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Awaiting the “bull-whip”: all eyes are on post-lockdown demand

A rebound is expected, but uncertainty about the scale of pent-up export demand from China could be crucial for global supply chains in the coming weeks.
Awaiting the “bull-whip”: all eyes are on post-lockdown demand
15 June 2022 •

Across global freight markets, all eyes are firmly focused on China. For weeks, rolling lockdowns have impeded the flow of exports to key ports. Imports of sub-components to manufacturers from elsewhere in Asia have also been hit due to the lack of trucking options.

That has left the industry trying to measure the un-measurable: how much demand is backed up inside China, and what will be its impact once the lockdowns are eased?

Despite the lockdowns, the port of Shanghai remains operational, and export volumes to Europe have dropped because less cargo is being delivered to the terminals. Thus far, there has been minimal impact on the Asia-Europe front, according to DHL’s June Ocean Freight Market Update.

“But this is only a temporary scenario, and further uncertainty sets in once the lockdowns are lifted,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

Leung also noted that there has been an increase in imports that include manufacturing parts and raw materials into China in the past couple of weeks. “This may lead to an increase in exports from China in the next few weeks, which will see ports in Europe and the U.S. getting busier,” he added.

How big is the backlog?

This epicenter of this uncertainty is Shanghai, the world’s largest container port. Its shutdown has had a severe impact, both on its population and on world trade. Take port data, for example. China’s Transport Ministry claims that of the country’s leading container ports, only Shanghai saw a month-on-month decline in April, the first full month of a city-wide lockdown that led to the closure of factories and the suspension of most trucking services.

Transport Ministry figures show month-on-month volumes at Shanghai falling 19 percent, from 3.8 million TEU in March to 3.1 million TEU in April. By contrast, other leading container hubs, including Ningbo-Zhoushan, Shenzhen, Guangzhou, and Qingdao, all saw substantial double-digit month-on-month percentage increases. Container volumes at eight of China’s top ports rose 25 percent to 16.8 million TEU in April from 13.4 million TEU in March, according to the Journal of Commerce.

However, while the volume figures look relatively unscathed by lockdowns, the Purchasing Managers Index (PMI) and export growth forecasts are far more pessimistic about the impact lockdowns have had on trade. The May PMI of 49.6 is the third consecutive contraction since the February PMI of 50.2.

Key to everything is trying to estimate how much is still in China awaiting shipment. If only part of the 700,000 TEU deficit at Shanghai in April is backed up and ready for shipment (the rest having been shipped out of alternative ports such as Ningbo), that remains a substantial surge of cargo set to be uncorked if the city finally reopens after numerous previous false dawns.

Shanghai surprise

For its part, maritime research firm Drewry estimates that 260,000 TEU of Shanghai’s export cargo built up in April alone and is now ready for shipment. That is the equivalent of 26 fully loaded 10,000 TEU container ships.

The release of this volume, says the analyst, will make the peak season “even more chaotic”, adding more heat to global supply chains “already severely stressed and facing reduced capacity due to pervasive congestion”.

Drewry added: “The greatest uncertainty is when China’s lockdown restrictions will end, and the ‘bullwhip’ impact this will have across the supply chain. Liner shipping schedules will also take at least one rotation to normalize. This would mean that, even if lockdowns were to end today, the predictability and capacity of the container distribution system would be jeopardised during summer peak season.”

The jury is out

But not everyone agrees. Peter Sand, Xeneta chief analyst, believes some of the forecasts that a flood of cargo will soon be departing Shanghai and other Chinese ports are overstated.

“I have consistently put my money on very little pent-up demand in Shanghai,” he said.

Sand added that even though some container shipping indices had edged up in the final week of May, Xeneta had recorded that spot freight rates were still in retreat. He does not expect the opening up of Shanghai to have more than a limited impact on East-West trade lane spot freight rates.

He is also pessimistic about demand. “The markets have turned a corner. As demand weakens, and shippers prepare for disruptions such US West Coast dockworker negotiations well in advance, this downward trend continues,” he added.

Port uncertainty

While the focus largely remains on Shanghai, there are other issues. Another factor causing uncertainty in freight markets is delays and congestion at ports in northern Europe. According to DHL’s June Ocean Freight Market Update, container ships deployed on the Asia-North Europe trade currently need an average of 101 days to complete a full round voyage. This means they arrive on average 20 days late in China for their next round trip, forcing carriers to blank some sailings as there are no vessels available. The delays have further increased during recent months.

“The time needed to discharge at leading European ports remains high even though volumes out of China to Europe have fallen,” said Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding.

This is caused by a combination of factors including inland bottlenecks, and a lack of port and trucking labor. “It is likely congestion in Europe will worsen if exports from China do indeed strengthen in the weeks ahead. Considering these factors, advanced booking is more important than ever to counter the potential rebound from cargo backlog in China,” cautioned von Orelli.

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Across global freight markets, all eyes are firmly focused on China. For weeks, rolling lockdowns have impeded the flow of exports to key ports. Imports of sub-components to manufacturers from elsewhere in Asia have also been hit due to the lack of trucking options.

That has left the industry trying to measure the un-measurable: how much demand is backed up inside China, and what will be its impact once the lockdowns are eased?

Despite the lockdowns, the port of Shanghai remains operational, and export volumes to Europe have dropped because less cargo is being delivered to the terminals. Thus far, there has been minimal impact on the Asia-Europe front, according to DHL’s June Ocean Freight Market Update.

“But this is only a temporary scenario, and further uncertainty sets in once the lockdowns are lifted,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

Leung also noted that there has been an increase in imports that include manufacturing parts and raw materials into China in the past couple of weeks. “This may lead to an increase in exports from China in the next few weeks, which will see ports in Europe and the U.S. getting busier,” he added.

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How big is the backlog?

This epicenter of this uncertainty is Shanghai, the world’s largest container port. Its shutdown has had a severe impact, both on its population and on world trade. Take port data, for example. China’s Transport Ministry claims that of the country’s leading container ports, only Shanghai saw a month-on-month decline in April, the first full month of a city-wide lockdown that led to the closure of factories and the suspension of most trucking services.

Transport Ministry figures show month-on-month volumes at Shanghai falling 19 percent, from 3.8 million TEU in March to 3.1 million TEU in April. By contrast, other leading container hubs, including Ningbo-Zhoushan, Shenzhen, Guangzhou, and Qingdao, all saw substantial double-digit month-on-month percentage increases. Container volumes at eight of China’s top ports rose 25 percent to 16.8 million TEU in April from 13.4 million TEU in March, according to the Journal of Commerce.

However, while the volume figures look relatively unscathed by lockdowns, the Purchasing Managers Index (PMI) and export growth forecasts are far more pessimistic about the impact lockdowns have had on trade. The May PMI of 49.6 is the third consecutive contraction since the February PMI of 50.2.

Key to everything is trying to estimate how much is still in China awaiting shipment. If only part of the 700,000 TEU deficit at Shanghai in April is backed up and ready for shipment (the rest having been shipped out of alternative ports such as Ningbo), that remains a substantial surge of cargo set to be uncorked if the city finally reopens after numerous previous false dawns.

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The supply chain challenge lies in whether it is ready to cope with the likely upswing.

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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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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Shanghai surprise

For its part, maritime research firm Drewry estimates that 260,000 TEU of Shanghai’s export cargo built up in April alone and is now ready for shipment. That is the equivalent of 26 fully loaded 10,000 TEU container ships.

The release of this volume, says the analyst, will make the peak season “even more chaotic”, adding more heat to global supply chains “already severely stressed and facing reduced capacity due to pervasive congestion”.

Drewry added: “The greatest uncertainty is when China’s lockdown restrictions will end, and the ‘bullwhip’ impact this will have across the supply chain. Liner shipping schedules will also take at least one rotation to normalize. This would mean that, even if lockdowns were to end today, the predictability and capacity of the container distribution system would be jeopardised during summer peak season.”

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The jury is out

But not everyone agrees. Peter Sand, Xeneta chief analyst, believes some of the forecasts that a flood of cargo will soon be departing Shanghai and other Chinese ports are overstated.

“I have consistently put my money on very little pent-up demand in Shanghai,” he said.

Sand added that even though some container shipping indices had edged up in the final week of May, Xeneta had recorded that spot freight rates were still in retreat. He does not expect the opening up of Shanghai to have more than a limited impact on East-West trade lane spot freight rates.

He is also pessimistic about demand. “The markets have turned a corner. As demand weakens, and shippers prepare for disruptions such US West Coast dockworker negotiations well in advance, this downward trend continues,” he added.

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Other factors such as ongoing Covid-19 restrictions place a huge question mark over freight recovery and fears of yet another ‘false dawn’ for Asia.

Surging jet fuel prices are the latest disruptor to global air cargo markets, with surcharges more than doubling overall freight costs. The situation is particularly gloomy for Asia, which was usually vibrant in terms of outlook.

According to the International Air Transport Association (IATA), global jet fuel prices in mid-May were up 126.8 percent year-on-year, inflating the collective global fuel bill for airlines this year to a forecast USD$120.1 billion.

Rising costs are dampening the return of passenger capacity, according to the May DHL Air Freight Market Update, which notes that “high prices” for the fuel are a factor in the “already slow belly capacity recovery” and are a factor “adding to the high rates”.

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However, in Asia, it is Covid-19 travel restrictions in particular which continue to weigh most heavily on chances of a bounce-back in bellyhold options.

Willie Walsh, Director General of IATA, told delegates at the Changi Aviation Summit hosted in Singapore in May that while international travel in 2021 had shrunk to a quarter of that in 2019, the first quarter of this year had seen it climb to 48 percent, compared to the same quarter in 2019. But Asia is a different story.

“Indeed, in some parts of the world including Europe, North America, and Latin America, the recovery has reached around 60 percent,” Walsh said. “Regrettably, Asia continues to lag the recovery in 2021. International travel was only at seven percent of where we were in 2019. And although it’s improved to 17 percent in the first quarter of this year, there is still a long way to go.

“And to put it into context, international travel within this region, one of the biggest and most important international markets in the world, is only at 6 percent of where it was in 2019.”

Walsh went on to call for a change in Covid-19 policies that stymied trade and travel, particularly in China. As the heavy demand for shipping increases, border re-opening is essential to increase the much needed capacity.

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Lockdowns and travel restrictions related to Covid-19 were part of the reason why global air cargo capacity was 16 percent lower in May this year versus the same month in 2019, with bellyhold capacity still 21 percent below pre-Covid-19 levels, according to the latest DHL Update.

Month-on-month capacity levels are still fluctuating due to recent service disruptions, flight cancellations and re-routings, especially on many intra-Asia routes which were previously part-supported by seasonal or scheduled passenger flights.

Asia Pacific outbound flight cancellations are also still common, especially in China, while the closure of airspace due to war in Ukraine is adding to pressure on alternate trade lanes as cargo is re-routed.

“Essentially, capacity and demand are out of sync. Even though demand growth has softened and factory closures and/or truck bans are stopping lots of cargo reaching airports and ports, we are still in a capacity constrained environment,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

The upshot of this capacity crunch and rising fuel costs is that even as economic forecasts are downgraded and stock markets tumble on a cocktail of fiscal policy tightening, food insecurity, war in Europe and inflation, air cargo prices have remained at historically high levels on many key lanes.

“Easing demand pressure has allowed for some measure of debottlenecking and some anecdotal reports of air-to-ocean conversion,” said a report for the Baltic Exchange by Bruce Chan, Director & Senior Analyst, Global Logistics & Future Mobility Equity Research at Stifel.

“However, there have been few signs of respite in global air cargo prices, which remains elevated relative to 2021 on Asia-origin lanes.”

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On Asia-to-Europe lanes, rates in April from Hong Kong and from Shanghai were still 30 percent and 70 percent higher, respectively, than the same period in 2021, according to Chan. This is relatively higher compared with rates to North America, which rose 13 percent and 27 percent year-on-year, respectively.

All eyes are currently on when and how China might lift lockdowns. In May, more than 40 Chinese cities and over 300 million people were subject to strict Covid-19 shutdowns, according to Nomura, and most economic indicators for China have tumbled.

Analysts have been comparing China’s re-opening to taking a cork out of a bottle of freight. “We are hearing more positive messages on Chinese policy and we are hopeful that we will see some of these backlogs starting to be cleared and a return to more normal operations out of Asia in June and July,” said Leung.

But it is a volatile market at the moment and hopes of a potential rush of cargo, both inbound to factories desperate for sub-components, and exports still sitting in storage, are in place.

“However, we have found more than one false dawn during these extraordinary times, so any optimism is tempered by the possibility that more Covid-19 outbreaks could lead to a further tightening of policy,” cautioned Leung.

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Port uncertainty

While the focus largely remains on Shanghai, there are other issues. Another factor causing uncertainty in freight markets is delays and congestion at ports in northern Europe. According to DHL’s June Ocean Freight Market Update, container ships deployed on the Asia-North Europe trade currently need an average of 101 days to complete a full round voyage. This means they arrive on average 20 days late in China for their next round trip, forcing carriers to blank some sailings as there are no vessels available. The delays have further increased during recent months.

“The time needed to discharge at leading European ports remains high even though volumes out of China to Europe have fallen,” said Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding.

This is caused by a combination of factors including inland bottlenecks, and a lack of port and trucking labor. “It is likely congestion in Europe will worsen if exports from China do indeed strengthen in the weeks ahead. Considering these factors, advanced booking is more important than ever to counter the potential rebound from cargo backlog in China,” cautioned von Orelli.

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