How the Coronavirus is Affecting Freight Rates
The coronavirus continues to spread throughout China and has increased the number of supply chain and travel disruptions throughout the country. As the number of new cases of the virus continues to rise in China, the longer-term impact of coronavirus-related trade disruptions is yet to be determined.
The traditional Chinese Lunar New Year holiday typically causes February to be a slower import month for the United States, but this year will see an extended slowdown. The Lunar New Year generally runs until the end of January but was pushed until the beginning of February due to the virus outbreak.
From a business perspective, those in the supply chain industry are wary of the virus’s potential impact. China’s economy is intertwined with the U.S. and the rest of the world, and the coronavirus could have a ripple effect on worldwide supply chains.
Positives from the Chinese New Year
There is no good time for a viral outbreak, but the Chinese New Year has lessened the initial ramifications of the coronavirus.
Cheyenne Miranda, Director of International Services for R+L Global Logistics, states that “the Chinese New Year break itself should not have impacted the demand, because the downtime was already factored in prior to Coronavirus really moving to the forefront.”
Many U.S. retailers were already beginning to shift some sourcing to other countries due to ongoing trade negotiations with China. This will soften the impact on some supply chains, but if the shipping restrictions in China continue, there may be a more severe effect. If the shutdown continues into March, there could be significant declines in U.S. import traffic and port activity in general, especially on the West Coast.
It’s questionable how soon manufacturing will return to normal, as the coronavirus has not come to a stop. Any further decisions China makes to control the outbreak, following the extension of the Lunar New Year, will be a determining factor in the future state of manufacturing.
An Optimistic Outlook
The outlook may look uncertain, but don’t panic just yet.
When speaking on freight rates, Miranda said, “for the short term, we have not seen an impact on rates, but we expect better indicators when capacity requests kick in around (February) 15th. We do expect upward pressure to continue over the coming weeks as manufacturing orders catch up.”
Furthermore, “the initial impact of Coronavirus is a 2-3 week delay in production and shipping.” This “will take a direct hit on JIT (just-in-time) manufacturing and cause a peak demand on short-term capacity.”
When production does pick up again, it may take time to ramp up as facilities work through a backlog of orders and transportation networks come back online after regional quarantines lift. Experts recommend that those in the supply chain industry attempt to mitigate the disruption as much as they can by being prepared with alternate suppliers to keep production moving.
Some barriers to production remain though, with parts of China still restricted, causing disruptions in supply chain and transportation. Miranda added, “Key areas like Wuhan which have been on lockdown will continue with limited access.” No doubt, there will be complications with supply chain and transportation until all areas of China are released from the shutdown.
However, there are business opportunities when the shutdown is lifted and the Chinese population starts traveling again. Miranda states that once “the post-Chinese New Year migration from rural areas to the industrial and urban center” begins, then “opportunities for emergency shipment and product lines like medical technical goods will be directed to China as they combat the crisis. This includes screening and treatment for the internal migrating population who are potentially infected. China will continue managing the crisis for months to come.”
This possible upside, plus some other factors surrounding the coronavirus, suggests that the situation is not all gloom and doom. The additional variables below may not be entirely positive in the situation but can be taken as promising that the coronavirus is not a harbinger of havoc to the U.S. transportation and supply chain.
Domestic Truck Transportation will be Affected Last
International ocean freight and air freight are likely feeling the pressure from coronavirus-related work stoppages and quarantines, but domestic truck transportation within the U.S. will be the last to suffer. This is due to the fact that a high percentage of cargo travels by ocean or air, while imports only compromise a small percentage of trucking freight in the United States.
There are likely to be more consequences from the virus in the supply chain going forward. The repercussion may be caused by changes in the price and availability of oil, copper, other commodities, and manufactured goods and components that China will not be able to provide in expected quantities. Also, some manufacturing sectors will suffer if key Chinese factories and ports remain closed for many more weeks.
U.S. Freight and the Global Oil Market
Oil and gas exploration may be more indirectly affected by the coronavirus. China is, by far, the world’s biggest oil importer and investors are concerned that the virus could stall the Chinese economy and thereby cause a sharp decrease in its oil and gas imports.
Oil prices fell from above $63 (WTI) at the beginning of January to just under $50 at the beginning of February, but the prices may already be starting to recover. The U.S. is protected to some extent from oil price wars, as they are a net energy exporter, but even American oil companies tend to reduce production when prices go below a certain amount.
For example, in 2015 when oil prices dropped below $30, it wasn’t worth the cost to drill in some locations. That led to a slowdown in oil and gas production in the U.S. and hurt domestic freight volume and rates. Fortunately, this situation seems unlikely to happen in 2020 for multiple reasons.
- The coronavirus is temporary: The stock market has had a quick recovery, causing energy companies and investors to believe that the coronavirus outbreak is a temporary setback. However, stock prices may be more volatile for companies that are more closely tied with Chinese industrial output.
- Drilling costs dropped: the marginal cost of drilling is much lower now than it was a few years ago when domestic freight volume and rates were negatively impacted.
- Pipeline construction will start soon: There are numerous pipeline projects that are funded and ready to begin in the spring, which will generate new demand for rail, rail intermodal, and flatbed services.
So while oil and gas exploration may see some changes due to the coronavirus, those changes will hopefully be short-lived, without causing much damage to U.S. freight or its economy.
R+L Global Logistics Can Assist with your Supply Chain Needs
R+L Global Logistics is prepared to provide support and assistance with your supply chain and transportation needs into and out of China. We continue to monitor the situation surrounding the coronavirus and what we can do to troubleshoot or counteract any industry concerns.
Our international logistics professionals will work through any delays and communicate with you quickly and effectively to minimize the impact of the virus on your operations. Chat with one of our experienced customer service representatives today to get the help you need now.