Trade

Coronavirus impact stalls imported beef supply chain in China

Jon Condon, February 11, 2020

AS THE impact of coronavirus continues to spread across China, trade in imported meat and other commodities is coming under increasing pressure.

The spread of infection continues exponentially across the country, with more than 43,000 cases now reported, and deaths now well past 1000.

The virus and the response delivered by the Chinese Government is disrupting trade, production and supply chains as well as having a significant impact on out-of-home food consumption, with the closure of many food service outlets.

Travel restrictions are still expected to keep tens of thousands of workers in their homes even after the extension of the Lunar New Year holiday period by the government ended yesterday.

Some Chinese ports are said to have ground to a virtual standstill this past week, as workers are being told to stay at home to avoid spread of infection.

Shipping industry reports this week suggest backlogs are greater in some ports than others, with Tianjin, Shanghai and Ningbo the worst affected. Multiple terminals and ports in China are waiving storage fees, which would be the equivalent of demurrage charges, sources say.

Refrigerated containers are being discharged in China but few importers are picking them up, with the result that some terminals are running out of reefer plugs to power the refrigeration units. Shanghai and Xingang ports have reported 100 percent utilisation of available reefer plugs.

Impact bigger than SARS

Regardless of when coronavirus is contained, it will almost certainly have a larger impact on food and beverage industries than the global SARS (Severe Acute Respiratory Syndrome) epidemic in 2003, Australian-based head of Rabobank Food & Agribusiness Research, Tim Hunt said in a report issued this morning.

Mr Hunt said coronavirus had already spread more widely than SARS, but it was Australia’s “much larger exposure to China” that is the biggest difference between current events and SARS.

Back in 2002, just before the SARS crisis, Australia sent eight percent of its ag exports to China, he said, And this was largely in the form of fibre to be processed for re-export.

Fast forward to 2020, and Australia sends around 28pc of its food and agricultural exports to China, much of which is consumed within China itself.

“Add to that, the stronger links that have been developed between Australia and China in terms of exports, tourism, education and investment, we have a very different environment in which we might see the potential impacts of coronavirus this time compared to SARS in 2003,” Mr Hunt said.

There were likely to be both first and second-round impacts of coronavirus on the Australian agricultural sector, he said, with the first round already being felt by any food and ag business relying heavily on the food service channel in China, particularly perishable goods like red meat.

“Chilled meat shipments for food service are also a risk category given a lot of restaurants are closed at the moment.”

While Chinese consumption of meat, dairy and grains is unlikely to fall in the short-term, Mr Hunt said if the virus continued for many months to come, second-round impacts likely to hit Australia’s food and fibre industries, would come into play.

“Hopefully we won’t get to ‘round two’,” he said. “But if we do, incomes may fall in China and we may eventually see less growth in sales of premium food and beverages as that wealth effect starts to kick in.”

“And this may start to go beyond just food service sales and logistical disruptions to potentially impacting consumption in general of meat, dairy, grains and seafood.”

That said, in the event coronavirus has second-round effects, the currency exchange rate would act as an important stabiliser for Australian agricultural exporters, Mr Hunt said, with the Australian dollar likely to depreciate significantly as the market responded to slowing economic growth and rising risk concerns.

This would “somewhat offset” any fall in global commodity prices when expressed in local currency terms.

Going forward, Mr Hunt said it will be important to closely monitor developments, including this week’s return to work in China after the extended New Year holiday and how the Chinese government continues to manage the outbreak including restrictions on the food service sector.

“But the most important development will be when we see a slowdown in the rate of infection. SARS took around three and a half months for the infection to start slowing, but after that, it didn’t take long for infections to cap a few weeks later.”

“While we have no idea how this virus will behave compared to SARS, there won’t be any easing of restrictions until it does.”

How has imported beef demand been affected?

Independent Australian analyst Simon Quilty last week looked at how imported beef demand has been impacted in China so far.

Simon Quilty

“Australian beef exporters I have spoken to are saying that food service demand is poor and is down in regions by 50-80pc, as customers are not going out and are staying at home to eat,” he said.

“The Hotel, Restaurant and Institutional sector is also struggling, as travel plans and flights are being cancelled across not only China but also Asia.

Conversely, China retail demand had been outstanding in the previous ten days and product movement had been excellent, Mr Quilty said last week – so much so it had made up for the lost demand in food service. The only exception to this was loin cuts, which were very specific to food service, where demand remained sluggish.

On-line platforms in China have been booming also in the last fortnight, with more and more citizens requesting home-delivery of most food items to avoid contamination.

“There has been a notable slowdown in delivery times for beef items, however. Before coronavirus deliveries were same-day, but now there is a six-day minimum wait to get purchases delivered and in most instances many beef items on-line have been sold out,” he said.

“I am told availability of meat products in supermarkets is ample in most big cities, but this, is because people are not going out and instead having food delivered to their homes.”

Mr Quilty said the jury was still out on whether imported commodity beef such as cow cuts and trims would be affected by a slow-down in food service. Several market participants felt that demand for cow cuts would remain strong due to the majority of commodity style frozen beef ending up in China’s manufacturing sector, and is value-added products like meat balls, burgers and prepared frozen traditional style meals.

These manufacturing meat products tend to play a role in both the retail and food service sectors and so many exporters felt that the impact on commodity cow beef items might be minimal, as they flow across different food sectors where they are most needed.

Most contacts, however, agreed that the current frozen cow cut/trim inventories within China were large, and that it might take several weeks for this product flow to recommence as manufacturers work through this inventory, Mr Quilty said.

Road blocks are causing issues in regional areas

The situation in regional China was very different, particularly around Hubei and Hanan provinces where roadblocks and transport restrictions were in place, preventing feedgrains and rations getting onto farms for hogs and chickens to eat – leading to reports of starving animals and serious feed shortages at finishing barns.

The Chinese New Year slow-down through China’s ports seemed to have impacted different beef and sheepmeat exporters in different ways, Mr Quilty said.

Australian chilled beef exporters he spoke to last week had had no problems with product clearances at arrival with three days to clear being the norm throughout the CNY period.

The congestion of Chinese ports seemed to vary from port to port and in many situations from supplier to supplier depending on their export track record including labelling, product quality and the expertise of the importer they deal with.

“During CNY the slowdowns were due to lack of government personnel at ports which impacted inspections, lack of manpower for stevedores and terminal transit was shut down by many local governments. The presence of coronavirus added another layer of complexity to this problem with many workers encouraged to stay away from what was already a tight labour situation due to CNY,” he said.

Some reports last week suggested several shipping lines were looking to redirect vessels away from China to South Korea where they could hold cargo in transhipment to ease the pressure on the China ports for the time being.

“Other shipping lines are saying its business as usual. It can only be assumed that certain ports are more congested than others and depending on what vessels go where will determine if redirection is necessary – but there has been no official communication on this yet,” Mr Quilty said.

Preventative action taken by Australian and NZ exporters

In the last week, many beef and sheepmeat exporters in both Australia and New Zealand had adopted similar preventative steps to minimise the oversupply problem in China in the hope to create some breathing space to help China’s market to recover.

Some of these steps included:

  • Chinese buyers asking exporters to push back shipments to late February and early March
  • Packers have looked to sell their product away to alternate markets
  • Packers are holding product in outside cold storages in both Australia and New Zealand.

“The recent rain in Australia had slowed beef production down, so the pressure to ship meat has been removed in the short-term. Should the rain continue then this ability to ‘hold back’ product will be made even easier,” Mr Quilty said.

In areas where rain has not been abundant, some packers in both NZ and Australia had slowed production down deliberately to take the pressure off from shipping to China.

One of the key underlying concerns was credit, Mr Quilty said, with some exporters still nervously waiting for payments on product that has arrived in China, while others spoke of deposits now starting to flow into their bank accounts after the CNY holiday period.

Many packers reiterated the need to be vigilant on payments and watching closely their creditors’ lists.

“It would be fair to say that I did not sense any degree of panic from Australian and NZ exporters, but a genuine belief that if they work closely with their Chinese customers that these issues will be fixed within weeks and not within months,” he said.

Earlier this month, Reuters reported that China’s commerce ministry had urged importers in China to actively expand meat imports to stabilise domestic supply amid the coronavirus outbreak.

Preliminary data released had mid-January pork and beef imports at 310,000 tonnes and was expected to reach 640,000t by month’s end, which would be a 190pc increase on January last year.

Conclusion

“The challenges of coronavirus, bird flu and food shortages in China will inevitably see a fall in protein consumption if this virus continues. The challenge is understanding which sectors are impacted the most, and which are not by these market disruptions.

“But the fundamentals within China have not changed, namely that there is a severe protein shortage.”

Beef and sheepmeat have played an important role as a replacement for domestic pork and should coronavirus remain a threat, it could see a structural market change that will happen quickly, as online buying becomes a significant part of the market. The challenge for global exporters is to be part of this online growth, as China’s wet markets could well struggle to be part of this changing landscape.

“The adjustments that Australian and New Zealand exporters are making to manage their current exports to China and the desire by the Chinese government to continue its ever expanding import program points to me that these problems will be fixed in weeks and not months.

China halves tariffs on $75 billion worth of US goods

Meanwhile China announced last week that it will halve additional tariffs on $75 billion worth of US imports. The reduction affects US goods that China imposed extra tariffs on last September, including pork and beef, as part of the trade war with the US.

Starting later this week (February 14), China will cut the additional 10pc tariff rate it enacted back then on some US goods to 5pc. For most US pork cuts entering China, this will lower the total tariff rate from 68pc to 63pc, and from 47pc to 42pc for most US beef.

US National Economic Council director Larry Kudlow said the expected increase in purchases of US agricultural products according to Phase One of the recently-signed US-China trade deal would now be delayed.

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