Virus Outbreak: Virus hits global shipping
Sea freight transport, the lifeblood of trade and a bellwether of the global economy, has been blown off course by the COVID-19 outbreak, sparking general alarm. As analysts pore over charts to gauge just how badly Chinese megafactories have been hit, figures provided by cargo ship traffic paint a gloomy picture. The Baltic Dry Index (BDI) reflects the daily price of moving goods such as coal, rice and wheat along routes deemed representative of the global market.
The BDI has now reached lows last seen in early 2016, when the shipping sector was suffering a supply and demand imbalance in the wake of the global economic crisis of 2008 and 2009. Its "capesize" index for the largest category of ships -- ones that cannot even squeeze through the Suez or Panama canals -- is at historic lows. "The latest slump is directly related to the coronavirus epidemic in China and the subsequent restrictions on activity," London-based Capital Economics Ltd said in a research note.
"Given that China accounts for about 40 percent of global seaborne trade, it is not so surprising that freight rates have tanked," it added. Arctic Securities AS analyst Lars Bastian Ostereng said that the outbreak "basically led to full stops in many ports in China." Louis Dreyfus Armateurs SAS, a global merchant based in France, is one of many shipping giants approaching China with caution.
The 169-year-old company has banned its sailors from going onshore and stopped relieving its crews at Chinese ports, resulting in considerable disruptions. "The coronavirus epidemic is a very serious event for the market," Antoine Person, a top executive at the firm, said. China does not just produce goods, it is also a major consumer with a booming middle class and the world's largest population.
It accounts for "about 35 percent of all seaborne dry bulk imports in the world," Ostereng said. With more than 2,400 death reported from COVID-19 and swathes of the country under effective lockdown for a second month, Chinese demand might suffer for months to come, he said. This would impact exports to China from around the world, including the US and Europe, with accompanying political repercussions.
"Power generation in China has dropped and steel mills are reportedly cutting capacity utilization which, respectively, point to lower demand for coal and iron ore," research firm Capital Economics wrote. That in turn reduces Chinese imports of coal and steel produced in places such as Australia and Brazil, impacting their economies. The price of shipping both commodities is reflected in the BDI index, which is in "free fall," Capital Economics said.
In addition to importing raw materials -- Chinese factories consume nearly 40 percent of metals produced in the world -- the factory slowdown has forced the world's largest shipper to brace for the year ahead. Denmark's AP Moller-Maersk AS on Thursday said that the outbreak has "significantly lowered visibility on what to expect in 2020." "We expect a weak start to the year," it warned.
Daily Telegraph international business editor Ambrose Evans-Pritchard on Thursday wrote that the shipping collapse was "threatening weeks of chaos for manufacturing supply lines and the broader structure of global trade."
He said that optimists expect Chinese demand and factory output to explode once the restrictions end and businesses try to make up for lost ground.