Shutdowns in China leave things open-ended for supply chain stakeholders

The ongoing Omicron variant-driven issues that have been plaguing key manufacturing and port hubs in China continue to raise supply chain concerns.

As previously reported, these issues are having a significant downstream impact on United States-bound import patterns, at a time when the ongoing supply chain congestion issues appeared to be showing signs of improvement. And since then, China’s largest city, Shanghai, is under a full lockdown, which has been extended indefinitely, due to the ongoing increases in positive cases that have been reported.

What’s more, a March 15 New York Times report, leading up to the Shanghai shutdown, noted that Chinese officials are “imposing lockdowns and restrictions that are adding chaos to global supply chains,” coupled with China’s zero-Covid policy, with many of China’s largest industrial cities fighting outbreaks, which are impacting its factory and transportation networks, referred to as the backbone of both China’s manufacturing, as well as the global economy.  

The report also noted that since Omicron infections have picked up in China, a number of cities with major manufacturing operations and presences have closed down, including: Dongguan and Shenzhen in southern China near Hong Kong, where Foxconn has huge factories to make iPhones and other Apple products; Changchun and Jilin City in Jilin Province; and Langfang, next to Beijing. And it added that some smaller cities have also gone into lockdowns, like Suifenhe and Manzhouli on China’s border with Russia.       

Recent data and analysis, from various companies, continue to monitor the ongoing situation and how it is impacting freight transportation and logistics operations.

Chicago-based 3PL and global freight forwarder SEKO Logistics said in a customer advisory that ocean and airport operations in Shanghai are currently operating, with factories running if operating under a closed loop system.

The company said that, for ocean freight deliveries, drivers can deliver containers to the Port of Shanghai’s terminals if they are picking up from factories that are open outside of Shanghai, if they have a negative Covid test and an Equipment Interchange Receipt permit with an anti-epidemic pass to deliver and accept full truckload shipments.  

“Ocean terminals are operating as normal but with lower efficiency due to staff shortages,” said SEKO officials. “We have seen an approximate 80% decrease in container pickups from outside the lockdown area due to driver shortages and restrictions. Carriers have announced omit calling at Shanghai and vessel cut-off delays due to traffic restrictions.  This will be put additional pressure on the terminal once it opens, and we expect port congestion once the restrictions end. The port of Ningbo is an alternative option but is now being impacted as almost all cargo excluding Zhejiang Province has been diverted to Ningbo as an alternative port to Shanghai.  This has caused an increase in rates out of Ningbo as well as an equipment shortage.”

Judah Levine, Head of Research for Freightos, a SaaS-enabled logistics technology provider focused on instant freight quotes for freight forwarders and shippers, wrote that the indefinite extension of the Shanghai lockdown is causing a significant slowdown of operations at the its major air and ocean ports due to labor shortages and also a decrease on goods availability as manufacturing and warehouses close, and trucking availability is significantly disrupted because of quarantine rules and travel restrictions.

“[S]ome shippers are shifting to alternate ports like Ningbo when possible and there are reports of carriers omitting Shanghai port calls,” observed LM. “These developments are resulting in growing backlogs of ships not only in Shanghai but in Ningbo as well. Last year’s outbreak at Shenzen’s port of Yantian slowed operations by more than 70% there for nearly a week and resulted in a 20% spike in ocean rates to the U.S. and Europe.”

As for current ocean rates to the U.S., Levine explained rates have remained stable and are down 3% since the outbreaks in China began, which he said could be attributed to the decrease in available goods.

“When operations rebound, we can expect some surge in shipments and possibly an increase in rates—though in the Yantian example ocean prices began to climb shortly after the shutdown began,” wrote Levine. Most indications are for strong Transpacific volumes in the coming months, including some pull forward of summer demand to get ahead of peak season congestion and fears of West Coast labor disruptions. But there are also growing signs that consumer demand—the underlying driver of congestion and sky-high rates—is beginning to wane as a result of inflation.”

Christian Roeloffs, co-founder and CEO of the Container xChange, likened the current situation in China to a traffic jam.

“The problem is that this will lead to a significant sort of bulk up in demand for freight services which will essentially be unleashed once the factories reopen,” he said. “And when the demand is back, the carriers will again not have enough equipment on the ground because not enough equipment went into China during the Port lockdowns and not enough vessels are available so that will push up prices once again. So, this will continue pushing the volatility in the market and the congestion situation on the Transpacific will also not significantly improve because it's almost like a start-stop situation. It will just come back worse than it was because the way you remove the traffic jam is not by stopping something violently and then hitting the accelerator again. It's sort of making sure that the traffic flows at a certain speed.”

And he added that the impact of COVID lockdowns on key markets will have wider reaching impacts leading to equipment scarcity in China, hike up of rates and worsening of the traffic jam on Transpacific.  

“The problem will continue to remain after that because there are also labor union disputes in the U.S. waiting in the month of May, which historically always leads to slow down at the west coast ports,” he noted.

The longer this situation goes on for, the more significant the disruptions become, said Larry Gross, president of Gross Transportation Consulting.

But, at the moment, he said, at the moment, that the China lockdowns are having a very small impact on North American intermodal operations.

“The reason for that is that we have queues of container ships, at most ports, that are persisting,” he said. “Until those queues get worked down, and all of that freight that is sitting out on the water waiting to be offloaded from the ships, then what we are really seeing here is a reduction in the number of ships that are entering the queue because of the disruptions we are seeing in China. I don’t see a big effect yet. But, to the extent that we see a huge surge in volume from China after all of these lockdowns are ended, that may build up these queues that have been shrinking, at least on the West Coast, but not so much on the East Coast because we are seeing a lot of diverted freight that is trying to get around the congestion on the West Coast and also around the risk of a port labor strike, with the end of the contract [between the PMA and ILWU] fast approaching.”

Freight is also moving a little earlier than normal simply because stakeholders have been impacted by the congestion and want to get their summer and back to school goods to arrive in plenty of time, given how the recent history has been painful, in terms of deadlines being missed, as freight has been sitting out on the water and otherwise delayed on route to destination, noted Gross.