Coronavirus freight slump will cause demand spike – eventually

Supply chain stakeholders will claw back some of the revenue losses due to coronavirus when freight demand resurges – once China reopens for business.

Coronavirus is not the only headwind facing forwarders in 2020. But it does represent a poor start to the year, admits Jens Lund, chief financial officer for DSV Panalpina.

However, he told Lloyd’s Loading List that once the impact of the deadly virus subsides and China reopens for business, the starvation of supply chains due to factory closures will be followed by a huge surge in freight demand, creating capacity shortages across all modes – that the largest forwarders can monetise.

“Production is significantly reduced or standing still in many places in China, so we are moving less cargo, which of course is creating a lot of bottlenecks in global supply chains,” said Lund.

But once production across restarts – which looks increasingly unlikely this week for most of the country – freight will need to be transported by whatever mode has capacity.

“This represents a lot of work that has to be carried out at that point in time,” added Lund. “We have to find ways to basically manage this, and if we do this well, of course it means that there is an opportunity for us to regain some of the money that we lose initially.

“It will take a couple of months to clear that backlog. But, of course, the more time lapses the longer it takes.”

Coronavirus not a major break on profits

As reported last week in Lloyd’s Loading List , after reporting healthy financial returns in 2019, DSV Panalpina expects profits to increase in 2020 despite the poor start to the year due to the coronavirus shutdown.

According to Lund, a reduction in trade tariffs and tension would go a long way to helping the forwarding behemoth achieve its aims. Transport between China and US represents approximately 10% of DSV Panalpina’s air and sea volumes, but the US-China trade war dampened volumes on the trans-Pacific for much of 2019.

It also led to some production shift out of China. In its annual report released last week, DSV Panalpina said the upshot of tariff war had resulted in “several examples of production being moved from China to other countries – mainly in Asia”.

However, “large scale changes to established supply chains will take years,” said Lund who told Lloyd’s Loading List that the recent reductions in tariffs by the world’s two largest economies were a positive sign – although he admitted the outlook could change with a tweet from the US president.

“I think they [China and the US] are working in a more constructive way,” he added. “We just deal with it as we go on.

“There is one constant – the political environment is completely unpredictable.

Trade wars do no stop consumption

“We take things into account and deal with it.  The good thing is you won’t stop eating or consuming and so you will need us as we make sure this is possible.

“So, if we move cargo from D to B, or from A to B, it doesn’t matter: you will get it. We need to make sure we are part of that supply chain, no matter where the cargo moves from.”

DSV Panalpina estimated in its financial report that the European road freight market grew a modest 1-2% in 2019, in line with the underlying economic growth rate. It noted that the slowdown in German economy led to lower road freight volumes, not only in Germany but across the region.

“The negative development was most significant in the automotive sector, but other industries were also impacted,” it added. “Uncertainty related to Brexit was another negative factor for the road market, and most traffics related to the UK declined, especially in the second half of 2019.”

UK Brexit changes

According to Lund, Brexit will continue to impact supply chain planning through 2020. He said some companies currently based in the UK were establishing non-UK production and distribution hubs as they prepare for more trade friction at borders once an agreement on trade between the UK and EU has been agreed.

And he predicted companies that had previously served the UK market from hubs in continental Europe would invest more in the UK on the basis that they can no longer rely on cross-border friction-free transport.

“Supply chains will need to be more separate,” he added. “There will be less trade with the UK now; that’s the whole point.”

Asked if the UK would be a winner or loser on inward and outward logistics investments as a result of Brexit, he added: “Less will be going in.”

Source: lloyd’s