The spread of coronavirus overshadows the outlook for global supply chains. Our Q2 outlook takes a look at the prospects for global trade volumes, the state consumer and healthcare supply chains, the challenges faced by logistics firms and developments in trade policy.

Also: structural container line offering changes starting to arrive; oil supply chain hopes depend on a call that may not yet have happened; and the U.S. trade drop contains a victory for Trump.

Daily Datum: > 1 million
confirmed coronavirus cases globally at 20:30 BST on April 2, 2020

NEED TO KNOW

Q2 2020 Outlook: Through a COVID-19 lens, darkly
The outlook for global trade and supply chains is overshadowed by the continued spread of COVID-19 and the unprecedented disruptions it is causing. Today’s Panjiva Daily provides an overview of the areas where COVID-19 could disrupt supply chains in the next three months. 

Corporations are struggling to determine the way ahead – Panjiva’s analysis shows over 400  companies withdrew their earnings guidance in March, including logistics firms such as Maersk through capital goods manufacturers including Deere. That increases the importance of alternative data-sets in tracking corporate activity.

The spread of lock-downs will have a significant impact on trade activity. The potential magnitude is shown by U.S. seaborne imports from China which fell 59.5% year over year in the first three weeks of March while shipments from Taiwan and Vietnam climbed 17.4% and 25.5% respectively.

Chart segments change in U.S. seaborne imports by origin. Data for March through 21st of month. Source: Panjiva

Just as supplies from China are returning to normal there’s a concurrent slump in demand – reflecting the bull-whip effect – with over 61% of Chinese textile companies are reporting orders that are less than half their normal levels. U.S. apparel importers already slashed their shipments. Seaborne imports linked to Target, Walmart and H&M all fell by 50% to 55% in the first three weeks of the month compared to a year earlier.

Chart segments change in U.S. seaborne imports of apparel and textiles by consignee. Data for March through 21st of month. Source: Panjiva

The logistics industry has responded to lower demand by cutting capacity in both the container-line and airfreight sector – more will be needed as coronavirus disruptions spread. A build-up of undelivered cargo has started, leading MSC to offer space at its transshipment hubs to customers that can’t take delivery at the usual destination. The largest users of MSC’s U.S.-inbound shipping services in 2019 who may make use of the service include Walmart and Best Buy among retailers and Newell Brands and Mattel among industrials.

A surge in air freight rates has led FedEx to raise its surcharges, while wider complications have led FedEx and UPS to trim their service guarantees. FedEx’s seaborne shipping customers who might transfer airfreight over include Wistron and Apple with 673 and 626 shipments linked to each firm respectively shipped to the U.S. by sea in 2019. In extremis, logistics firms may follow Ceva and DHL in declaring force majeure.

Chart segments U.S. seaborne imports handled by FedEx by consignee on a monthly and three-month average basis. Source: Panjiva

The healthcare supply industry has been roiled by a mixture of surging demand and export restrictions. A G20 initiative to limit the latter may not prove effective. While import barriers are being removed, U.S. imports of ventilators and PPE fell by 35.5% and 33.5% respectively compared to a year earlier in the first three weeks of March. Pharmaceutical imports only fell 3.5%, but lockdowns in India and Europe introduce risks.

Negotiations to formulate new trade deals are likely to be on hold, particularly in terms of U.S. plans for deals with the EU, UK, Kenya and India while progress in Asia on RCEP and CPTPP are unlikely in Q2. Implementation of USMCA is delayed until at least July. U.S.-China relations may continue to deteriorate. Chinese imports of products covered by the phase 1 trade deal in February were 62.8% below the level implied by China’s purchasing commitments for 2020 as well as 18.4% lower than a year earlier.

More pressingly, the U.K. needs to decide whether to extend the Brexit withdrawal period and how it may shore up access to critical goods. The EU represented 80.9% of British medical imports in 2019 while shipments slumped 20.9% year over year in January.
(Panjiva Research – Outlook)

Chart shows U.S. exports to China of products covered by the phase 1 trade deal. Source: Panjiva

GLOBAL SUPPLY CHAIN WRAP

Structural container line offering changes starting to arrive
Coming back to logistics, container-line MSC and its 2M partner Maersk have cancelled two Asia-U.S. services for the whole of Q2 while also making ad-hoc changes to a further three services on Asia-U.S. lanes and two changes on Europe-U.S. lanes.

As flagged in Panjiva’s research of March 19, MSC had been the best performing container-line on U.S.-inbound routes in February. The move follows similar widespread blankings by THE Alliance while Ocean Alliance (including CMA-CGM) does not appear to have made structural changes yet.

That said, CMA-CGM may be embracing the trend towards slower-steaming by routing a vessel from Asia to Europe via the Cape of Good Hope rather than via the Suez Canal. The move may be linked to lower fuel costs (see below) than simply demand factors.
(MSC, Splash247)

Oil supply chain hopes depend on call that may not yet have happened
The crude oil price surged yesterday on statements from President Donald Trump that the leaders of Saudi Arabia and Russia had spoken and were close to agreeing a 10 million barrel/day oil production cut. As outlined in Panjiva’s research of March 9 the recent collapse in oil prices has been due to a lack of demand resulting from coronavirus-disruptions as well as the Russia-Saudi spat over production levels.

A deal and subsequent reflation of oil prices would raise shipping costs but boost the value of global trade. Later press reports suggest, however, that the Russian government has refuted President Trump’s statement. There may also be an OPEC+ meeting on Monday, though that has yet to be confirmed.
(White House, Bloomberg, S&P Global Platts)

U.S. trade drop contains a victory for Trump
U.S. international trade activity fell for a sixth straight month in February with a 2.8% slide. As in prior months that’s been led by a 4.1% drop in goods while services rose by 0.9%. The slowdown in goods imports of 5.8% is likely to have accelerated in March, based on U.S. seaborne imports discussed in Panjiva’s March 27 report.

The growth in services exports slowed to 1.6%. Unsurprisingly that was due to a 6.5% drop in transport services and an 8.3% slide in tourism / travel as a result of the travel bans imposed globally over the past two months.

The good news for longer-term Trump administration trade policy: the overall trade deficit fell by 22.1% year over year. That was the fastest rate of decline since March 2016 and was largely due to the deficit versus China reaching its lowest since February 2009.