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China's record slump in manufacturing output during factory
closures in February to combat the spread of the coronavirus
disease 2019 (COVID-19) is supporting growing fears of stockouts at
plants across the United States, Europe, and East Asia.
The purchasing manager's index (PMI), a measure of manufacturing
activity, confirmed the extent of China's manufacturing decline.
Factory closures through February dragged the IHS Markit Caixin PMI
to its lowest level in the 16-year history of the survey, sending
it falling from 51.1 points to 40.3 points. Anything below 50.0
indicates contraction.
The UN Conference on Trade and Development (UNCTAD) even put a
price on the manufacturing slowdown in China, estimating it has
cost the global economy $50 billion and counting.
Europe, US, and East Asia regional value chains were feeling the
greatest disruption, UNCTAD wrote in a technical note, adding that
the extent of the global effects would depend on how the
coronavirus was contained and whether there were changes in supply
sources.
"Even if the outbreak of COVID-19 is contained mostly within
China, the fact that Chinese suppliers are critical for many
companies around the world implies that any disruption in China
will be also felt outside China's borders," the UN agency warned.
Hardest hit sectors included precision instruments, machinery,
automotive, and communications equipment.
"For many companies, the limited use of inventories brought by a
lean and just-in-time manufacturing process would result in
shortages that will impact their production capabilities and
overall exports."
Line downs in East Asia
Carmakers and electronics manufacturers in South Korea and Japan
are already reporting production line shutdowns, while shippers and
forwarders in the US and Europe are expecting stock levels at
manufacturing and assembly plants to start depleting from
mid-March.
A shipper who did not wish to be identified said although
manufacturing activity in China was slowly returning, the last of
the containers shipped ahead of the Chinese New Year shutdown had
arrived in the US and Europe, and little had been produced in China
since those shipments left.
"Companies have increased the amount of inventory they keep on
hand, but they still only hold 15 to 20 days' worth of stock," the
source told JOC.com "It is possible the Chinese New Year holiday
motivated some companies to increase their inventory coverage by
another week, but that still means most companies will only be able
to match supply with demand for two to four weeks. After that,
manufacturing will have to stop."
The logistics director for a global clothing retailer said he
had enough inventory on hand for now from the pre-Chinese New Year
shipments, but in two weeks the picture will be very different.
"Luckily we managed to get a lot of our goods out before the
Chinese holidays, but we are concerned that if the volume out of
China starts to pick up in a couple of weeks, there will not be
enough capacity," the source told JOC.com, pointing to the record
numbers of blanked sailings by the carriers.
According to Alphaliner, 30 to 60 percent of weekly outbound
capacity has been withdrawn from the Asia-Europe and trans-Pacific
trades over the past three weeks, as well as from the intra-Asia
routes. The reopening of factories in China would see a gradual
return of demand, but Alphaliner noted in a recent newsletter that
cargo volume recovery was expected to take a few weeks, and until
normal volume was reached, carriers would continue to selectively
implement blank sailings, likely until the end of March.
Global production slump
Led by the record slump in China, global manufacturing also
dropped below 50.0 points, an indication of the country's outsized
role in the global economy. The JPMorgan Global Manufacturing PMI,
compiled by IHS Markit from its surveys in 31 markets, fell 3.2
points from 50.4 in January to 47.2 in February, its lowest since
May 2009 and signaling steep deterioration in the health of
worldwide manufacturing.
Chris Williamson, chief business economist at IHS Markit,
believes the key to whether global production picks up or slumps
even further will depend to a material extent on the
re-establishment of functioning supply chains out of China.
"Production facilities are slowly coming back on line after
extended New Year holiday closures, designed to limit the spread of
the coronavirus," Williamson said in an update on the IHS
Markit February PMI data.
"However, the PMI results reveal that even towards the end of
February many firms were reporting that production was yet to
restart or was running well below capacity, limited in part by
restrictions on travel for workers and input shortages," he added.
"The prospect of lengthening of lead times bodes ill for production
in many countries."
Posted 13 March 2020 by Greg Knowler, Senior Journalist, Maritime & Trade, S&P Global Market Intelligence
