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Rising export levels inspire cautious optimism

Despite continuing risks, there are some positive signs for ocean shipping stakeholders.
DHL Ocean Freight Market Update Dec 2021
22 December 2021 •

While the supply chain situation is still far from pre-Covid-19 days, constraints are easing in parts. This is because some Asian economies, which remain critical to the supply-side element of global supply chains, have been reopening after strict Covid-19 lockdowns have been lifted.

DHL’s December Ocean Freight Market Update notes that Asia Pacific economies are rebounding from third-quarter setbacks as factories re-open. With the Delta variant wave of Covid-19 subsiding, manufacturing production in Asia Pacific is recovering, led by accelerations in Indonesia, Thailand and India.

In China, the key supplier of products shipped on major trade lanes by container lines, the Caixin/Markit Purchasing Managers’ Index (PMI) rose to 50.6 in November, indicating a return to expansion after the contractionary 50.0 recorded in September. This was partly achieved because power shortages eased substantially after many factories suffered electricity cuts earlier in the year.

This, however, should be tempered with a sense of cautious optimism. “The current disruptions and bottle-necks are expected to carry onto 2022. On a positive note, the PMI numbers have shown that the power shortage in China has not affected the overall production among our customers,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

Ongoing operational challenges

Of course, it will not all be plain sailing. Carriers are still opting for blank sailing, thus cancelling routes to maintain its schedule integrity. Due to operational reasons, some have also taken a less disruptive approach with port omissions, skipping only certain ports out of many in their routes.

“Ongoing blank sailings and port omissions, followed by last minute vessel sliding, are reducing the overall capacity in the market and this remain an industry-wide challenge,” notes Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding.

Global vessel schedule reliability improved again in October, but only marginally, and reliability levels remained firmly in the 34-40% range seen throughout the year, according to Sea-Intelligence. And it is worth noting that reliability in October 2021 was down 18 percentage points compared to October 2020 with the average delay for late vessel arrivals dropping only marginally to 7.34 days.

Maersk was once again the most reliable top-14 carrier in October 2021, with schedule reliability of 46.4%, followed by Hamburg Süd with 38.1%.

Worryingly, scheduling shortfalls and port congestion are increasingly cascading into intra-Asia services, further disrupting traffic and leaving large volumes of traffic stuck at transhipment hubs.

Moreover, global port congestion remains a challenge, given that demand is expected to remain strong leading into Chinese New Year.

Adding to possible bottlenecks, China’s strict quarantine rules for seafarers are prompting feeder operators to wind down operations on the Pearl River Delta in southern China from late December until mid-February.

“There are still multiple operational challenges to overcome as we try to ease global supply-chain disruptions,” said von Orelli. “There are clearly multiple risks to any forecasts about the health of global shipping in 2022.”

Easing of supply chain constraints

Even so, there are indications that the economy is slowly improving. In November, the JPMorgan Global Manufacturing PMI signaled improvements in business conditions for the 17th consecutive month.

Olya Borichevska, Global Economist at JPMorgan, said the November Global Manufacturing PMI also recorded “an increase in the output component against a modest easing across indicators related to supply constraints” with the findings suggesting an “industrial sector moving toward improvement”.

JPMorgan also reported that the volume of global new orders rose again during November, while new export orders increased in November faster than in October.

This is further confirmed by analysis from investment bank Nomura which reported in early December that factories ramping up output after Covid-19 lockdowns were helping to overcome supply chain bottlenecks. It said the Suppliers’ Deliveries Times Index (SDTi) rose to 43.8 in November from 42.9 in October, with improvements particularly noticeable in Vietnam and China.

The turnaround in Vietnam has been particularly striking. Ranked at 38th out of 169 countries in the DHL Global Connectedness Index, Vietnam has seen exports bounce back after it suffered a 6.1 percent contraction in GDP due to strict social distancing regulations. Vietnam’s Ministry of Trade now expects a 10 percent increase in exports this year.

“When I look at Vietnam opening up, on top of the healthy global macroeconomic and Asian export data we’ve seen, I’m cautiously confident for 2022,” said Leung.

But he was quick to point out that events over the last two years, such as the pandemic, the closure of the Suez Canal and unpredictable weather, have provided a sober lesson for the industry.  “If we have learned anything, the only certainty is to expect the unexpected, and be as prepared as possible with advanced planning,” added Leung.

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While the supply chain situation is still far from pre-Covid-19 days, constraints are easing in parts. This is because some Asian economies, which remain critical to the supply-side element of global supply chains, have been reopening after strict Covid-19 lockdowns have been lifted.

DHL’s December Ocean Freight Market Update notes that Asia Pacific economies are rebounding from third-quarter setbacks as factories re-open. With the Delta variant wave of Covid-19 subsiding, manufacturing production in Asia Pacific is recovering, led by accelerations in Indonesia, Thailand and India.

In China, the key supplier of products shipped on major trade lanes by container lines, the Caixin/Markit Purchasing Managers’ Index (PMI) rose to 50.6 in November, indicating a return to expansion after the contractionary 50.0 recorded in September. This was partly achieved because power shortages eased substantially after many factories suffered electricity cuts earlier in the year.

This, however, should be tempered with a sense of cautious optimism. “The current disruptions and bottle-necks are expected to carry onto 2022. On a positive note, the PMI numbers have shown that the power shortage in China has not affected the overall production among our customers,” said Kelvin Leung, CEO, DHL Global Forwarding Asia Pacific.

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Ongoing operational challenges

Of course, it will not all be plain sailing. Carriers are still opting for blank sailing, thus cancelling routes to maintain its schedule integrity. Due to operational reasons, some have also taken a less disruptive approach with port omissions, skipping only certain ports out of many in their routes.

“Ongoing blank sailings and port omissions, followed by last minute vessel sliding, are reducing the overall capacity in the market and this remain an industry-wide challenge,” notes Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding.

Global vessel schedule reliability improved again in October, but only marginally, and reliability levels remained firmly in the 34-40% range seen throughout the year, according to Sea-Intelligence. And it is worth noting that reliability in October 2021 was down 18 percentage points compared to October 2020 with the average delay for late vessel arrivals dropping only marginally to 7.34 days.

Maersk was once again the most reliable top-14 carrier in October 2021, with schedule reliability of 46.4%, followed by Hamburg Süd with 38.1%.

Worryingly, scheduling shortfalls and port congestion are increasingly cascading into intra-Asia services, further disrupting traffic and leaving large volumes of traffic stuck at transhipment hubs.

Moreover, global port congestion remains a challenge, given that demand is expected to remain strong leading into Chinese New Year.

Adding to possible bottlenecks, China’s strict quarantine rules for seafarers are prompting feeder operators to wind down operations on the Pearl River Delta in southern China from late December until mid-February.

“There are still multiple operational challenges to overcome as we try to ease global supply-chain disruptions,” said von Orelli. “There are clearly multiple risks to any forecasts about the health of global shipping in 2022.”

Easing of supply chain constraints

Even so, there are indications that the economy is slowly improving. In November, the JPMorgan Global Manufacturing PMI signaled improvements in business conditions for the 17th consecutive month.

Olya Borichevska, Global Economist at JPMorgan, said the November Global Manufacturing PMI also recorded “an increase in the output component against a modest easing across indicators related to supply constraints” with the findings suggesting an “industrial sector moving toward improvement”.

JPMorgan also reported that the volume of global new orders rose again during November, while new export orders increased in November faster than in October.

This is further confirmed by analysis from investment bank Nomura which reported in early December that factories ramping up output after Covid-19 lockdowns were helping to overcome supply chain bottlenecks. It said the Suppliers’ Deliveries Times Index (SDTi) rose to 43.8 in November from 42.9 in October, with improvements particularly noticeable in Vietnam and China.

The turnaround in Vietnam has been particularly striking. Ranked at 38th out of 169 countries in the DHL Global Connectedness Index, Vietnam has seen exports bounce back after it suffered a 6.1 percent contraction in GDP due to strict social distancing regulations. Vietnam’s Ministry of Trade now expects a 10 percent increase in exports this year.

“When I look at Vietnam opening up, on top of the healthy global macroeconomic and Asian export data we’ve seen, I’m cautiously confident for 2022,” said Leung.

But he was quick to point out that events over the last two years, such as the pandemic, the closure of the Suez Canal and unpredictable weather, have provided a sober lesson for the industry.  “If we have learned anything, the only certainty is to expect the unexpected, and be as prepared as possible with advanced planning,” added Leung.

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According to DHL’s Global Connectedness Index 2020, Vietnam ranked 38th out of 169 countries, one place higher than in 2017.

Vietnam is a fast-rising star in global manufacturing. With China experiencing a fallout from its trade war with the United States, Vietnam has been welcoming manufacturers keen to shift production away from China. It scored its biggest annual flow of foreign direct investment (FDI) in 2019 and gained more attention as an alternative hub when Covid-19 disrupted China’s manufacturing systems and pummeled supply chains.

Vietnam’s resilience to the impacts of the pandemic in 2020 meant it was able to bounce back quickly. Its economy expanded 2.9 percent last year and export value rose 28.4 percent in the first half of 2021 from a year earlier, making it a rare economic success story during the pandemic.

Even as it recently suffered its worst Covid-19 outbreak yet, the country is showing signs of regaining its economic and manufacturing momentum. IHS Markit’s Vietnam Manufacturing Purchasing Managers’ Index (PMI) for October 2021 rebounded to 52.1 in October 2021 after falling to 40.2 the previous month. Even as factories temporarily closed due to lockdowns in mid-2021, total merchandise exports went up 21.8 percent for the first eight months of 2021 compared to a year ago.

“Despite near-term risks, over the medium-term economic outlook, a large number of positive growth drivers are creating favorable tailwinds and will continue to underpin the rapid growth of Vietnam’s economy,” says Rajiv Biswas, IHS Markit’s Executive Director and Asia-Pacific Chief Economist. “This is expected to drive strong growth in Vietnam’s total GDP as well as per capita GDP.”

Cyn-Young Park, Director for Regional Cooperation and Integration at the Asian Development Bank, agrees. “Even as investors may delay their decisions due to the current Covid-19 situation, Vietnam will continue to be a strong regional destination for investment, given the likely changes in the region’s value chain structures and the implementation of the RCEP (Regional Comprehensive Economic Partnership),” she says.

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Drivers of Vietnam’s growth

Changes in Asia’s value chain include China’s shift away from low-cost production to products of higher value, such as robots and advanced semiconductors. This transition has driven up manufacturing wages, making production hubs with lower labor costs and young workforces like Vietnam more attractive.

Vietnam’s proximity to China and location along regional shipping routes play to its advantage – so does its strong international connectedness. According to DHL’s Global Connectedness Index 2020, Vietnam ranked 38th out of 169 countries, one place higher than in 2017.

The country has shown a marked improvement, similar to neighboring countries such as Cambodia, Malaysia and Singapore. Reforms to open up the economy over the past few decades have pushed Vietnam’s GDP per capita of roughly $500 (in 2019 U.S. dollars) in 1985 to its current status as a middle-income country with a GDP per capita of $2,715.

Such policies to boost international trade flows have also placed Vietnam high up on the Trade pillar of the Global Connectedness Index. By 2019, the country had entered into trade agreements with countries that account for 67 percent of the rest of the world economy.

“A country must have large international trade flows relative to the size of its domestic economy, and international flows must be distributed across the world for it to be considered globally connected,” said Bernardo Bautista, Managing Director and Country Manager, DHL Express Vietnam.

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To add on, Vietnam has also signed the Regional Comprehensive Economic Partnership agreement, which will extend the reach of its trade agreements to include almost all major economies worldwide when it goes into force on 1 January 2022. “This puts Vietnam in a position to be a strong trade and manufacturing hub for the world economy,” adds Bautista. “We remain optimistic about Vietnam’s economic growth and will continuously invest in our network and our services in the country. Besides a new dedicated flight between Ho Chi Minh City and Hong Kong earlier this year, recently we have also introduced additional freighters to support businesses in Vietnam who want to tap into the global market.”

On the manufacturing front, Vietnam has a pipeline of investment from companies looking to diversify production away from China and ease disruptions to their supply chains. Apple supplier Foxconn recently received approval to build a US$270 million (€228 million) plant in the province of Bac Giang. According to the Vietnamese government, Foxconn has so far invested US$1.5 billion in Vietnam and plans to bring in a total of US$700 million this year.

Then there is Samsung, one of the early major investors in Vietnam. From initially investing US$670 million to build a mobile phone production plant in 2008, the manufacturing giant has grown into Vietnam’s biggest source of FDI with a total investment of US$17.3 billion.

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On the road to recovery

Looking ahead, a rebound in world trade is expected to lift Vietnam’s export manufacturing sector.

“Indeed, as coronavirus-related restrictions are rolled back and vaccines become more widely available, we forecast world trade in real terms will surge nearly 10 percent this year,” says Sian Fenner, Lead Asia Economist at Oxford Economics. “We believe Vietnam will benefit from (the) rise in global demand for electronics because its participation in global supply chains has increased significantly over the past five years following a surge in FDI.”

Vietnam is also expected to continue to gain substantially from manufacturers’ diversification away from China, attracting more investment to produce capital-intensive consumer goods.

“Vietnam’s role in global supply chains has grown as it has absorbed a significant portion of labour-intensive goods production from China and also some portion of the electronics supply chain,” write analysts from BofA Global Research. They add that they do not see other Asian economies “fully replicating Vietnam’s role in the long run”.

To support economic recovery, “it’s critical that the government curbs the infections, accelerates the vaccination drive, insulates the major manufacturing production sites from Covid-19, and protects the poor and most vulnerable,” says Park.

The country also needs to accelerate digitalization in key areas of trade, adds Park. “It should improve trade logistics and minimize disruptions through paperless, digital transactions.”

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