The looming demand-side crisis at US ports

Hello from Washington. The cherry blossoms have come and gone while we’ve been trapped indoors, though I did have a view of one through my front window. The beginning of this week has featured a continued battle for medical supplies across the US, even as coronavirus remains below its predicted peak level of infections.

Our main piece today is on the odd supply-demand shift across trans-Pacific supply chain routes, while our person in the news is Mike Roman, chief executive of 3M. Our chart of the day looks at how far China has to go to meet its phase-one trade deal commitments with the US this year.

The cargo that nobody wants anymore

If you speak to port authorities in the US, they’ll tell you that, for now, everything is fine. But they’ll also tell you that ships generally take about a month to reach the US from China — and that once those ships reach US shores next month, there’ll be a problem. 

It’s this: nobody wants that cargo any more. 

While China was offline, US companies were still desperate for goods from China. Several weeks ago, America was relatively unaffected by coronavirus and many westerners seemed in denial about just how bad the disease might get. Retailers still wanted jeans and sneakers to sell in New York, automakers still wanted car parts to assemble in the rust belt. Amazon, too, was accepting everything from yoga mats to bedside lamps to distribute through its vast warehouse networks.

Now, Amazon’s warehouses accept only essential items and it’s almost impossible to buy jeans. At the same time, over in China, factories have been restarting their machines and workers have cautiously returned to work. Things the US ordered in more innocent times are now on their way across the oceans. 

Port operators, on the front line of the coronavirus crisis, are scratching their heads. The movement of the crisis from a supply-side one to a demand-side one threatens to leave unloved and abandoned shipping containers piling up on US shores. Several ports have told the FT they’ve received panicked calls from companies asking ports if they can store their containers of cargo. Usually, shipping containers sit at ports for as little time as possible. But with companies lacking the warehouse infrastructure to cope with excess stock, leading ports are looking into expanding their storage facilities.

Ocean liners are helping by travelling on longer routes than usual, deliberately delaying the arrival of the cargo to the US, and some are offering to drop the cargo at ports with extra storage capacity in Europe along the way. Trade magazine Splash reports that CMA CGM, a French shipping group, has been routing ships around the Cape of Good Hope and avoiding the Suez Canal, making the journey both longer and cheaper.

French shipping group CMA CGM plans to idle as many as 15 vessels, with chief executive Rodolphe Saadé saying he expects next month to be ‘tense’ © Charly Triballeau/AFP/Getty

But if US companies can stop the cargo arriving in the first place, they’re cancelling their orders. Simply, fewer goods will be demanded from China. Shipping lines, largely responsible for making globalisation work, are facing tough times ahead.

Once the temporary glut in cargo has passed through the system, ocean liners will face falling demand. While most ocean liners are watching nervously and saying little, Rodolphe Saadé, chief executive of CMA CGM, told French newspapers on Tuesday that he expected May to be “tense”. The company plans to idle as many as 15 ships.

Freighters are also canning routes to get ahead of the inevitable crash in freighting prices that too much ship capacity would bring. Maersk, the Danish freighter, and the Mediterranean Shipping Co, which jointly run a weekly freight service from north Asia to the US west coast, said they would suspend the service for the entire second quarter. They’ll also suspend another weekly service from south Asia to the US east coast. Lars Jensen, the chief executive of research firm SeaIntelligence, estimates this is about a fifth of their weekly freight capacity.

Meanwhile, anyone trying to export essential goods is hit by rocketing air freight costs. The need to send medical equipment, such as masks and personal protective equipment, quickly has led to increasing demand for air freight, according to Freightos, a freight forwarding company. This is combined with a reduction in supply as passenger jets, which usually carry some cargo, are grounded. High air freight costs, for now, are sending some extra customers to the ocean liners, if speed is not of the essence. 

A slowdown in cargo shipping seems pretty bad news for the prospects of global trade, and it may be months before demand in the US and Europe picks up. In the meantime, let’s hope that the companies carrying goods across the world are able to weather the storm — and that idle ocean liners don’t turn into permanent ghost ships.

Charted waters

The trade truce, or phase-one deal, signed between the US and China involved the latter agreeing to buy an extra $200bn in additional US exports over the next two years — $77bn of those this year alone. That is now looking rather unlikely. Purchases by China in the first two months are far below the levels they would be expected to be on a proportional basis to meet the targets this year.

Person in the news

Mike Roman, 3M chief, said ‘nothing could be further from the truth’ that the company was not doing everything it could to maximise respirator deliveries in the US © Takaaki Iwabu/Bloomberg

Who is it?

Mike Roman, chief executive of 3M

Why are they in the news?

3M has been embroiled in a spat with the White House over exporting N95 masks. Although the company ramped up US production of the masks to 35m a month since the start of the outbreak, the White House was pressuring it to halt exports of the masks. Responding to criticism by Donald Trump on Twitter, Roman told CNBC that “nothing could be further from the truth” that the company was not doing everything it could to maximise delivery of respirators in the US.

A truce was reached, and a new deal announced yesterday with the US government will involve 3M importing 55m masks a month into the US for three months from its factory in China.

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