Wide-scale spread of the COVID-19 virus (Coronavirus) is very real. Cases reported outside China recently exceeded new cases reported inside China, a possible tipping point. What could the implications be for North American freight railroads?
McKinsey & Company suggests three scenarios for business impact: (a) Quick recovery is viewed as “least likely” but economic impact is kept to 1Q20; (b) The best case is for global slowdown with direct impacts through 3Q20; (c) The worst case is pessimistic, with low consumer confidence and air travel restricted into 4Q20, ahead of recovery.
Though the GDP impacts vary in each scenario, the worst case could be global recession. Setting aside the macro-economic factors, let’s think about the supply chains with which railroads are involved. The immediately obvious traffic stream impacted is international intermodal traffic, especially from China. The Chinese New Year and the Coronavirus outbreak is a double-whammy for China’s production of consumer goods destined for North American markets.
Migrant workers cannot return to their workplaces due to travel restrictions and quarantine in certain places. Thus, manufacturers cannot produce goods; neither can their China-based suppliers make vital parts. The supply chains are disrupted. Once recovery starts, they may not be able to pick up instantly due to order backlogs and long lead times through the cumulative supply chain.
Thus, imports by sea will slow, container availability may become imbalanced due to cancelled sailings. Our ports may become congested with empty boxes unable to be shipped back to China (or full ones delayed because the Chinese market is depressed). Once imports pick back up, as they will do eventually, ships will seek to off-load at ports with capacity, which may change the lanes for intermodal traffic.
Railroads will have to be extra resilient and agile, shifting power and human resources to ports and terminals traditionally not used to or equipped to handle increased traffic. As with any recovery, deadlines will be short. Shippers will look to pre-book space earlier than they do now, and with a bigger proportion of no-shows quayside.
If this recovery runs into key buying periods such as back-to-school, Black Friday and Christmas, then shippers will be looking for the greatest flexibility in getting goods to consumer markets. At that time, trucking capacity issues could generate an opportunity for rail. Transit times and reliability will be paramount. Shippers could be prepared to pay for more reliable service.
Thus, the complexity of the risks associated, and this brief piece touches on but a few, could have a big threat to overall revenue but it also includes a number of opportunities for rail, provided we are ready to grab them when presented. To do this, a first step is to establish strong customer relationships with shippers for both intermodal and merchandise traffic. The latter will be impacted if the virus continues to spread within North America.
Companies will set up supply chain management teams to try and manage the risks and mitigate their impact. The railroads need to be part of those teams, so they are not caught by surprise while being able to offer additional value to their customers. It has been done before following major disruptions such as port strikes and weather related disruptions.