Lockdowns and gridlocks: Gauging China’s uncertain road to supply chain recovery

Freight rates from China have slid upon lockdows in the past month. Will the impact of Shanghai lockdown on global supply chains last only for a short while, or will it stretch through the entire year and maybe even longer? Early indicators present a mixed bag of opinions amid rapidly evolving and increasingly complex set of challenges.

Truck access is the major setback amid lingering zero-Covid policy

A Covid-19 outbreak that began on March 1, 2022, in the city of Shanghai became the most widespread the city has had since the start of the pandemic two years prior. Amid the Chinese government’s strict zero-Covid policy, authorities introduced a series of measures that initially started as a two-phased lockdown but soon expanded to encompass the entire city.

As several analysts pointed out, the major problem that clogged up ports and choked off supplies was largely the restricted truck access. Bottlenecks were magnified as the number of truck drivers transporting goods from factories to warehouses and to the world’s busiest ports dwindled. Hapag-Lloyd noted in a recent advisory that even though Shanghai terminal operations were normal, the daily trucking ratio was reduced by around 45%.

China’s manufacturing falls deeper in contractions

According to Shanghai’s statistics bureau, the city’s industrial output fell 7.5% in March as the introduction of tighter restrictions pressured manufacturing performance. China’s general manufacturing was also dampened by the ongoing disruption to business operations. The country’s manufacturing PMI dropped to 47.4 in April from 49.5 in March, according to data released by the National Bureau of Statistics. This marked the lowest level in more than two years.

Production and supplies still on shaky ground

By mid-April several factories, including key auto-makers and electronic manufacturers, started to return to production. However, this return to production was not a conventional one as most factories adopted a “closed-loop” approach, which entailed workers living on-site to avoid outside contact.
Despite efforts to implement a closed-loop system to keep operations going, production difficulties remained as logistics issues hampered deliveries to the factories.

Freight rates slump due to lockdowns

Freight rates for containers and small bulkers have been weaker as exports from China slowed down amid the ongoing lockdown measures. According to Drewry, freight rates on Shanghai-Rotterdam declined by nearly 9% from March 25 until April 29. Similarly rates on Shanghai-New York dropped by 8.5% during the same period, although prices on both lanes remain extremely elevated compared to pre-pandemic levels.

Analysts forecast that ocean freight rates will increase once lockdown is lifted in mainland China. The pressure is poised to increase significantly if the reopening coincides with preparations for holiday retail peak season, which usually lasts from mid-August through mid-October.

Disruptions ahead for global supply chains, but the question is: more or less?
There are divergent views regarding the global impact of strict lockdowns in Shanghai and other Chinese cities. The general consensus seems to be that the reopening of Shanghai will lead to a surge in ocean volumes, resulting in clogged US and European ports and delays.

However, whether this will prove to be a short-term impact, limited to second-quarter activities, or a much bigger issue than it was last year is still up for debate.

Some argue: Disruptions to be managed

Some experts believe that actions taken by container carriers in the past month will smooth out the ripple effect and prevent substantial setbacks that global supply chains previously witnessed.

These experts are also optimistic that unlike what happened in 2021 at Yantian and Ningbo ports, Shanghai port has so far remained active, albeit with significant limitations in on-site staffing. Although total congestion levels at Shanghai’s port is estimated to have increased by 30-40% since March 2022, it is still lower than the peak of last year. As most ships continue to arrive at the port of Shanghai, some logistics experts believe that the factors that caused the previous supply crisis may not be present this time.

Consumer demand in Europe and the US has also started to ebb due to inflation this year, after a pandemic-induced boom last year. This also explains the smaller increase in congestion levels at Shanghai ports, which is anticipated to help avoid a disruption in supply chains as severe as the previous years.

Others: Things will get worse

However, not everyone is convinced that it will turn out to be a short-term phenomenon. Several industry experts report that backlogs and pent-up demand will have a negative impact lasting through the whole of 2022 once China reopens.

With 46 cities estimated to be in full or partial lockdown, a potential escalation of government’s efforts to contain the highly contagious Omicron variant is also clouding the outlook for supply chains. Some logistics professionals note that prolonged and widespread shutdowns could potentially bring the worst disruption since the start of the pandemic.