Chinese factories recovering but global supply chains still in shock
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It had been hoped that global trade would quickly bounce back once China’s production lines began rolling again, but that was when economists naively believed the Coronavirus disease, known as COVID-19, could largely be contained within the boundaries of the Asian giant.
But the virus quickly jumped borders, spanned continents, and brought much of the world to an economic standstill.
Analysts have now been forced to acknowledge that COVID-19, which has whipped through 170 countries and has been declared a pandemic, threatens supply chain disruptions far beyond sourcing and production in China. They are now warning of a looming global recession.
How China’s Manufacturing is Recovering
The pace of reported coronavirus cases has slowed in the most seriously affected regions of China, allowing factories to reopen and people to return to work.
Among local industries back in operation at near-full or full capacity are the state-owned oil and gas, electricity, communications, and transportation enterprises, according to media reports.
On the international front, Apple, which was forced to shut its retail locations in China due to the spread of the virus, has reportedly reopened all of them, while Groupe Renault said it planned to restart production on March 20.
In Wuhan, where the virus is thought to have originated, companies making electric car batteries, pharmaceuticals, and telecom components are among those that have reopened. However, automakers and a plethora of other industries will only resume full production by mid-April due to a shortage of components.
The State of Play on the Ground in China
Global logistics company Agility, in a situation update, reports the following developments on the ground in China:
- Work has largely resumed after quarantines were lifted, with production estimated at 60-70 percent of normal.
- Production has been sharply up in most provinces since the last week of February.
However, international traders now have to contend with a shipping lag caused by numerous vessel cancellations to and from China, which has resulted in considerably less space and container availability, Agility, which is headquartered in the Middle East, reports.
As an indication of the enormity of the shortfall, data from trade research firm Ocean Audit shows that daily container traffic at US ports from China fell from 32,550 units on February 4 to just 2,784 on February 26.
Airfreight, too, is under strain, with passenger flight cancellations removing an average of 5,100 tons daily of capacity from China and freighter capacity not able to fill the gap left by the belly-capacity shortage. As a result, airfreight rates from China have skyrocketed.
Even as China Recovers, the Rest of the World Teeters
Just as China managed to start ramping up production, demand began plunging in its main export markets, especially Europe and the United States, due to far-reaching lockdowns imposed by governments in a desperate bid to contain the Coronavirus.
For example, a dive in demand for auto components from China, the main supplier, was sparked by the closure of assembly plants this week in Europe and the United States. They are not expected to reopen before March 30.
With the freight logjams and slump in demand, Chinese exports are expected to remain subdued in March, despite the rebound in manufacturing.
Overseas shipments already suffered a sharp contraction in January-February this year, falling 17.2 percent from the same period a year earlier.
Peering into the Abyss of a Global Recession
It was these latest figures that prompted a global recession forecast from S&P Global, which described them as “much worse than feared”.
The financial information and analytics company ascribed its gloomy forecast to tight restrictions on person-to-person contact in Europe and the US, which, it said, sent markets reeling and prompted a sharp deterioration in assessments of economic activity, earnings, and credit quality.
Possible ‘Second Wave’ Adds to the Jitters
Adding to the sense of unease are warnings of a possible ‘second coronavirus wave’ in China, sparked by people importing it from abroad.
So, although China said that on March 18 it had recorded no new domestic cases, the first time since the emergence of the virus in December, it had, however, on the same day reported 34 new cases among people returning from overseas.
We are now at the point where global supply chains are being mangled by COVID-19 yet again—and even an unlikely V-shaped rebound in China would do little to stop the rot. It looks like we’re in for a long period of uncertainty that will test supply chain resilience and adaptability like nothing previously seen in most of our lifetimes.