China’s Lockdown Extended: We’re in the ‘Eye’ of the Supply Chain Storm

Authorities in Shanghai have extended the city’s lockdown indefinitely after 23,000 new asymptomatic COVID cases were reported on Saturday.  The lockdown, which has now been extended to Guangzhou, a major manufacturing hub, is significantly impacting the flow of goods – from the halted production lines and shuttered warehouses to the pileup of containers at the ports.

Factories operating in a ‘closed-loop system’ are struggling to get materials needed for production.  Shippers are finding it difficult to move their products to the ports as 90% of trucking capacity has been sidelined by the restrictions.  While Shanghai Port remains open, terminal productivity has been severely limited by labor shortages, leading to worsening port congestion.

Meanwhile, rerouting freight to other ports is becoming increasingly difficult.  Trucks have been prevented from moving in and out of Shanghai without a permit, which is only valid for 24 hours and only on specific routes, and many drivers are unwilling to enter into Shanghai due to the risk of being quarantined.  And as more freight is diverted from Shanghai, backlogs and equipment shortages continue to grow at nearby ports, leading to a growing queue of vessels off the coast of China.  As of yesterday, the queue had swelled to 477.

As carriers struggle to fill their vessels with cargo, many are offering discounted spot rates.  But the lower rates are just theoretical if you can’t get products to the port.  Some carriers have announced they will skip port calls at Shanghai and Ningbo in order to avoid the congestion and delays, while others have announced blank sailings through April 18.  We expect more blank sailings will be announced over the coming weeks.

What does this mean for the global supply chain?  The longer China continues to impose its zero-tolerance policy, the more significant the disruptions will become and the greater the impact on inventories.

The Eye of the Supply Chain Storm

Outside of China, the logistics chain has entered the eye of the supply chain storm.  People often use the phrase “eye of the storm” to refer to the small zone of calm in the midst of the swirling chaos and battering destruction of a major storm.  Inside the eye, the winds disappear and blue skies return.

While we are in the eye, the logistics chain will experience a brief respite from the battering winds and be given an opportunity to clear the backlogs of vessels and containers.

But as with any major storm, circling just outside the eye are the winds that make up the eyewall – the nastiest, scariest part of the storm – and these winds can explode within a matter of seconds as the eyewall moves across the land.

Once the lockdowns are lifted and factory production resumes, the supply chain winds will be unleashed.  How severe will these winds be and what can we expect?  For the answer, we’ll have to take our clues from what happened the last time China went into a major lockdown, just over 2 years ago when the COVID-19 pandemic began.  These include:

  • Pent Up Demand: Businesses around the world will be eager to restock their depleted inventories caused by the production stoppages and supply chain bottlenecks in China.
  • Increased Volumes: When factory output rebounds, we expect to see a massive surge in container volumes.  Many experts anticipate the surge will extend through the summer months, as retailers will likely bring in merchandise for the fall and holiday selling seasons early to avoid potential delays.
  • Reduced Capacity: The surging demand will far outpace capacity again, as carriers do not have enough vessels available to handle the growing volumes of freight.
  • Container Shortages: Carriers will not have enough empty containers at origin to meet demand because not enough equipment will have gone back to China during the lockdowns due to operational blanked sailings and skipped port calls.
  • Price Increases: The increased demand, reduced capacity, and equipment shortages will most likely lead to dramatic price increases as shippers again vie for space.  This will also lead to increasing inflation as the costs will likely be passed along to consumers.
  • Port Congestion: The surge in volumes is expected to result in a tsunami of cargo that will again clog up American and European ports, creating massive congestion.  Southern California ports will most likely feel the brunt of it, especially if China’s return to normalcy coincides with the ILWU longshoremen contract negotiations, which are set to begin on May 12.

OCEANAIR will continue to monitor the situation and will provide updates as they become available.