Supply Chain Impacts of COVID-19 in Latin America

Supply Chain Impacts of COVID-19 in Latin America

Executive Summary

  • Latin America is emerging as the new epicenter of the COVID-19 virus, with more daily cases than the U.S. and Europe. As of June 25, Peru has 268,602 cases, with 8,761 deaths; Chile has 259,064 cases with 4,903 deaths; Colombia has 77,313 cases with 2,611 deaths; Ecuador has 53,156 cases with 4,343 deaths; and Argentina has 49,851 cases with 1,124 deaths.
  • This is particularly troubling, as the region has limited financial or governance capacity to offset the abrupt economic shocks that have already begun surfacing. The region is a critical source of raw materials and primary goods for global supply chains, reverberating the impact of the region’s ill-preparedness. As production output at mines continues to decrease, supply of raw materials is likely to diminish in the coming months. However, supply is expected to make a strong rebound when operations can return to normal. Though mining operations are gradually recovering, the losses from halted copper and lithium production across the region have been considerable. This is particularly relevant in Chile and Peru, which together experienced losses of some 325,000 metric tons of copper production, or about 1.7 percent of global annual output. Lithium production is expected to drop globally by 110,000 tons by the end of 2020, representing a loss of USD 960 million. 
  • Restrictions on movement, including curfews, border closures, and flight cancellations, remain in effect across the region. While cargo is generally exempt from movement restrictions, air, ocean, and ground freight have all been impacted due to staffing and equipment shortages, decreased global demand, enhanced sanitation protocols, and production halts. While regulatory impediments to cargo transport are unlikely to be considered, continued staff shortages and reduced capacity for logistics, manufacturing, and mining will decrease efficiency and increase delays.
  • Domestic and international flights are scheduled to resume, at varying intervals, over the next few months. Though, the region’s two largest passenger air carriers, LATAM and Avianca, have filed for bankruptcy due to prolonged flight restrictions from COVID-19. This decision came after the airlines experienced a 95 percent passenger reduction in May alone. It has lost over 80 percent of its consolidated revenue since the start of the pandemic. Though Ecuador had one of the region’s most strict restrictions on incoming flights, it has resumed 30 percent of air traffic on June 1. Despite the bankruptcy proceedings, 16 weekly domestic flights operated by Avianca Ecuador restarted on June 15; the first of the airline’s regional subsidiaries to do so.
  • Due to restrictions on commercial flights, cargo capacity has been significantly reduced. Air freight between Chile and Asia Pacific, Europe, and the Middle East has seen a 70-80 percent reduction. Between Colombia and the same regions, a 90-100 percent reduction has occurred. At the height of the outbreak in May, Quito International Airport experienced a 90 percent decline in passenger air traffic and, consequentially, a 65 percent decline in air exports.

Background

Before the COVID-19 pandemic, globalization was largely considered beneficial for the world economy. Now, it is responsible for the promulgation of the virus, causing immense difficulties in containing its spread. The interventionist measures implemented and enforced by countries around the world have had considerable economic impacts, most notably through disruptions to global supply chain operations. Different industries have experienced varying levels of disruption to business continuity. Regional disparities in preparedness have halted critical links in industry supply chains, which have obstructed entire end-to-end (E2E) operational capacities. 

Apart from the industrialized economies of Mexico and Brazil, Latin America is generally regarded as a strategic source of raw materials and primary goods for export to external manufacturers. Integrated sub-regional trading blocs have begun to effectively tackle longstanding logistics impediments due to poor distribution infrastructure. This has enhanced the reliability and as such, profitability, of supply chain operations in the region. Unfortunately, necessary lockdown measures to contain the spread of the virus have threatened to derail regional strides in distribution logistics. Regional medical standards have been unable to meet the health care demands of the pandemic. As such, ceasing business operations, including cargo transportation, has been a popular coping mechanism. Decreased global demand for commodities has also been a considerable contributor to the stagnant state of production across the region. This is because most countries in the region have supply chains that are reliant on a small range of commodity products – such as metals and energy in Chile and Colombia, respectively. 

In this report, Everstream Analytics looks at the ongoing supply chain impacts of COVID-19 in two sub regions of Latin America. First, the Southern Cone countries of Argentina and Chile. Next, the Andean countries of Colombia, Ecuador, and Peru. Understanding the commonalities and distinctions of the virus’ manifestation across the region will ultimately allow companies to react with more effective, localized solutions.

Southern Cone: Argentina and Chile

Lockdown Measures

On June 16, the Chilean government announced that the state of emergency, established on March 19, will be extended to September 14, with tightened national restrictions on movement to limit the spread of COVID-19. Chile is among the countries in the region with the highest number of daily cases relative to population size. As of June 24, Chile has reported a total of 259,064 COVID-19 cases, with 4,903 deaths, according to the country’s health ministry. Chile remains in Phase 4 of the outbreak, which indicates uncontrolled and widespread community transmission of the disease. 

A nationwide curfew is in effect from 10:00 pm to 5:00 am. In the capital Santiago, a total lockdown was announced, with residents only permitted to leave their homes twice per week. In addition, several communes and municipalities throughout the country have extended quarantine measures which limit the public from leaving their homes apart from accessing basic or essential services, such as medical attention. 

On June 23, three communes in the Antofagasta region were placed under full lockdown following an increase in COVID-19 cases. Antofagasta is one of Chile’s worst hit regions, with 246 new confirmed cases within 24 hours reported on June 21. The measures will be reinstated in the communes of Antofagasta and Mejillones after being lifted on May 27 and implemented for the first time in Tocopilla. Authorities have not yet specified the duration of the lockdown restrictions. 

As of June 24, Argentina has 49,851 confirmed cases, with 1,124 deaths. This has prompted officials to consider tightening quarantine measures that are set to expire on June 28. Enhanced restrictions will be implemented in the greater Buenos Aires area, where most new cases are being confirmed. Lockdown measures, including strict social distancing requirements, were initially introduced in the country on March 20. 

Logistics and Cargo Movement

In Chile, COVID-19 has impacted nearly all forms of cargo transportation and logistics planning. Air carriers have been the most impacted by the country’s lockdown measures and border closures.  Although the border closures apply to foreign travelers and not to cargo movement, the decrease in travel demand caused air carriers to reduce international operations, leading to limited cargo capacity. Strict and prolonged flight restrictions have caused LATAM and Avianca airlines to file for Chapter 11 bankruptcy protection, though there have not yet been any operational consequences during the time of restructuring. The overall operational status of airports, truckers, and customs remains stable. Air freight between Chile and Asia Pacific, Europe, and the Middle East has seen a 70-80 percent reduction in cargo capacity. Between Chile and the Americas, there has been a 40-50 percent reduction in cargo capacity due to restrictions on commercial flights.

There are currently no major restrictions on sea logistics operations. Chilean ports, terminals, and rail ramps are operating under relatively normal conditions, though productivity is noticeably lower due to decreased manpower. Delays and congestion continue in the terminals due to limited staff capacity, reduced working hours, and local quarantine measures. Although ocean freight capacity remains normal, shipping lines are reportedly taking two weeks, on average, to confirm bookings. Warehouses are also working with limited capacity due to decreased labor amid the nationwide social distancing and lockdown measures. 

In Argentina, land and air transportation have been significantly slowed. This has made it more difficult for essential workers to go to work, causing further disruptions. Argentine ports are operating with little disruption, but the cargo-gate-process is experiencing some delays due to port authorities prioritizing essential cargo such as food and pharma. Industry sources indicate that import and export cargoes are being delivered and loaded on usual schedules, but shipping lines are working with limited staff and with reduced hours of operation, which could cause delays for cargo release. Many Argentine terminals are also operating with limited capacity. 

In the air freight space, only cargo flights are authorized to operate while all international and commercial flights are banned until September 1. Flights into Argentina require special authorization, including technical stops and crew rest stops. Special allowance may be given for air ambulance flights and official flights. Restrictions are currently in place for flights from all countries and a temporary entry ban for all nonresident foreign nationals remains in place until further notice. LATAM Airlines Argentina has announced that the company will suspend both passenger and cargo operations in the country indefinitely, citing local industry conditions and the COVID-19 pandemic. 

Production Impacts

In Chile, mining operations have been permitted to continue during lockdown periods. However, the Chilean Copper Commission (Cochilco) announced that the country has suffered a 200,000-ton loss of copper production due to COVID-19. Cochilco officials credited the decrease in output to a reduction of personnel at mining sites and the suspension of several mining projects. Chile, the world’s leading copper producer, produced an estimated 5.6 million metric tons of copper in 2019, nearly 28 percent of the global production.

In addition to a decrease in copper output, Chile and Argentina have halted lithium development projects due to the COVID-19 quarantine measures. Lithium production is expected to drop globally by 110,000 tons by the end of 2020, representing a loss of USD 960 million (CLP 78 billion; EUR 851 million), according to Roskill consultancy. In Argentina, production is expected to drop 35 percent, and in Chile by 20 percent.Chile is the second-largest producer of lithium in the world, owning approximately 22 percent of the world’s lithium reserves. In 2019, Chile produced 16,000 tons of lithium from the country’s salt flats in the Atacama Desert.

Sociedad Química y Minera (SQM), a Chilean chemical company and a supplier of plant nutrients, iodine, lithium, and industrial chemicals, remains largely stable but the company said that falling demand for lithium could force it to adjust production and expansion plans for 2020. SQM decided to reduce its staff following the death of one of its employees who had contracted COVID-19. Albemarle, SQM’s main competitor and the world’s largest producer of battery components for electric cars, announced on June 17 that it planned to shut down its potash plant in San Pedro de Atacama for 15 business days to comply with government restrictions. The measure requires decreasing staff capacity by 10 percent, or 24 people, due to the rising COVID-19 infection rate in the country. Company officials said the decision would not affect its lithium production. 17 of the plant’s workers and contractors have been infected with the virus.

In Argentina, the mining sector has been exempted from quarantine measures since restrictions were first implemented in May, but low demand has slowed production. The major mining projects in the country are working at less than 50 percent capacity according to the Argentine Chamber of Mining. The Caucharí-Olaroz lithium project was halted in March due to delays in the delivery of equipment from China. The mine is now expected to start operating in 2021 rather than by the end of this year. Company officials said that they are evaluating the impact of COVID-19 on the development program, including discussions with all suppliers and freight brokers on the delivery schedule to develop mitigation strategies. Additionally, the French company Eramet decided to cancel its project to extract lithium in the Centenario-Ratones salt flat in the province of Salta. 

In March, Argentine authorities closed all automotive factories but have permitted the facilities to slowly restart operations under strict health and sanitation protocols. Only one shift is allowed per day and production is at one third of the installed capacity. Nissan Argentina resumed production at its plant in Córdoba where it manufactures the Frontier pickup truck, after almost three months of inactivity. Volkswagen also started the production at its plant in Córdoba. 

Andean Countries: Perú, Colombia, and Ecuador

Lockdown Measures

As of June 24, Peru has 268,602 confirmed COVID-19 cases, with 8,761 deaths. On March 14, Peru was one of the first Latin American countries to implement a strict nationwide lockdown. There was an exception for essential services, such as food, banking, and medicine. Despite this, the virus has been spreading rapidly throughout the country. Many people credit the lockdown’s relative failure to Peru’s social issues – over 50 percent of Peruvian households do not have a refrigerator, and the same percentage lacks access to online banking. Due to its inability to control the spread of the virus, Peru has extended its lockdown and state of emergency until the end of June. However, the measures are loosening, allowing some non-essential businesses to reopen. This will include businesses such as retail and salons, which will operate at reduced capacity and with strict sanitation and distancing mandates in place. The data suggests that Peru will be unsuccessful in entering into a recovery phase until August, at the earliest.

As of June 24, Colombia has 77,313 confirmed cases, with 2,611 deaths. On March 25, Colombia initiated a National Health Emergency and a strict nationwide lockdown that is now in its fifth extension, slated to remain in place until July 1. Restrictions on movement have already begun to ease in lesser impacted parts of the country, and some non-essential businesses, such as salons, museums, and libraries, are reopening with reduced hours, limited staff, and enhanced sanitation requirements. However, public transit between municipalities and domestic flights are still barred. Movement restrictions in Bogota remain strict, as the capital city is responsible for a considerable proportion of the country’s infections. The emergency declaration closed all overland, water, and air borders, and will not expire until September 1, at which point international arrivals will again be permitted to enter the country. 

As of June 24, Ecuador has 53,156 confirmed cases, with 4,343 deaths. Ecuador, one of the hardest hit Latin American countries by COVID-19, instituted a virus “state of exception” on March 16 and has since extended it to August 13. The restrictions include closed borders, a nighttime curfew, a mobilization of the armed forces, and a suspension of freedom to assemble. The port city of Guayaquil was once the worst impacted city in the country and the broader region. This is due, in large part, to the city’s disproportionate number of informal workers who had to break quarantine to survive. Guayaquil, like other parts of Ecuador, has since begun easing restrictions after the peak had seemingly passed. Though, it has maintained the curfew, imposed vehicle traffic limitations, and continued to ban incoming domestic and international flights. On June 4, the capital city Quito entered the second, “yellow” phase of partially eased lockdown measures. This included the resumption of public transportation and the reopening of shopping malls and some restaurants – all operating at reduced capacity, with mask wearing and distancing mandates. 

Logistics and Cargo Movement

In Peru, airports, ports, and customs are each operating with reduced manpower which is slowing processes down and decreasing efficiency. Airport cargo terminals are open, and air freighters are being operated. However, both incoming and outgoing passenger air travel is banned, leading to decreased cargo capacity. Between Peru and Europe, Asia Pacific, Middle East, and Americas, a 60-70 percent cargo capacity reduction has occurred because of passenger flight cancellations. Between Peru and the U.S., a 50-60 percent cargo capacity reduction has been recorded. Domestic passenger air travel is slated to resume on July 1, international passenger air travel on August 1. 

Though ports are experiencing slight container and equipment shortages, ocean freight is operating at otherwise normal capacity. Road freight through customs check points is experiencing some delays due to increased regional border protocols. This is being further constrained by driver and equipment shortages. 

In Colombia, air and ocean freight are also operating with decreased manpower but are not impacted by container and equipment shortages. Cargo capacity is severely limited by bans on incoming and outgoing air passenger travel. Between Colombia and Europe, Asia Pacific, and the Middle East, there has been a 90-100 percent cargo capacity reduction. Between Colombia and the U.S. and Americas, there has been a 30-50 percent cargo capacity reduction. Both domestic and international passenger air travel are slated to resume on September 1. Colombia has also experienced considerable disruption to road freight, both domestically and cross-border. There are significant restrictions in place on cargo movement between municipalities and regions. Apart from medical goods, road freight through borders has been delayed due to decreased capacity and increased regional border protocols. Between Colombia and Ecuador and Venezuela, ground freight is limited to food and essential goods. 

In Ecuador, all, including citizens and residents, were barred from entry on March 16th. Inbound international passenger flights were suspended, as were domestic passenger flights and inter-provincial ground travel. International air cargo transport was not limited by the restrictions on air travel, but suffered, nonetheless. Decreased global demand for export goods such as Ecuadorian flowers sharply declined, canceling many cargo flights. Others experienced delays due to reduced airport capacity. Quito International Airport experienced a 90 percent decline in passenger air traffic and a 65 percent decline in air exports at the height of the outbreak in May. As of June 1, 30 percent of air traffic has resumed. On June 15, 16 weekly domestic flights operated by Avianca Ecuador restarted; the first of the airline’s regional subsidiaries to do so. Avianca filed for Chapter 11 bankruptcy due to the unforeseeable impacts of COVID-19, losing over 80 percent of its consolidated revenue. It will resume operations amidst the bankruptcy proceedings. LATAM airlines and its affiliates in Ecuador, Peru, and Colombia, joined Avianca in filing for Chapter 11 bankruptcy in May. This came after a 95 percent reduction of passenger operations the same month. Together, the two airlines hold the largest share of air passenger travel in the region.

Puerto Bolivar and Puerto Guayaquil, the country’s two busiest cargo shipping ports, did not cease operations even at the peak of Guayaquil’s health deterioration. However, port staffing shortages and a lack of temperature-controlled reefer containers threatened the country’s export potential – most notably, of bananas. Food exports and medical equipment are considered essential in Ecuador. As such, food and medical logistics employees were given special permits to continue working at the ports. All other port employees were subject to the same lockdown measures as the rest of the population. Ecuador is the world’s biggest banana exporter, worth more to it than the oil industry. Though COVID-19 caused little disruption to banana production on plantations, logistical impediments, and the implementation of enhanced sanitation measures at ports resulted in shipment interruptions. 

Production Issues

Peru’s main exports are copper, gold, and zinc. Its state of emergency and nationwide lockdown led major mining companies like Freeport-McMoRan Inc. and Newmont Corp. to halt copper production in the country. Chile and Peru alone experienced losses of some 325,000 metric tons of copper production, or about 1.7 percent of global annual output. Chinese miner MMG Ltd temporarily restricted the transport of concentrates and critical supplies from Las Bambas, which accounts for a fifth of Peru’s entire copper output.

Colombia is a critical source of the USD 100 billion global coffee industry. COVID-19 led to major disruptions to coffee supply chain operations. Though the actual coffee production was not much impacted, the mechanisms for export were. Labor shortages and increased sanitation protocols in coffee bean processing have slowed the initial production cycle. Demand shortages caused by restaurant and café closures across Europe and the U.S. were exacerbated by the extra production costs seen throughout global supply chains. This includes the imbalance of equipment in the global shipping system and reduced port personnel in virus-affected countries. The cost of ocean freight transport of coffee has increased due to the delayed processing times in the coffee producing countries of hard-hit Latin America. The outbreak of COVID-19 also had a significant impact on eCommerce and the broader retail industry in Colombia. Essential purchases, such as groceries and medical supplies, increased by 29 percent in the first week of April alone, due, in large part, to public uncertainty about disruptions to delivery services. Ecuador experienced disruptions in both its coffee and mining industries. In late March, the country scaled back its gold and copper mining operations. The Fruta del Norte gold mine, operated by Canadian company Lundin Gold Inc., suspended its operations but maintained a limited workforce of 400, down from its normal 1,080 personnel. The Mirador copper mine, operated by Chinese consortium CRCC-Tongguan, reduced its workforce from 2,400 to 800 in a similar effort. It also prohibited all visitors but authorities and sanitation workers, suspended the transport of copper concentrate to ports, and increased on-site medical personnel. In the two months following, mining activity fell by 60 percent. As of late May, both large mines, as well as many smaller mines in the south, have restarted mineral transport under strict international security protocols. In Ecuador, coffee production and transport are suffering due not to labor issues, but to infrastructure. Labor issues in the Ecuadorian coffee industry have not been as bad as in Colombia, mostly due to the small hectare average – just 2.56 hectares compared to Colombia’s 3.5. In Ecuador, 41.7 percent of coffee producers cited road closures as the greatest threat to coffee export during COVID-19. Despite the disruptions, 72.9 percent of these respondents expected to lose only 10 percent or less of their crop.

Outlook and Recommendations

As Latin America emerges as the new epicenter of COVID-19, consistently reporting more daily cases than the U.S. and Europe, prolonged lockdown periods should be expected. While regulatory impediments to cargo transport are unlikely, continued staff shortages and reduced capacity for logistics, manufacturing, and mining will decrease efficiency and increase delays. As production output at copper mines continues to decrease, supply of raw materials is likely to diminish in the coming months. However, supply is expected to make a strong rebound when operations can return to normal. 

Companies with supply chain operations in Latin America are advised to consider the following recommendations:  

  • Stay abreast of regulatory developments at the national and local levels: Lockdown measures throughout the region vary, in large part, based on the number of cases on a city- or provincial-level. Federal and local governments can apply restrictions with little notice, as hotspots flare up in different areas. Supply chain managers are advised to monitor the latest developments and adjust plans to local conditions.  
  • Contact suppliers and verify details of their COVID-19 operating environment: Latin American suppliers may independently halt production or operate at reduced capacity due to labor shortages or localized lockdown measures. Companies are advised to have continuous discussion with all suppliers and logistics providers to predict and mitigate any supply shortages and disruptions to deliveries. 
  • Consider rail shipping as alternative modes of transportation: As Latin American governments continue to implement restrictions on air transport and general mobility, companies should anticipate capacity shortages in air freight and disruptions to ground transport. Therefore, supply chain managers are advised to consider rail shipping as alternative modes of cargo transport. 
  • Identify alternative suppliers: Given the unpredictable environment in which companies are currently operating, production halts, lockdown restrictions, supplier insolvency, and labor protests can occur at any given moment. It is therefore recommended that companies operating in the region identify alternative suppliers in the event of a network disruption.  

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