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Reports from China suggest most large-scale factories are back operating at about 50% to 60% capacity, although it’s estimated just 30% of Chinese SMEs have reopened for business.
In a statement last week, the global shipping giant, Maersk, said it believed Chinese factories will be back to 90% production capacity by next week as health authorities in China relax movement restrictions on workers now that the country is getting to grips with the deadly virus.
However, containment of the coronavirus in China is only the first step in any return to normality. The shutdown in China over recent weeks has created huge backlogs at Chinese ports, with container ships docked at ports but unable to unload cargo. This in turn has resulted in a collapse of return container shipping from Chinese ports to the rest of the world.
Almost half of the planned sailings from Europe to China for February have been cancelled, while similar levels of cancellations are reported along shipping channels between China and North America.
These cancelled sailings are estimated to have resulted in the loss of 300,000 cargo containers a week from moving across world seas. Unsurprisingly, this level of cancelled cargo sailings will have major implications for the global economy for weeks to come.
Even with China returning to operational capacity, the backlog created at Chinese ports since the outbreak of the coronavirus will take time to clear which will slow down global supply chains even more. Freight rates are likely to rise due to insufficient capacity on ships as companies compete for any available space to transport new orders.
The first commercial impact of the coronavirus (COVID-19) was felt by the Chinese stock market when it reopened after the new year holiday. This week, stock market fears spread to Europe with huge falls as cases in several European countries were identified and the US is now also nervous.
With China being a huge food importer of food produce from across the globe, coronavirus is having a direct and indirect impact on trade. China had overbought beef ahead of the new year and that in itself would have caused market disruption. However, this has been compounded by the logistical difficulties around ports working at a fraction of their capacity and containers remaining unloaded.
China has been the most rapidly developing market in the world for beef in the past decade. Beef imports increased year on year from 70,000t in 2012 to 1m tonnes in 2018, with estimates of 1.5m tonnes in 2019. Forecasts for Chinese beef imports in 2020 are put between 2m and 2.5m tonnes, but that was before the issue of coronavirus arose. Chinese demand for beef imports had been increasing with the growth of middle-class consumers but this was further driven by the deficit in pigmeat availability caused by African swine fever (ASF). It is estimated by USDA/FAS that this will amount to 18m tonnes in 2020.
Aside from beef, the ASF outbreak means that China is now the world’s biggest importer of pig, poultry and sheep meat. In terms of beef, 95% of Chinese imports come from Argentina, Brazil, Uruguay, Australia and New Zealand, with Australia and New Zealand being the sheepmeat suppliers as well. Brazil and Thailand are the main suppliers of poultry meat while the EU countries are the biggest suppliers of pigmeat, with 75% of the market. Ireland supplies 3% of these imports and China is Ireland’s second most important market for pigmeat after the UK.
Reports from South America suggest demand for beef has reduced substantially in January compared with the previous months although it is still ahead of January 2019. According to meat industry representative association ABIEC, Brazilian exports were 53,200t in January, down 83,000t in December though more than twice the volume exported to China in January 2019.
A similar pattern is apparent in other South American countries, down on the volumes before the new year but still ahead of the corresponding period the previous year. In Australia, exports for January 2020 were 21,026t, down 39% on December 2019 but still 73% ahead of January 2019 according to Meat and Livestock Australia (MLA). It was a similar story for Australian sheepmeat exports. In January 2019, Australia exported 9,719t to China, a 32% fall on December 2019 exports but 17% more than January 2019.
So, it appears that food demand has remained strong if not just as strong as it had been at the end of last year. What happens next depends on how long it takes for the outbreak to be contained. Rabbobank has recently assessed the potential wider economic impact of the outbreak and the logic is transferable to the agri-food sector.
The bank identified four scenarios that could develop as a result of the outbreak under the headings of: bad, worse, ugly and unthinkable. The best of these, the bad scenario, is based on containment of the virus and impact restricted to the first half of this year and a reduction of growth from what it would have been. In the worse scenario, the outbreak would spread beyond Asia and have a wider global impact. Confirmation of cases this week in Europe and falling stock markets suggest we could be entering this phase. The ugly scenario envisages the virus becoming as big an issue across the world as it is in China, with normal commercial and personal lives severely disrupted and an impact on the global economy as bad as the 2008 financial crash and possibly worse. The unthinkable scenario is a global pandemic with serious human consequences never mind economic consequences.
1 Beef
Exports to China were forecast to reach 30,000t by the end of 2020.
Even if China was buying Irish beef at the upper end of estimates, it would still be a relatively small market and as it hasn’t been significant historically, would have little direct impact on beef trade. However, it has a potentially huge indirect impact. If the huge South American exporters are closed out of China for any length of time, Europe will be the alternative market and the consequence will be a devaluation of the Irish and wider EU market for home production. If coronavirus becomes a widespread problem within Europe, then there will be serious direct consequences for Irish beef exports and corresponding drop in value.
2 Pigmeat
Demand from China in 2019 transformed the fortunes of Irish pig producers, moving prices from a weak €1.37/kg in January 2019 to €1.90/kg at present. China has been Ireland’s second most important export market after the EU and therefore any disruption to trade with China has direct consequences for pig exports from the island of Ireland.
3 Sheepmeat
Ireland isn’t approved to export sheepmeat to China. While there would be no direct consequences, there would be indirect consequences. If New Zealand trade with China, who last year became their number one market, is disrupted, the EU becomes their target as they have a 228,000t tariff-free quota which they only filled half of in 2019. If the EU receives a surge in supply of New Zealand sheepmeat, it would undermine prices for farmers on the island of Ireland.
4 Dairy
Irish dairy exports to international export markets totalled €4.4bn in 2019. Like our beef and pigmeat sectors, Ireland’s dairy industry is totally reliant on export markets and any disruption to traditional trading or shipping patterns could have a negative impact on milk prices. China is Ireland’s third largest export market for dairy, importing €584m worth of Irish dairy last year. It’s still very early in the Irish milk production season, with most dairy farmers about halfway through calving. However, from March on co-ops will be processing increasing volumes of milk and that product will need to find a home in international markets.
5 Grain
Grain markets had been making some upward movement in response to a number of production issues and concerns but recent gains were short-lived with economic nervousness intensified this week as the coronavirus footprint continues to spread.
Chicago maize for December dropped from $3.92 to $3.81/bushel in recent days while wheat also dropped from $5.80 to $5.50/bushel. And the French December MATIF dropped from €187/t last Friday to €184.75/t by Tuesday night. The prospect of a slowing Chinese economy and its economic consequences, as well as immediate logistical difficulties with unloading grain at a number of ports, is driving negative sentiment in grain markets this week. However it remains to be seen if these developments will be short term.
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