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Continued Shanghai lockdown poses a huge question for cargo backlog

The supply chain challenge lies in whether it is ready to cope with the likely upswing.
Continued Shanghai lockdown poses a huge question for cargo backlog
13 May 2022 •

The fast-evolving nature of China’s Covid-19 lockdowns is still preventing significant volumes of cargo reaching ports. And while backlogs will need to be cleared when logistics networks in China re-open, there are signs that demand from key import markets in North America and Europe is faltering.

Unlike the closure of the port of Yantian in 2021, which caused substantial disruption of ocean supply chains, lockdowns in China this year are mostly affecting hinterland operations rather than terminals which have remained open.

Beijing has issued strict orders that provincial-levels government should keep highways, harbors and other transport arteries open and must not erect roadblocks or put healthy truck drivers into quarantine. Even so, logistics networks and manufacturers continue to be affected by a chronic lack of labor, while trucking capacity shortages are stymying central efforts to get freight moving.

Cargo backlogs will need to be cleared

With cargo backlogs building in warehouses and factories, any relaxation of China’s zero-Covid-19 policy is expected to result in a brief uptick in trade as production resumes and logistics networks move into top gear.

“This is not like Yantian in 2021 and other shutdowns when terminals were closed to prevent the spread of Covid-19. While ports in China are open, strict Covid-19 measures are preventing truck drivers from delivering freight to terminals,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

Warehouses and factories are also facing labor shortages, which in turn leads to delays for exports. Manufacturers in China are finding it harder to receive materials and components sourced elsewhere in Asia, and vice versa. This has led to a slowdown in intra-Asia trade.

”With a backlog of cargo building up, demand is expected to return later in the year, or just as soon as freight flows resume,” added Leung. “But at what level is not yet clear.”

The availability of cargo in key ports in China including Shanghai continues to dampen spot shipping rates, particularly on the Asia-Europe trade lanes. Forward export bookings are reported to be 40 percent or more below expectations prompting carriers to consolidate loads and blank more sailings.

China lockdown contributing to macro-economic fallout

The macroeconomic fallout from lockdowns is also proving significant. The Caixin manufacturing PMI, which surveys SMEs located in eastern coastal regions, dipped further into contractionary territory in April, falling to 46.0 from 48.1 in March, due to coastal logistics disruptions including at Shanghai, Jiangsu and Fujian. This “significantly weighed on manufacturing activity and exports in those regions,” according to analyst firm Nomura.

The supplier’s delivery time sub-index of the official manufacturing PMI dropped to 37.2 in April from 46.5 in March, meaning it took much more time to deliver goods. Meanwhile, the new orders index dropped to 42.6 in April from 48.8 in March, and its new export orders sub-index fell to 41.6 in April from 47.2 in March.

Nomura’s leading index of Asia ex-Japan’s aggregate exports also plunged by 3.8 points in April, the largest drop since June 2020 at the height of the Covid-19 pandemic. The index is made up of eight forward-looking components and has a three-month lead time. Nomura said prolonged lockdown measures in China, related weaker import demand, and the ongoing Russia-Ukraine war risk were exacerbating global supply chain disruptions.

The analyst also said a decline in orders for North American semiconductor equipment could herald a downturn in the global tech cycle, while the April drop in the index “could also be a harbinger of cooling global aggregate demand, as a result of tightening monetary and fiscal policies and the cost-of-living crisis”.

DHL’s May Ocean Freight Market Update also noted that with inflation pressures building, Western Europe’s real GDP growth will likely slow from 5.6 percent in 2021 to 2.6 percent in 2022 and 1.7% in 2023.

Taking stock of the volatile situation

While global ocean reliability schedule has seen a marginal month-on-month improvement, standing at 35.9 percent,  levels still remain low for most carriers. This is -4.4 percent from the numbers in 2021. The lowest reliability was recorded on the Europe-Oceania trade, at 13.2 percent in March 2022 versus March 2021.

Vessel congestion in Los Angeles/Long Beach has subsided in recent months, although container dwell times still range between five and seven days due to rail infrastructure shortcomings, notes the Update.

However, as pressure has subsided on the West Coast, congestion on the East coast has been building as carriers shift capacity across. Indeed, Asia-US East Coast capacity is up 28.1 percent over the last year, compared to 20.5 percent on the Asia-US West Coast trade lane.

“Berth utilization remains high at all [East Coast] ports and congestion is expected to worsen again as soon as China suspends the Covid-19 restrictions,” said Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding.

The Update also notes that truck and especially chassis availability remain a concern, adding to the congestion of the intermodal system. Port omissions continue as carriers are aiming to compensate vessel delays caused by the congestion.

“Overall, with the lockdowns in Shanghai and situation in Ukraine, the months ahead are expected to be volatile and require careful monitoring,” added von Orelli.

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The fast-evolving nature of China’s Covid-19 lockdowns is still preventing significant volumes of cargo reaching ports. And while backlogs will need to be cleared when logistics networks in China re-open, there are signs that demand from key import markets in North America and Europe is faltering.

Unlike the closure of the port of Yantian in 2021, which caused substantial disruption of ocean supply chains, lockdowns in China this year are mostly affecting hinterland operations rather than terminals which have remained open.

Beijing has issued strict orders that provincial-levels government should keep highways, harbors and other transport arteries open and must not erect roadblocks or put healthy truck drivers into quarantine. Even so, logistics networks and manufacturers continue to be affected by a chronic lack of labor, while trucking capacity shortages are stymying central efforts to get freight moving.

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Cargo backlogs will need to be cleared

With cargo backlogs building in warehouses and factories, any relaxation of China’s zero-Covid-19 policy is expected to result in a brief uptick in trade as production resumes and logistics networks move into top gear.

“This is not like Yantian in 2021 and other shutdowns when terminals were closed to prevent the spread of Covid-19. While ports in China are open, strict Covid-19 measures are preventing truck drivers from delivering freight to terminals,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

Warehouses and factories are also facing labor shortages, which in turn leads to delays for exports. Manufacturers in China are finding it harder to receive materials and components sourced elsewhere in Asia, and vice versa. This has led to a slowdown in intra-Asia trade.

”With a backlog of cargo building up, demand is expected to return later in the year, or just as soon as freight flows resume,” added Leung. “But at what level is not yet clear.”

The availability of cargo in key ports in China including Shanghai continues to dampen spot shipping rates, particularly on the Asia-Europe trade lanes. Forward export bookings are reported to be 40 percent or more below expectations prompting carriers to consolidate loads and blank more sailings.

China lockdown contributing to macro-economic fallout

The macroeconomic fallout from lockdowns is also proving significant. The Caixin manufacturing PMI, which surveys SMEs located in eastern coastal regions, dipped further into contractionary territory in April, falling to 46.0 from 48.1 in March, due to coastal logistics disruptions including at Shanghai, Jiangsu and Fujian. This “significantly weighed on manufacturing activity and exports in those regions,” according to analyst firm Nomura.

The supplier’s delivery time sub-index of the official manufacturing PMI dropped to 37.2 in April from 46.5 in March, meaning it took much more time to deliver goods. Meanwhile, the new orders index dropped to 42.6 in April from 48.8 in March, and its new export orders sub-index fell to 41.6 in April from 47.2 in March.

Nomura’s leading index of Asia ex-Japan’s aggregate exports also plunged by 3.8 points in April, the largest drop since June 2020 at the height of the Covid-19 pandemic. The index is made up of eight forward-looking components and has a three-month lead time. Nomura said prolonged lockdown measures in China, related weaker import demand, and the ongoing Russia-Ukraine war risk were exacerbating global supply chain disruptions.

The analyst also said a decline in orders for North American semiconductor equipment could herald a downturn in the global tech cycle, while the April drop in the index “could also be a harbinger of cooling global aggregate demand, as a result of tightening monetary and fiscal policies and the cost-of-living crisis”.

DHL’s May Ocean Freight Market Update also noted that with inflation pressures building, Western Europe’s real GDP growth will likely slow from 5.6 percent in 2021 to 2.6 percent in 2022 and 1.7% in 2023.

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Ongoing container fleet growth is slow and will require more time to balance out capacity versus demand.

The pandemic-driven shift of U.S. consumption from services to products, and the resulting surges in trans-Pacific ocean container demand and freight rates, are sucking ships out of Asia and driving up the region’s manufacturing and supply chain costs, according to DHL’s February Ocean Freight Market Update and the latest insight from leading analysts.

This increase in capacity has left holes both outside and within the region. At the start of 2022, 43.7 percent of the global fleet was operating on the Asia-Europe and trans-Pacific lanes, up from 38.1 percent a year earlier.

But the hardest hit has been trade within Asia itself. Some 331,200 Twenty-foot Equivalent Unit (TEU) slots have been removed from intra-Asian services last year, representing a capacity reduction of 10.8 percent, according to online shipping database Alphaliner. That has caused spot rates in some parts of Asia to more than double year-on-year, with no sign of them abating.

Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific, said: “After two years of logistics shocks, these increases in intra-Asia rates are not the biggest hurdle supply chain managers have had to cope with. But they are adding to overall supply chain and production costs. We are hoping for some easing of the situation in the second half of this year.”

The shift in capacity to trans-Pacific routes was evident early in the pandemic. As U.S. consumers splurged on lifestyle products during Covid-19 lockdowns, freight rates on the trans-Pacific rose sharply from Q2 2020. Drawn by the demand and profits to be made, carriers began to divert large numbers of ships to the region.

This has left some regions severely short as most additional capacity was sucked into East-West shipping lanes at the expense of regional and Africa trades.

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What does this mean for Asia?

The effect of intra-Asia capacity withdrawals has been an increase in freight rates and manufacturing costs in Asia. According to ocean and air freight rate benchmarking platform Xeneta, spot rates from the main Chinese ports to the main Japanese and South Korean ports in 2021 averaged USD 1,400 (€1,222) per Forty Equipment Unit (FEU), up from USD 640 (€560) in 2020. In the first half of January they rose above USD 1,800 (€1,571) per FEU.

“Though the increases are smaller than on some other major head haul trades, the higher spot prices can still have a considerable impact,” said Peter Sand, Chief Analyst , Xeneta. “Considering that many of the goods on these intra-Asian trades are intermediate goods moving between factories in the region, doubling spot freight rates can often add considerable costs to the manufacturing process, forcing manufacturers to reconsider their manufacturing and supply chains across the region.”

Leung said that while the company was hoping for some easing of the situation in the second half of this year, “DHL continues to secure capacity in sufficient scale to meet customer needs on all trades but booking early is paramount.”

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Capacity gains and losses

The East-West capacity upgrades also came at the expense of liner offerings to and from Africa, where the combined capacity of ships trading between Asia, Europe, America and Africa fell by 6.4 percent to 1.68m TEU at the start of 2022.

Capacity deployed on the trans-Atlantic, and to and from the Middle East/Indian subcontinent, was relatively stable over the period while Latin America-related services saw an increase in capacity.

However, the intra-European trade proved to be another victim of the capacity shifts. “Some 48,200 TEU slots disappeared from intra-European services (- 4.5 percent),” noted Alphaliner. That capacity appeared to be heading to the Pacific.

“The ongoing capacity reduction was illustrated last month as the 974 TEU SPICA J left Europe for China. The SPICA J previously operated for many years as a typical feeder vessel in North Europe but left Rotterdam without any cargo mid-December for a voyage to Asia. The ship is currently loading Chinese export cargo in Taicang.”

Ongoing shifts from East to West

Although Asia-Europe trade saw a capacity increase of 10.2 percent last year, this was largely due to the delivery of 16,000-24,000 TEU, which replaced the smaller 13,000 TEU units, according to Alphaliner.

The loss of capacity on regional trades such as intra-Asia was primarily a result of vessels being transferred to the trans-Pacific lane, which remains the most profitable for carriers even though port congestion on both sides of the Pacific is at record highs.

Alphaliner estimates that January spot freight rates including premiums on the Shanghai-California lane corresponded to revenue for vessel operators of  USD 1.29 (€1.13) per nautical mile. On Asia-Europe trade, the figure was just USD 0.73 (€0.64) , up from USD 0.42 (€0.37) at the start of 2021.

“At the start of this year, 22 percent of the total container fleet was deployed between Asia and North America, up from 17.5 percent on 1 January 2021,” notes the Update. “Carriers added 1.30m TEU of capacity to this major East-West route over the course of last year.”

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Congestion black hole

Unlike in 2020, extra tonnage in 2021 was drawn into the trans-Pacific. The capacity increase, however, was needed to compensate for the huge efficiency loss as many ships faced long waiting times at anchorages, rather than to cope with a corresponding surge in cargo demand.

Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding, said: “Carriers are making logical decisions based on the charter costs they must pay, and the likely returns they can make when deploying those vessels. That equation points to the highly lucrative trans-Pacific trade, despite the port congestion many encounter there.”

This is highlighted by the container traffic situation at Los Angeles (10.70m TEU) and Long Beach (9.38m TEU), which increased by a more modest 13 percent and 15.7 percent, respectively, last year.

“It is important to note that this is not just about big container lines moving capacity, this is also much smaller operators and feeder companies that are re-diverting ships, and also big shippers which have been chartering their own vessels,” added von Orelli.

While port congestions will continue well into 2022, container production is on track to overtake demand growth. Equipment availability, however, will only see more apparent improvements from 2023.

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Taking stock of the volatile situation

While global ocean reliability schedule has seen a marginal month-on-month improvement, standing at 35.9 percent,  levels still remain low for most carriers. This is -4.4 percent from the numbers in 2021. The lowest reliability was recorded on the Europe-Oceania trade, at 13.2 percent in March 2022 versus March 2021.

Vessel congestion in Los Angeles/Long Beach has subsided in recent months, although container dwell times still range between five and seven days due to rail infrastructure shortcomings, notes the Update.

However, as pressure has subsided on the West Coast, congestion on the East coast has been building as carriers shift capacity across. Indeed, Asia-US East Coast capacity is up 28.1 percent over the last year, compared to 20.5 percent on the Asia-US West Coast trade lane.

“Berth utilization remains high at all [East Coast] ports and congestion is expected to worsen again as soon as China suspends the Covid-19 restrictions,” said Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding.

The Update also notes that truck and especially chassis availability remain a concern, adding to the congestion of the intermodal system. Port omissions continue as carriers are aiming to compensate vessel delays caused by the congestion.

“Overall, with the lockdowns in Shanghai and situation in Ukraine, the months ahead are expected to be volatile and require careful monitoring,” added von Orelli.

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Global factors, including further Covid-19 restrictions in China, will continue to put a damper on the supply chain.

In northern Europe, container traffic to and from Russian ports has fallen dramatically due to sanctions imposed on Russia.

Meanwhile, Ukraine’s Black Sea ports are closed, prompting cargo to be diverted to ports in Romania, Turkey, Greece and Italy.  The result is port congestion in the region, further complicated as operators and carriers seek to confirm how they should handle Russian shipments under the sanctions regime.

With Russian imports and exports left stranded on quays and in storage, or stuck on vessels, ocean carriers have been forced to re-organize schedules and restrict services to avoid vessel delays in the region.

“For our part, DHL no longer accepts cargo to and from Ukraine, Russia and Belarus. Meanwhile, many major ocean carriers have suspended their services to Russian ports,” said Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding.

Despite port congestions looming on the horizon, the ocean freight situation is less severe than its air counterpart, which has seen significantly longer transit times due to airspace closures.

“Contrary to the situation in airfreight, the impact on the ocean freight market due to the ongoing situation in Ukraine is largely limited to the European region,” added von Orelli.

The war in Ukraine, however, is only part of an evolving global situation. The ongoing Covid-19 pandemic is still very much disrupting the global supply chain, which is facing further restrictions outside of Europe.

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China affected by further Covid-19 restrictions

Port congestion is blighting container ship scheduling beyond northern Europe, with delays globally soaking up shipping capacity. In China, strict lockdowns and Covid-related absences from work continue to disrupt exports, factory output, warehouse and distribution centre operations, and trucking service availability.

“Even with ports formally open, the lack of terminal handling staff and the expected trucking delays could force carriers to skip numerous Pearl-River Delta calls or keep vessels waiting, thus causing major delays,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

The lockdown of Shanghai is also disrupting cargo flows and it is not clear at this stage how long the city’s terminals and transport network will try to operate under these conditions.

Port congestion and vessel delays persist

According to supply chain analyst firm Sea-Intelligence, some 13.7 percent of the global container fleet was “not available” in January due to port congestion and vessel delays. This figure is expected to improve between 11.7 percent to 11.8 percent in February when final datasets are available.

Sea Intelligence’s terminal congestion index saw a gradual improvement in February and March in the U.S. but the index remained at an elevated level. The analyst firm also notes that there has been no improvement in the past three months in terminal congestion in Europe, with no sign of improvement any time soon.

On the intermodal side, the level of congestion in North America is not as high as compared to Europe, suggesting that the problems for the latter are more heavily focused specifically on terminals rather than capacity.

Economic impact from further Covid-19 restrictions in China

The above events continue to impact the world’s economy significantly, especially for China and its exports. The latest DHL Ocean Freight Market Update notes that China’s economic growth is likely to fall short of the country’s 5.5 percent target for 2022. The forecast is revised to 5.1 percent, reflecting the impact of higher energy prices and slower growth in European export markets. Furthermore, new outbreaks of Covid-19 variants could dampen industrial activity and consumer spending this spring.

Analyst firm Nomura’s leading index of Asia ex-Japan’s (AEJ) aggregate exports, made up of eight forward-looking components with a three-month lead time, is now predicting a modest slowdown in total export growth from AEJ, although export growth of around 15 percent year-on-year is still expected between March to April 2022.

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Expecting a major rebound in demand

With the ongoing Covid-19 restrictions in China, and developing situation in Europe, demand for Asia Pacific to Europe is likely to soften for the next few weeks. This, however, will most likely see a major rebound.

As space in various regions remains tight, the prudent approach is to place a higher emphasis on advanced booking to secure space. “Customers are advised to stay ahead of the situation, and consider booking up to four weeks in advance in anticipation of a revival in demand,” added Leung.

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