Global shipping Hit by Coronavirus
Global shipping holds its breath as the coronavirus continues to spread and generates massive economic and financial uncertainty.
Two weeks ago, BIMCO argued that – from an economic perspective - when China sneezes, we all catch the flu. Since the SARS outbreak in 2003, the global economy has become much more interlinked with China and the Chinese economy has grown to become the second largest in the world.
While hard facts and reliable data are in high demand, they are in short supply, nevertheless it’s time for a more thorough diagnosis on how this affects the global shipping industry.
The coronavirus outbreak coincided with the Lunar New Year, which led to nation-wide extensions of the holiday. However, even with the passing of the holiday extensions, large parts of China remain closed. For every week that large parts of China are impacted by the outbreak, it becomes more difficult to reach the annual GDP growth target of 6%.
At the very least, the first quarter of 2020 will mark a significant economic contraction compared to the last. As China gradually recovers, so will economic growth get back and shipping demand start to lift freight rates out of the current doldrums.
Limiting the virus’ spread and ensuring economic growth is a balancing act that seems difficult to pull off, but the Chinese government remain steadfast in the quest to ensure economic growth in line with the stated target. To dampen the economic impact the People’s Bank of China has recently implemented fiscal stimulus through interest rate cuts and reverse repo operations to maintain adequate liquidity in the banking system.
The virus itself and economic slowdown has been centered in China so far, but global supply chains have started to feel the ramifications of the widespread Chinese shutdown. Nations heavily reliant on trade with China, such as Singapore and Japan, have issued recession warnings and the coronavirus could also have a macroeconomic impact on advanced economies in the west.
The outbreak comes at one of the worst times for the shipping industry, which is currently struggling with the additional fuel costs from IMO 2020 and the switch to low-sulfur fuels.
Container shipping is inextricably tied to China with the main trade lanes, namely and China-Europe and China-North America, linking China’s manufacturing capabilities with the rest of the world. Now, the entire logistics chain is being disrupted.
The blanked sailings have partially safeguarded the freight rates from the coronavirus with the composite SCFI index, dropping a modest 93 index points from 981.19 on 23 January to 887.72 index points on 14 February 2020. However, the blanked sailings will only fend off the downward pressure for so long.
The virus will tighten its grip on the container market at different paces. The intra-Asian market will be the first to feel the blow with fewer semi-finished goods, such as parts used in car manufacturing, being transported to manufacturers in nearby countries like South Korea and Japan. Should the regional manufacturers slow production due to supply shortages, the long-haul trades will soon hereafter start to feel the pressure.