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What Happens To Freight And Rail Rates After Coronavirus Disappears?

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What Happens To Freight And Rail Rates After Coronavirus Disappears?

After a week in which there were hopeful signs that the spread of the coronavirus in China had slowed, it's safe to say this past week was not a good one for companies with an exposure to supply chains that might be impacted by COVID-19, the other name the virus has been given. 

Some companies, Apple Inc (NASDAQ: AAPL) most notably, reduced their forecast for revenues and earnings in 2020 and cited COVID-19. Repeated changes in how China is reporting the number of sick and deceased raised serious questions about what to believe and what to ignore.

Yossi Sheffi is a professor of engineering at MIT and director of the MIT Center for Transportation and Logistics. He is concerned about all these developments, but he's already looking ahead to the impact of COVID-19 in a few months.

There are two possible developments, Sheffi said, either of which will have a significant impact on the transportation sector.

What Sheffi said was the "best-case" scenario for the sector is that in two to three months, "we'll start having a boom of stuff coming into the West Coast, and trucking rates and rail rates will spike." Sheffi said many of his contacts in various supply chains are looking at that scenario now and trying to anticipate how they might react to it. Of course, it would be a best-case scenario for carriers; for shippers, not so much.

The other scenario is that there is no spike in rates. And Sheffi said that is likely to happen only if the pandemic is much worse, "and it's going to take six months to a year to recover from and it's worldwide." Such a scenario, he said, would probably bring the transportation sector down to the levels of 2008 when the great recession began.

Sheffi also doesn't think the drop in trade as a result of COVID-19 is over. Most of what continues to arrive on the West Coast now was shipped before the virus grabbed ahold of the Chinese economy. February's import numbers will obviously be down from January, he said, "and there will be a bigger reduction in all of March, or at least the first part."

The suggestion that things aren't getting much better was most clearly seen in the warning by Apple earlier this week that it was not going to meet its revenue guidance for the quarter, which it put out in late January right as the world was starting to deal with the reality of COVID-19.

The dangers Apple sees are twofold, and speak to the same issue that many companies are dealing with. "The first is that the worldwide iPhone supply will be temporarily constrained," Apple said in its announcement. Although iPhone manufacturing facilities have all reopened and none of them are in Hubei province, the province that includes the "ground zero" city of Wuhan, Apple said plants elsewhere in the country are "ramping up more slowly than anticipated."

"These iPhone supply shortages will temporarily affect revenues worldwide," Apple said.

The second is what many analysts have noted is different this time than the SARS pandemic of 2003: China buys a lot of stuff now, too. Sales are down, Apple said. That decline in the size of the Chinese market as a demand center can be expected to hit other companies and products as well, with the collapse in jet fuel demand as a result of canceled flights in and out of China being the most obvious example.

Apple's warning has been the most prominent COVID-19 cautionary signal by a company this past week.

The MarketWatch news service said a FactSearch check of earnings calls from the start of the year through the end of last week found that 38% used the term coronavirus at least once.

The divergence among companies describing the impact of COVID-19 is significant. For example, the earnings call of Walmart Inc (NYSE: WMT), a company that is at the end of hundreds of supply chains, had minimal references to the pandemic. By contrast, Disney executives on its earnings calls said they expect revenue at their parks in Shanghai and Hong Kong — both of which are closed because of COVID-19 — to sustain a combined drop in revenue of almost $280 million in the current quarter.

The impacts are in China and out of China. Adidas, the manufacturer of sports footwear and clothing, said its sales in China were down 85% since Jan. 25 on the back of many store closures. Far away, Fiat Chrysler shut a plant in Serbia because of a lack of parts coming from China.

Søren Skou, the CEO of shipping giant Maersk, said on his company's earnings call Thursday that the company's 2020 guidance on EBITDA was $200 million to $300 million less 2019. On the call, CFO Carolina Dybeck Happe said the coronavirus was one factor, but so was the impact of IMO 2020 as well as what she called "macro trends."

Skou said his estimate is that Chinese factories are operating at 50-60% of capacity and that he expects they will be up to 90% by the first week of March. He said Maersk was hoping for a V-shaped recovery, like what happened after China's SARS scare in 2003, "but with a larger magnitude, of course, because China's impact on global supply chain is just much bigger today and China's role in the global economy is much bigger."

Sheffi echoed that, noting that the Chinese role in the supply chain is different than it was just a few years ago. While China was known at first mostly as a source of cheap labor, that is not the current advantage.

What China is increasingly focused on are higher-sophistication products, Steffi said, "that are just not that easy to get out of the entire ecosystem of suppliers."

"So I don't see re-shoring seriously for most products," he added.

Image Sourced from Pixabay

 

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