Ash cloud disrupts Asia's links to global supply chain

HONG KONG (Reuters) - Airspace closures caused by a giant ash plume from an Icelandic volcano have disrupted high-end Asian exports and frozen air cargo services, posing formidable obstacles for manufacturers still eyeing recovery.

The ash has grounded planes across Europe and prevented flights from around the world landing there, stranding passengers and goods/

Some analysts say the disruption could cause worldwide losses for passenger airlines and cargo companies of as much as $3 billion.

In southern China’s Pearl River Delta, which churns out a third of the country’s exports, the virtual shutdown of Europe-bound air cargo from regional aviation hubs like Hong Kong’s international airport has begun to curtail the flow of goods to Europe.

The Hong Kong hub processes around 300,000 tons of air freight monthly.

“There’s a major disruption of the supply chain,” said Paul Tsui, vice chairman of the Hong Kong Association of Freight Forwarding and Logistics, a trade body representing logistics players like DHL, a unit of Germany’s Deutsche Post AG.

“Right now, there’s nothing we can do.”

Economists said losses at Asian exporters, critical for the region’s growth, may be small and short-lived, though that largely depended on how much longer the shroud of ash lingers.

As of Tuesday, the volcano in Iceland was still erupting, though the cloud was lower. Pending no fresh eruptions, flights from parts of Europe including Italy and France were set to resume on Tuesday. A handful of flights left Amsterdam and Frankfurt late on Monday.

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Across Asia, freight forwarding firms and exporters faced stalled delivery of goods typically transported by air, including mobile phones, high-tech consumer electronics, luxury fashion items and advanced Asian electronics components critical to production lines in Europe.

Diverting goods onto ships is not a viable alternative for many firms, given vastly longer transportation times.

Japan’s Fujitsu Ltd said its notebook PC shipments to Europe had been halted temporarily due to disruptions in European air traffic, though European inventory stocks were providing a buffer.

Japan’s No.3 automaker, Nissan Motor Co, said it would halt production for a day on three lines at two Japanese factories due to a parts shortage.

Taiwan’s biggest electronics parts maker, Hon Hai Precision Industry, said delays in receiving components had set back production by up to three days.

In South Korea, a trade association said the economic cost of lost exports was an estimated $112 million. Over 3,000 tons of air cargo are grounded at Seoul’s Incheon airport, one of the world’s top air cargo hubs.

Taiwan -- a key part of the global technology chain -- has so far reported around $6 million in losses from grounded cargo.

The losses are a fraction of last year’s total exports of $204 billion in Taiwan and more than $363 billion in Korea.

“Everything (is being) pushed back down the pipeline,” said Greg Knowler, editor of Cargonews Asia in Hong Kong.

“The forwarders are actually sending stuff back to the factories,” he said, adding that one German forwarder estimated it had 4,000 tons of goods backed up in Hong Kong, the equivalent of about 40 cargo planes.

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To meet orders, some freight forwarders are chartering flights at great cost to southern European airports like Barcelona, and then transporting goods by road to northern Europe, Knowler said.

Some computer manufacturers with operations in central China are considering sending goods across Russia to Europe by train if the disruptions persist for several weeks, said Kirk Yang, head of technology hardware research at Nomura in Hong Kong.

But not all firms said they were affected.

Big Japanese corporate names -- Sony Corp, Sharp Corp, Hitachi Ltd and Panasonic Corp -- said they saw no impact from the disruption.

For Singapore-based Flextronics, a Nasdaq-listed contract electronics manufacturer, the situation has been contained so far, said Jun Fu, the head of the firm’s sprawling manufacturing complex in southern China.

Taiwan’s AU Optronics, the world’s No.4 LCD panel maker, said shipments to its assembly plant in the Czech Republic are unaffected because they go by ship.

For now, two factors are shielding computer makers.

First, retailers and distributors typically hold two to three weeks of inventory.

Notebook and desktop PC makers also ship more products by sea than they used to. Yang said that five years ago nearly all computers were sent to Europe via air. That changed during the downturn. To save money, most manufacturers now put only 20 percent on airplanes and send the rest by boat.

“Hopefully this closure of airspace will be limited before the end of the week,” said Dennis Yau, director general of the Federation of Hong Kong industries.

He said Europe-bound air cargo demand would likely pick up substantially for the peak delivery period in May. “We see pressure on the European civil aviation authorities to take another look at the situation.”

When cargo flights resume, Asian manufacturers may accelerate output to make up for lost time.

“Airlines will have higher load factors for a while to pick up some of the lost ground because currently the goods are just waiting to be delivered,” said Frederic Neumann, an economist with HSBC.