How the current pandemic is affecting global trade and what you need to think about
We asked our friend and Senior Adviser to Treyd, Anders Malm, what the effects are from the pandemic on the global trade, right now and in the future. Here is his thoughts.
The current pandemic that we are going through has a major impact on our societies. Not only is it leading to emotional and physical suffering and large numbers of deaths, we are also seeing social, cultural, political and financial consequences.
I would like to share with you my thoughts on the financial aspects, from a global trade perspective, and offer some advice on what you need to think about as we gradually start opening businesses and countries again.
Many years of experience in global purchasing and supply chain have given me a very valuable wide network. During this extraordinary time we have been updating each other on developments and sharing reflections on a weekly basis. I would like to share a brief summary of the reconnaissance we are seeing now at the end of May.
Short perspective during the start-up phase:
Production Much of global production has been closed during the first months of the pandemic, which has affected global supply chains. It has become clear how global and sensitive our supply chains really are today. We are now seeing increased activity in China that is back at the same levels as one year ago. In Europe, planning for the start-up of several activities is underway, but there is still some time to go before production levels are back to the levels that we saw before the crisis. In the United States, the picture is fragmented and different states have different timetables for what a start-up looks like. Some reconnaissance suggests that Europe and the United States will be back at pre-pandemic levels after the summer.
As production in China is already up and running at high levels, these products will reach Europe during the summer, since much of the transport is now taking place on ships with longer transport times.
Transport Global transport systems have been heavily affected by the rapid change in trade. At the beginning of the pandemic, transport activity fell dramatically as production stopped globally. Sea and land freight prices fell sharply as a consequence.
Air freight has been hit particularly hard as a large part of the world's aircraft fleet is now on the ground. Passenger traffic accounts for a large part of global air freight, which now means that there is a huge lack of capacity for air freight. This has led to very high air freight prices with increases in cost of up to 500-700%.
Road transport has been affected by countries closing borders with long queues and delays as a result. This is however perceived as manageable, even if delays affect customers negatively.
Sea freight has had a large oversupply of capacity, which has put pressure on prices and profitability for shipping companies. Transportation volumes from Asia are now starting to pick up rapidly, but transport costs are expected to remain low due to the imbalance in trade flows. The shipping industry also benefits from lower energy costs as bunker fuel is now at very low levels.
Energy The sharp and fast drop in energy demand has hit energy companies very hard and there have been major falls in oil prices on the world market. Above all, this is driven by historically low demand, while OPEC+ has difficulty agreeing on production cuts. This is driven by the fact that several countries' economies have a large dependence on income from oil and when both price and volume fold, it has a double negative effect.
From a global trade perspective, however, it is positive when energy prices decrease. The cost of production and logistics is declining, which benefits global growth in the short and medium term.
Financing One of the major current challenges for companies is liquidity and financing of the business. Many countries are continuously launching major crisis packages to stimulate economies and reduce unemployment. For smaller companies, liquidity challenges are hitting very hard and many of these businesses are fighting for survival. In addition to countries' crisis packages, I believe that creating flexibility in liquidity flows is crucial. Combinations of bank loans, reduced amortization, longer credit periods for invoices and other financing tools are needed to bridge the next 9-12 months. The uncertainty regarding the different start-up phases in different countries is making inventories grow and locking working capital.
Part of what is needed to mitigate this and to manage operational cash flow, is to look into flexible financing of purchases and products during transport. This will enable more flexibility and cash flow during the ramp up period and beyond.
The long-term impact is very difficult to predict, but a few key insights and advice worth mentioning are these
Several companies and countries will review the sensitivity of their global supply chains. Critical products such as food, medicine, hygiene products and energy will certainly be closer to the final market in terms of production or inventory
Global trade will continue to be important and much will return to what the patterns looked like in the past.
Transport systems globally will return to more normal patterns, but air freight will most likely continue to be at much higher costs in the coming 24-36 months when air travel will decrease from earlier levels.
Energy prices will be at low levels in the coming 9-12 months but then we can see a sharp increase in 18-24 months as supply and investment in new energy production declined