Shanghai starts reopening: What awaits cargo flows and freight rates?

Residents of the Chinese city of Shanghai have finally started emerging out of lockdowns. As millions begin to restore production and normal order of life starting from June 1, here is a review of the possible outcomes for the months ahead in the shipping industry amidst elevated freight rates.

Cargo flows in May impacted by prolonged lockdown

Most of Shanghai’s 25 million population had been confined to their residential compounds since April this year. Although the city’s ports remained operational through the lengthy lockdown, significant disruptions in manufacturing and trucking kept available exports below normal levels. By mid-May, several ocean carriers responded to this by blanking more than a third of their scheduled sailings out of Asia through the end of May.

This strategy was adopted as a mitigating solution to the problems –such as longer lead times– arising from the lockdowns in China.

Operations at Chinese ports ramp up as lockdown eases

However, the latest reports show that operations in Shanghai port are seemingly getting back to normal. A customer advisory published by CMA CGM, a French container transportation and shipping company, said that pressure on yard resources was easing.

The advisory also reported an improvement of vessel waiting time at Waigaoqiao (one of the three main container port areas of the Port of Shanghai) due to higher labour availability.

But concerns over shipping congestion remain

Although figures show that daily container throughput at Shanghai’s port has rebounded nearly to 95.3% of pre-pandemic levels, analysts expect to see an extended shipping congestion due backlogs that accumulated during the lockdown.

Maritime research consultancy Drewry warned of an increased pressure on supply chains and more difficulties in cargo shipping as Shanghai reopens. The consultancy stated that congestion across US and European ports could be widespread heading into the second half of 2022.

Summer peak season looms amid already clogged-up US ports

The capacity of the container distribution during summer peak season is a foremost concern particularly in the US. The US ports are once again bracing for a perfect storm that is threatening to disrupt supply chains and trigger significant bottlenecks.

As shippers gear up to avoid delays and clogging, peak season –which usually starts near the end of July– looks set to start closer to the end of June this year.

Despite assurances of overhauled operations, persistent labour and equipment shortages, as well as full warehouses, continue to worry shipping customers. Pacific Merchant Shipping Association noted that the average time a container spent in yards before being picked up by a truck was six days at Ports of Los Angeles and Long Beach in April.

Supply chain concerns force companies to change policies

While port directors take caution, global businesses are adopting new strategies to cope with supply disruptions. Companies ranging from chemical producers to apparel sellers are reportedly trimming down order counts because of supply disruptions. Fearing that supply issues will continue for the remainder of the year, some companies have also reportedly started carrying additional inventory to keep up with orders.

Spot freight rates look set to increase —but for how long?

Spot freight rates from Asia are also bracing for increases as Shanghai reopens. However, signs of waning shipping demand could mean that this expected increase will be brief. The slowdown in demand, mostly triggered by the lockdows in China, has already been visible in freight rates as a global benchmark fell for 11 weeks in a row, although overall freight rates remained more than three times higher than prior to the pandemic.

In a recent market update, the US investment bank JPMorgan Chase highlighted inventory accumulation at major retailers, forecasting that they would order less from their suppliers. JPMorgan Chase also reported a shift in consumer preferences, which suggests consumers moving away from goods to services. According to analysts, this potential slowdown in imports –which suggests a weaker peak season than expected– might provide a respite for ports.

Back to normality? Not soon enough

Drewry stated that normalisation and rebalancing of the supply chain was not expected before 2023.

Even with inflation slowing demand, a Lloyd’s List analyst forecasts that high container freight rates are likely to last well into 2023 while Drewry also anticipates a return to normality by 2024 in a different report.