing business in China or with Chinese manufacturers. Google, Ikea, Starbucks, Amazon, Microsoft and Tesla have also closed or halted operations. Hong Kong medical workers are currently on strike demanding that the Chinese border be shut down.

U.S. – China trade has decreased but U.S. manufacturers still do a good amount of business with China. The virus coincides with the U.S. – China trade deal that was signed in December and the Chinese government agreed to purchase $200 [1] billion in U.S. goods and services.

The situation is extremely fluid as carriers consider options due to an immediate decline in origin China demand for the next several days and then a huge spike for capacity in both air and ocean for, at minimum, the next 6 weeks .

Transplace is actively monitoring the situation and will send additional updates as they become available.

Are you talking to internal teams for contingency plans in your supply chains? What are you hearing from suppliers?

 

[1] https://www.brookings.edu/blog/up-front/2020/02/04/why-the-purchase-commitments-in-the-us-china-trade-deal-should-not-be-replicated-ever/