OMGT2321 – Global Trade Operation

EXECUTIVE SUMMARY

COVID-19 has severely disrupted the lives of millions of people, both from a public health crisis perspective and a economic one. As countries close borders and restrict travelling, logistics and transportation services suffer. The virus’ origin in China, the world’s manufacturing hub, causes supply chains to be heavily disrupted. China’s congested cargo ports and suspended freight routes hampers importing and exporting activities globally. Air freight capacity reduces significantly, causing rates to surge. Ocean freights slow with lower demand and more blank sailings while land transport is strained with more demand but fewer workers. For Australia, the impact is considerable due to its long-run economic integration with China. This paper investigates and analyzes some of the sectors in Australia that are affected by this logistics disruption. It also presents three recommendations to mitigate the situation in Australia, including utilization of passenger aircrafts to deliver cargo, digitalization for optimization, and supply chain diversification.

INTRODUCTION

Ever since the wake of the global pandemic caused by the novel coronavirus, COVID-19, there have been almost 40 million cases and more than 1 million deaths globally (World Health Organization 2020). COVID-19 has wreaked havoc not only on the public health sector but also the global economy. International trade is faced with multiple obstacles with supply chains around the world heavily disrupted. As countries move to restrict travelling and suspend businesses to contain the spread of the virus, transportation and logistics industry suffer across air, sea, and freight sectors. Statista (Mazareanu 2020) estimates that the global logistics industry shrinks by 6.1 percent in gross value with the aviation industry hit the hardest.

In Australia, the virus has infected more than 23,000 and killed more than 900 (Australian Government Department of Health 2020). Its economy also takes losses. PwC (2020) has estimated that Australia’s GDP will contract by 1.32% due to the pandemic. Output loss is likely to be more than $160 million, with living standards falling, high employment rate, and record budget deficit (Edwards 2020).  The economic impact of COVID-19 in Australia, however, is still expected to be less severe than other developed nations. Australia’s exports rely on East Asia, especially China, which is its biggest buyer and trading partner (Edwards 2020). But China was the first to feel the impact of the pandemic in hampering the movements of goods, which then created a ripple effect that plagues global markets including Australia. The congestion at China’s ports heavily disrupted the movements of goods (Donaldson 2020). As the virus continues to spread throughout the world, logistics and transportation companies are faced with overcoming border closures and limited travelling. As Agility (2020) identifies, capacity, fluctuating demands, supply chain disruptions, and geographical risks become challenges that need to be overcome within the logistics sector during the age of COVID-19.

BACKGROUND

Before the COVID-19 pandemic, the logistics industry was expected to experience major progress due to the rapid technological development, new customer expectations, and shifting competition (PwC 2019). For the purpose of this paper, the logistics industry is defined to include logistics service providers (LSP) and courier/express/parcel (CEP) companies (PwC 2019). Market segments for this industry involves business-to-business (B2B) and business-to-customers (B2C). The players in logistics and transportation have a vital role in facilitating international trade and global supply chains as they provide “multi-modal transportation, freight forwarding, warehousing, and inventory management” services (International Finance Corporation 2020, p. 1). The onset of COVID-19 in China, the world’s major manufacturing hub, has put the flow of goods on hold as the country’s container ports experienced backlogs, a lack of truck drivers for delivery, and sails cancellations without prior notice (Resilience 360 2020). Even though by March 2020, the situation has improved, and workers are gradually allowed to return to work, a full recovery requires more time. The suspension of businesses in China creates a ripple effect that negatively impacts other markets that are typically its trade partners (International Finance Corporation 2020). As the virus spreads to the rest of the world, border closures and travelling restrictions create obstacles to the movement of goods. IFC (2020) reports that freight capacity in all three segments – air, land, and sea, have been affected, with air freight hit the hardest at a 19-percent decrease in volumes in March 2020. While the demand for ocean freight was weak during the beginning of 2020, there was additional demand for land transport due to the needs of essential goods for areas under lockdown, but reduced labor put a strain on capacity. Higher freight rates were also observed in logistics companies due to the mismatch between demand and supply. These are hurdles created by the pandemic that governments and companies need to mitigate not to further hurt their supply chains and international trade activities.

EFFECTS ON AUSTRALIA TRADE

Logistics disruption due to COVID-19 outbreak has become an obstacle to Australia’s trade activities. Agility (2020) reports that air freight capacity between Australia and other continents are significantly constrained at 80-90 percent Tradelane capacity reduction due to passenger flight cancellations (with the exception of China, which is at 70-80 percent). Freighter cancellations result in a 40-50 percent capacity reduction for air freights. Regarding ocean freight, capacity is constrained for trade with all other regions. Ports also experience slight shortages of container or equipment. The fact that China accounts for a third of Australia’s exports also makes it difficult for Australia to distance itself from the impact of the virus on China’s backlogged ports and travel restrictions. According to Edwards (2020), “Australia is meshed with China’s economy not only because China is the market for more than a third of Australian exports, but also because it is the major trading partner for Australia’s other markets in East Asia.” Australia is economically integrated into the East Asia region with China being their biggest buyer, selling them from iron ore and coal to wine, dairy, and meat products (Edwards, 2020). Ibisworld (2020), in a recent report, notes that logistic disruption affects sectors that are highly impacted by the virus, including textile manufacturing, petroleum and coal product manufacturing, and basic material wholesaling. All three sectors rely on trading either with China or other countries in Asia for imports and exports. As delivery of goods is limited, many manufacturers cannot receive raw materials from Asia and vice versa.

To further evaluate the impact of logistics disruption on Australia’s trade, this paper investigates one specific sector: agriculture, forestry and fisheries. In this sector, access to air freights and freight rates are critical in determining the gross value of production (Greenville et al. 2020). Due to COVID-19, international travel bans have caused a mismatch between demand and supply. As the majority of airfreighted exports are via passenger aircrafts, most of which are cancelled due to border closure, supply is sharply reduced, causing demand to be unmet. For this industry, sea freight costs have not increased, however, availability is a concern as well as restrictions on seaports.

In response to these challenges, the Australian Government (2020) has been supporting businesses with more than $300 million in the International Freight Assistance Mechanism to keep international freight routs and flights in operation. The good news is that China’s economy is recovering, as their workers are returning and quarantine periods ending. Port congestion has reduced but is still affecting the arrivals of shipments. Australia should expect to see further recovery from its biggest trading partner but a full recovery to pre-COVID state is still out of the question.

RECOMMENDATION

Considering all the challenges posed by logistics disruption due to the pandemic, this paper presents some recommendations, both short-term and long-term, for Australia to mitigate the impact of this global crisis on its trade.

Changing passenger aircraft to carry more cargo. The ban on passenger flights on multiple routes across the world greatly reduces air freight capacity. The supply constraint means that rates surge while demand is abundant. To tackle this issue, some countries have resort to using their idled passenger aircraft to deliver essential goods to critical locations internationally (Anjumohan 2020). As Australia’s air freight sector suffers from capacity problems, this is a viable solution. Depending on the impact of reduced air freight capacity on different industries, Australia can utilize their empty passenger jets to resolve the problem of constrained supply of transportation to facilitate the movement of goods.

Digitalization for optimization. COVID-19 has tested the resilience of the global supply chains. For logistics companies, flexibility, visibility, and contingency planning are now essential to mitigate the impact of the disruption caused by the pandemic. The delays in maritime and air freights require companies to be transparent to their customers and communicate with actual data. Therefore, companies should invest into their digital capabilities to optimize their delivery routes as well as create what-if scenarios to prepare themselves for externally induced changes to their operations. Strong digital logistics allows for better cargo tracking and constant feedbacks to both the service providers and customers. According to Bain & Company, better analytics can increase accuracy in forecasting by 20 to 60 percent. In times of great uncertainty, it is important that companies can keep a close track of what could happen.

Rethinking the supply chains. Australia’s reliance on trade with China and other Asian nations could pose as a vulnerability in its global supply chains. This vulnerability has been exposed during this global health crisis, as much of Australia’s exports and imports is stagnant due to the congestion in Chinese ports and logistical operation. Therefore, Australia needs to consider diversifying the players in its supply chains to mitigate the risk. This is more a long-term solution than a short-term one as China is evidently a major buyer of much of Australia’s goods, making the shift away from them more difficult. Another obstacle to hamper this shift is that other countries that are major trading partners with Australia, such as Korea, Japan, Taiwan, or Singapore, also have a close-knit trading relationship with China.

CONCLUSION

The COVID-19 pandemic is not only a public health crisis but also an economic one. International trade is significantly affected as many logistics and transportation services are halted. The suspension of logistics services in China has created a ripple effect that spreads throughout the world, derailing the flows of goods and disrupting global supply chains. All three sectors of transportation, air, maritime, and land, is affected in one way or another: capacity drops sharply, cargo ports are congested, flight routes and sails are cancelled. For Australia, much of the challenge comes from the suspended operation in China, the biggest player in Australia’s supply chain. Australia is unable to sell its natural resources and agricultural products in its biggest markets in Asia nor buy raw materials for its manufacturing activities. Even though the situation in China is gradually recovering, a full return to pre-pandemic operations is still unlikely.

This paper recommends three solutions to tackle the challenge of logistic disruption for Australia. As air freight capacity shortage is a serious problem, Australia can utilize its idled passenger aircraft to carry cargo to mitigate the shortage of supply of air transportation service. Contingency planning, visibility, and flexibility in route-mapping can be improved with technological integration. Companies can optimize their operations to better support customers and be more prepared for operational changes. In the longer term, Australia should consider diversify their supply chains away from China and the Asia regions to reduce supply chain risk.