21 February, 2020
How is Coronavirus Affecting the Shipping and Logistics Sectors?
Corvid-19 Sees Fuel Supplies, Port Calls and Workforces Cut
WORLDWIDE - The biggest story in the past few weeks has of course been the spread of the Coronavirus, or Corvid-19 as it is now known.
Anyone walking across Westminster Bridge in London or along Walking Street in Bangkok will have noticed the almost complete absence of Chinese faces, a sign of just how seriously the disease is impacting tourism and trade. So, what is the impact on the shipping and logistics sectors?
What is certain is that the risk and pressures affecting the international supply chain should not be underestimated.
Despite the best efforts of the PRC to contain the virus the effects of it are already hitting vulnerable parts of the industry. At the time of writing there are still severe disruptions to both air and ocean carrier schedules whilst Wuhan, Hubei Province, a major economic centre, still has factory lock downs causing materials shortages.
Added to the natural downturn caused by the Chinese lunar New Year celebrations the cut backs in supply initially saw an immediate reduction in port calls to the country by the major carriers as supplies dried up. Container shipping has been seemingly hardest hit but a study by VesselsValue (VV) using satellite tracking technology showed that China's real time demand for seaborne crude oil from the Middle East in recent weeks, against the same period last year, fell off a cliff.
In recent weeks, VV says demand can be seen to have fallen almost to zero from a 2019 average of 3.42 billion tonne miles per day, whilst sale and purchase of vessels has almost stopped completely, new buildings (which mostly happen in Asia) are being delayed due to the inactive workforce, and charter rates (vessel earnings) are down.
Based on VV Charter Rate assessment, the cost per day of hiring a Very Large Crude Carrier (VLCC) for 12 months has fallen by over 20% in last 1 month or by $4 million over the period. From $53,460 per day on 14th January 2020 to today $42,250 per day. Spot earnings have fallen by over 70% during the same period.
Staying with the ocean sector, last month P&I Insurers the Shipowners Club issued a bulletin on the virus and has updated advice to ship owners and charterers pointing out the BIMCO Infectious or Contagious Disease clause (with different versions for time and voyage charter parties) was released by BIMCO in 2015 in response to the Ebola virus outbreak. The clause can be viewed in full on BIMCO's website.
The clause helpfully sets out the parties' rights and obligations in the event that an infectious or contagious disease affects certain areas such as the load port or discharge port. The ramifications for stakeholders will depend on precise interpretation of the various details within the clause however. Will Covoid-19 be deemed ‘seriously harmful' as with Ebola?
At what point did the ship call at an infected port, was the infection risk known prior to docking? If the ship is diverted elsewhere due to the perceived risk, who bears the extra costs? These and other points need consideration. There is also the possibility of invoking the force majeure clause when performance of the charter party appears to be adversely affected by COVID-19. However ship owners and charterers are reminded to exercise caution when doing so by the Shipowners Club.
The factory shutdowns are having knock on effects globally. Phil Reuben, executive director of SCALA Consulting and chairman of SCALA's Home Appliance Supply Chain Best Practice Forum points out that, in the UK and elsewhere, consumer-facing industries are extremely dependent on these imports and a delay to just one specialist small component sourced from China could potentially delay production of goods by several months if the country remains unable to go back to work.
Where these stoppages affect countries in Asia and beyond, they in turn are unable to complete export orders which may lead to both higher prices and the lay-off of staff as businesses worldwide find themselves unable to continue production, or simply with nothing to sell on. Whilst good for the environment with less global fuel usage (as per the VV study), the effect on an individual basis might be disastrous.
Whilst Samsung has taken to using airfreight to supply its Asian factories from the PRC, in the UK JCB is reducing production levels at UK factories due to anticipated component shortages from Chinese suppliers. The move will mean a shorter working week for around 4,000 JCB and agency shop floor employees from this week. This follows an immediate suspension of all overtime when the crisis arose.
The measures have been discussed with the GMB union and will see the introduction of a 34-hour week for UK production employees until further notice. JCB employees will be paid for a 39-hour week and will bank the hours, working them back later in the year. JCB Chief Operating Officer Mark Turner said:
"The disruption to the component supply chain in the UK comes at a time when demand for JCB products is very strong, so while this course of action is very unfortunate, it is absolutely necessary to protect the business and our skill base. Production in the UK has so far been unaffected by the situation in China. However, more than 25% per cent of JCB's suppliers in China remain closed and those that have reopened are working at reduced capacity and are struggling to make shipments.
"It is therefore clear that the inbound supply of certain components from Chinese partners will be disrupted in the coming weeks as they seek to replenish their stocks. This inevitably means we will not have the required amount of parts needed to build our forecast number of machines in the short term.
"These measures will ensure that, while we will produce machines in lower than anticipated numbers, we will do so with the same number of employees, whose skills we will need to fulfil customers' orders when the situation returns to normal. We are keeping the situation under review and we anticipate a surge in production levels once this period of supply disruption has passed."
Source: Transport & Construction