Coronavirus Impact Seen Prolonging U.S. Freight Slump

Analysts say shipping companies may see strong rebound once restrictions subside and companies rush to replenish inventories

Trucks traveling along a loading dock at the Port of Long Beach in Long Beach, Calif., the largest U.S. gateway for seaborne imports from China.

Photo: Marcio Jose Sanchez/Associated Press

28365365体育投注Supply-chain disruptions from the coronavirus outbreak are likely to prolong a continuing slump in U.S. freight transport, industry analysts say.

28365365体育投注But transportation operations could see a bump once production in China ramps back up as companies rush to restock depleted inventories.

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Businesses from apparel brands to makers of toys, cars and electronics say sourcing problems in China are hampering production and could delay shipments of some goods into the second quarter of this year. Quarantines, half-staffed factories and logistical bottlenecks inside China are affecting the movement of both finished goods such as footwear28365365体育投注 and raw materials from Chinese vendors that supply manufacturers elsewhere.

The slowdown has sent volumes plummeting28365365体育投注 this month at the Port of Los Angeles, the largest U.S. gateway for seaborne imports from China, and is expected to “drive sustained weakness” in demand for domestic trucking and intermodal service moving freight long distances by truck and rail, Credit Suisse Group AG analyst Allison Landry said in a Feb. 26 research note.

“Suffice it to say, a recovery in domestic freight volumes is unlikely on the near-term horizon,” Ms. Landry wrote.

UBS Securities LLC reduced its quarterly earnings estimates for FedEx Corp. and United Parcel Service Inc. on Friday, citing the impact of a sharp decline in Asia exports.

“Clearly the near-term impact is one of reduced activity not only on international lanes linked to China but also in terms of reduced freight activity in the U.S. given the expected fall off in imported container goods over the next month or longer,” UBS analyst Thomas Wadewitz wrote in a research note.

28365365体育投注U.S. shipping demand already was faltering before the coronavirus restrictions began disrupting global supply chains.

Container handling through U.S. ports fell 2.7% year-over-year in January, the fourth straight month of declining traffic, according to Panjiva, the supply chain research unit of S&P Global Market Intelligence. The Cass Freight Index, a measure of North American transport volumes, dropped 9.4% from the same month a year ago, the largest decline since 2009, according to Cass Information Systems Inc.,28365365体育投注 which handles freight payments for companies.

As Chinese workers trickle back to factories, manufacturers and retailers are making arrangements to move goods by air to make up for lost time. Equipment-maker Deere & Co.28365365体育投注 is budgeting an extra $40 million in expedited freight costs for the second quarter to help ensure parts from Chinese suppliers can reach its facilities, the Moline, Ill.-based company said last week.

Freight airlines Atlas Air Worldwide Holdings Inc. and Cargojet Inc. are fielding calls from freight brokers looking to line up capacity as manufacturing comes back online, company executives said in earnings calls this month. They expect demand for China service to surge in the coming weeks, exacerbated by the lack of cargo space on passenger jets after a wave of service cancellations that could stretch into April.

Meanwhile, many retailers and manufacturers say they are bracing for inventory shortages as their stockpiles purchased before the disease outbreak dwindle.

“Everybody carries 30 days of inventory on the ground if you source from China. We’re no different,” Chief Executive Robert McCormick of Douglas Dynamics Inc.,28365365体育投注 a Milwaukee-based maker of snow and ice control equipment for trucks, said in a Feb. 25 earnings call. ”Even people who want to airfreight shipments aren’t going to be able to because of the flight restrictions…So it isn’t a matter of if we’re going to have some shortages, it is a matter of when and to what extent.”

Mr. McCormick said that although about 80% of its Chinese manufacturing suppliers are up and running, those factories aren’t yet fully staffed, and that its vendors that also source from China also are coping with diminishing supplies.

Children’s clothing company Carter’s Inc. said this week that travel restrictions in China will affect production schedules and could delay the delivery of fall products to the Atlanta-based company in the second quarter.

San Jose, Calif.-based Arlo Technologies Inc.28365365体育投注 said that even though the company’s security cameras are manufactured outside China, key components are sourced from the affected regions and inventory is drawing down quickly.

“Our vendors do not have sufficient quantities of the required components to fulfill our demand because the component factories are operating at considerably reduced output,” Chief Financial Officer Christine Gorjanc said in a Feb. 24 earnings call.

Some companies have more of a cushion because they built up inventory ahead of the Lunar New Year holiday or front-loaded shipments in previous months to get ahead of anticipated tariffs, although those stores are being drawn down as container lines cancel sailings from China.

“Right now, we’ve got to get a lot of empties and some backlogged exports out the door to Asia,” Port of Los Angeles Executive Director Gene Seroka said this week. Once manufacturing regains steam, “it’s going to be kind of a big pendulum swing from the asset base.”

As container service comes back online, there could be a flood of raw materials, parts and supplies hitting North American ports, Credit Suisse’s Ms. Landry wrote.

28365365体育投注“That could lead to a tightening of domestic truck capacity,” driving up transportation prices, she wrote. “So while freight demand is likely to be weaker than expected in the next few months, there is the potential for a more meaningful V-shaped recovery in [the second half of the year].”

Write to Jennifer Smith at jennifer.smith@txbbqking.com

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