COVID-19 BEST PRACTICE RESPONSE: EFFECTS ON SHIPPING AND THE GLOBAL SUPPLY CHAIN
June 8, 2020 Maritime Safety News
One of the most problematic knock-on effects of the response to the Covid-19 pandemic has been the restricted availability of labour, and by extension the inability to manufacture and transport goods. Lockdown policies enacted by many governments have resulted in the closure of plants and factories, causing supply chain deficiencies across the globe.
One possible solution is to move operations from a Covid-19 affected country, or at least to spread out manufacturing sites to create a level of resilience to a pandemic event. However, this is not without consequence. Speaking to Electronics360, Len Jelink, research vice president for components and devices at Omdia said, ‘I think we will see some supply chain diversification where companies can financially make it work, but I do not see a whole sale repositioning of the electronics industry unless we see governmental intervention or tariffs… I do not see how companies that have automated in Asia can, for example, be financially competitive while having to make duplicate investments in a new location unless governments are willing to fund those moves.’
This is a view shared by Michael Larner principal analyst for industrial and manufacturing research at ABI Research, ‘in the short term, it is unlikely the industry will see a hollowing out of manufacturing from China and Taiwan…A lift and shift approach won’t work because moving just one part of the value chain to say southeast Asia won’t help much when you still need supply of components from firms in China or Taiwan. Also, nobody knows how this virus will evolve and where another version might occur. The next hotspot could be where the manufacturer has moved their assembly lines.’
According to the International Transport Forum, ‘Covid-19 could reduce global freight transport by up to 36% by the end of 2020’. In a briefing publish on 11th May, the ITF stated ‘The current mobility and activity restrictions around the world are likely to result in a strong reduction of global freight transport volumes in 2020 of more than one third’.
‘Overall, freight transport, measured in tonne-kilometres, is projected to be 36% below the level foreseen without Covid-19 for this year. Non-urban freight activity, i.e. national and international goods transport outside of cities, could be 37% lower overall, compared with the estimate for global 2020 freight volumes without Covid-19.’
This however will not be a blanket figure across the whole world. Instead significant regional differences will occur. The ITF estimates ‘A reduction of more than half is projected for ASEAN countries, Russia/Central Asia and India. For China, the impact is just above a quarter less freight. Europe and the Americas are in the middle of the range with reductions of around 40%; only the Andean countries are projected to be hit harder, with a 50% fall in non-urban freight activity.’
The picture for localised transport is different. ‘Freight transport within cities can expect to be hit significantly less hard than national and international goods transport. Updated projections see urban freight activity at 8% below the estimate that did not yet reflect any impact from Covid-19. One reason for this is the growth of online shopping during the lockdown in many countries, which leads to more deliveries of e-commerce purchases. Associated with this phenomenon is an increased number of vehicles delivering goods in cities, despite the still significant fall in volume.’
One positive to come out of this analysis is the environmental benefit to the reduction in transportation. ‘Carbon dioxide emissions from national and international freight would be close to one third (30%) lower than projected without the impact of Covid-19. For urban freight, the drop is half as big (14.5%), yet still significant.’
The reduction in manufacturing, economic activity, and the associated decline in demand for transport have major implications for the global shipping industry. On 29th April, the ITF published analysis noted that ‘Container freight rates have remained fairly stable because carriers have idle capacity, yet the high debt level of container carriers creates insolvency risks. Any bailouts for the sector should address offloading of risks to the public.’
‘The main response of carriers to falling demand has been to reduce supply. Ship operators have massively started to idle vessels by cancelling services. These blank sailings have increased significantly compared to previous years, with 188 in February/March 2020, of which 85 were on the Asia-North America West Coast trade lane and 49 on the Asia-North Europe trade lane’.
The ITF analysis suggests that cost reductions will be vital to secure the future of shipping companies. ‘Over the past decade, carriers mitigated excess capacity by lowering ship speeds, scrapping older vessels and cancelling orders for new ships. Carriers will likely resort to a mix of similar instruments in the second and third quarter of 2020.’
‘In 2015, carriers re-routed traffic after the opening of the new Suez Canal, forcing the Canal Authority to cut rates by 65%. Now, some are again re-routing Asia-Europe services via the Cape of Good Hope to avoid Suez Canal charges, a course of action made viable by very low oil prices.’
The reduction in demand for shipping has had a knock-on effect at ports, where ‘Volumes handled in the main global container ports fell by 6% in both February and March 2020 on the previous year’.
The ITF further predict that ‘Service cancellations will cascade through the containerised transport system and reduce the number of feeder services. Carriers will transfer some of the large ships no longer needed on usual trade routes to other routes in order to optimise utilisation. This will intensify peaks and troughs in ports not used to handling these large vessels.’
One major concern for the ITF is the danger of a ‘race to the bottom’, as governments seek to use subsidies and state aid to protect the shipping industry. In the view of the ITF this could cause ‘a vicious cycle of regulatory competition for the most generous subsidies and tax exemptions. By this logic, temporary support to weather a crisis become permanent; one country’s support measures invite others to match or outdo them; and some countries will expand their support measures to increase their shipping sector’s competitiveness.’
‘The shipping subsidies introduced during Great Depression in the 1930s generally continued, even if the form and character of the aid changed over time. More recently, the aftermath of the 2008 financial crisis saw an accumulation of government support packages that generally remained in place, followed by an expansion of scope of the schemes.’
It is not however all bad news. Instead, the ITF suggests ‘Governments should use the economic leverage of the Covid-19 crisis to address these concerns. Actions could include closing tax loopholes, reducing exemptions and introducing carbon pricing for shipping.’
‘Governments could also halt the unfair competition of tax-exempt carriers with non-tax exempt companies with regards to logistics activities. They could stimulate a more crisis-resilient container shipping model that includes clear conditions regarding the value the sector creates for society, embraces environmental sustainability and internalises external costs and risks in the price of containerised ocean transport.’
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