Stronger ‘peak’ shipping period could lie ahead for freight

Lower Chinese manufacturing output likely to weigh on transport demand in first half of 2020 but ‘silver lining’ could come in the form of reduced US inventory levels later this year.

Lower Chinese manufacturing output as a result of the coronavirus is likely to weigh on transport demand in the first half of 2020 but a potentially stronger ‘peak’ period for shipping could lie ahead later in the year, according to  Barclays Research in its latest North America Transportation report entitled, Estimating Coronavirus Impact on Freight Markets.

“While the damage from reduced Chinese manufacturing activity is still too early to fully calculate, we have provided a framework to arrive at workable estimates for 1H20 freight market demand downside. Given many industrial manufacturing companies have recently commented that Chinese capacity is slowly coming back on line, following a prolonged New Year holiday shutdown in February, we think a conservative starting point would suggest a 30-40% reduction in outbound freight for 1Q20.

“While driven by different catalysts, we believe sequential outcomes in 2019 transportation demand that was negatively impacted by US tariffs on a wide array of Chinese goods (which declined by roughly 30% last year) serve as a relevant starting point to assess potential volume downside in early 2020.”

Barclays Research said its downside estimate assumes freight markets behave in a similar fashion to outcomes in early 2019, when Chinese exports were significantly challenged by increased US tariffs.

“Of course a prolonged disruption to manufacturing output could drive further downside, but anecdotal industry commentary suggests Chinese manufacturing output is improving this month.”

It said a “silver lining” could come in the form of reduced US inventory levels later this year, leading to a stronger and compressed “peak” shipping season, it added.

“Since the 2018 ‘pull forward’ in Chinese imports to the US, high relative inventory levels have weighed on incremental supply chain demand. We suspect reduced manufacturing output from China could quickly normalize or even lead to low inventory levels in the US this spring, potentially driving a large pickup in supply chain demand later this year.”

Last week, the Freightos Baltic Index ocean rate update for China-US ocean freight highlighted that Chinese manufacturing was taking “definite steps” towards normalisation  as quarantine periods in many areas came to an end and travel restrictions were eased.

It said the vast majority of factories were back online, with many operating at as much as 80% capacity. Inter-province trucking, a major pain point for some weeks, has also benefited from these developments and is now operating at about 80% capacity as well.

In the UK, JCB has reinstated its full production schedule at UK factories but warned of “new threats” to its supply chain, The Times reports.

The company, which is one of the UK’s biggest manufacturing companies, making excavators, earthmovers and farming equipment,  announced last week that workers at its domestic plants have returned to a full 39-hour week.

It cut staff hours last month in what it called a “very unfortunate” decision that affected 4,000 staff at 11 sites.

Graeme Macdonald, chief executive of JCB, said: “This is not a moment for celebration, but it is a step in the right direction. There has been some improvement in the shipment of components from China but new threats are emerging from our supply chain in other parts of the world, notably Italy and South Korea.”

Source: Lloyd’s