What has been the impact of the coronavirus outbreak on the global supply chain?

Tony Hatch (4)

The Impact on the Global Supply Chain – perhaps the biggest longer-term risk is this further attack on globalization (after nationalism, ill-informed trade policy, weather events), although judging by the Mexican market’s outperformance, there are some bets that the China-to-Mexico production move may accelerate. That would, of course, be pro-rail, but most of the news is bad short term, and potentially bad longer-term, for this trade-dependent industry. The FT wrote yesterday that the virus and its impact is “raising doubts about the merits of outsourcing” (other business press have noted that “supply chains are at risk” – WSJ – or that the virus is “wreaking havoc on supply chains” – several). This is, of course, a derived demand business – if the virus hurts global supply chains (autos, etc), or imports from China (electronics, furniture, clothing, etc), or consumer confidence in general, that’s bad. And the nature of railroading being a network business also has had an impact – if there is a backup at the ports (Ag, say) that will (has) impacted operating metrics (velocity and dwell, asset “spin”). More thoughts: 

  • Rail earnings impact will likely be bigger in Q2 than this quarter as the safety stock, often built up for the traditional Chinese New Year, this out (and remember it takes 2-4 weeks for the container on the Pacific). 
  • Port volumes will show it first – LA has announced they expect Q1/20 to be down ~15%, showing an accelerating decline pattern (February down ~25%).
  • A noted analyst of major global industrials said that his big companies' factory utilization levels were back to 80%+ - but supply chains only at 50-55%. Some medical pros have said that China’s encouragement of factory re-openings may risk a second outbreak... 
  • On the bright side, if I can say so, the Financial Post noted last week that “this has sent retailer Canada Goose into a tailspin”. Oh, if only that were so...