China lockdowns prompt domestic shortages, global supply chain disruption
- Asia Pacific
- Organisational Resilience
Seréna Pilkington and Daniel Rechtschaffen
Lockdowns in Shanghai and other cities across China (particularly in regions surrounding Shanghai) are straining domestic and international supply chains and have significantly increased operational risks for companies. Project44, an online supply chain tracker, on 21 April said that Shanghai import container wait time had jumped by 163% from 4.6 days on 28 March to 12.1 days as of 15 April. We assess the impact on local and global supply chains of China’s zero-COVID strategy and associated maritime operational disruption.
- It will likely be several weeks after COVID restrictions are lifted before port operations in China return to normal and supply chain logistics return to late 2021 levels.
- As the port backlog clears, a surge in containers exported to Europe and the US will prompt significant disruption at European and US ports in the coming months.
- China is unlikely to significantly ease its COVID-19 restrictions before the 20th Party Congress in late 2022, leading to regular operational disruption throughout 2022 as different localities face outbreaks.
- The potential for further COVID-related disruption in China and a knock-on impact on port activity worldwide will sustain global supply chain disruption throughout 2022.
Domestic situation in China
Concerns about the economic impact of lockdowns is leading Chinese authorities to introduce measures aimed at facilitating major industrial operations and transport while maintaining their zero-COVID strategy. According to a list issued on 16 April, 666 “key industrial enterprises”, including multiple foreign manufacturers, were allowed to resume operations on condition that they implement strict virus prevention measures. However, most companies, including several in the automobile sector, face significant difficulties in sourcing supplies from outside Shanghai. Most industrial parks in and near Shanghai have been shut, and those that remain open are operating at reduced capacity and face increased labour costs due to staff shortages. While official COVID-19 case numbers have been declining in Shanghai since a 13 April peak, the city is unlikely to see its lockdown lifted completely in the coming weeks.
Despite new policies by the Shanghai and central governments to ease logistics networks supplying the city, local governments in the provinces surrounding Shanghai continue to implement strict measures that have significantly increased operational disruption. On paper, truckers crossing inter-provincial borders are required to provide a nationally recognised 48-hour COVID-19 test and traffic permit, but in practice many local governments are demanding that tests be retaken locally and highways have been shut. Local authorities are also implementing other measures to impede the flow of cargo through their jurisdictions to prevent COVID-19 outbreaks.
While disruptions are most severe in the Yangtze River Delta region (one of China’s largest economic belts, of which Shanghai is the cornerstone), minor COVID-19 outbreaks across the country have led to outsized responses by local governments. Multiple cities across the country (Xining, Taiyuan, Wuhu, Guangzhou, among others) have implemented strict lockdowns over low case numbers (in the dozens) since mid-April and have restricted the flow of goods through locked-down areas.
Zero-COVID policy to continue
The central government in Beijing has repeatedly emphasised that it will not abandon its zero-COVID policy despite significant supply chain disruption. The authorities likely perceive the policy to be the best approach given healthcare capacities and low vaccination rates among older citizens. Operational disruption in China is likely to continue throughout the rest of 2022 as localities implement strict COVID-19 lockdown measures over outbreaks that would be considered minor by the standards of other countries. Multiple economists have downgraded their growth outlook for China’s economy for 2022 since the beginning of the year and it will likely be revised further down. The stringent lockdown measures that form the backbone of China’s zero-COVID approach are unlikely to be fully removed before the politically important 20th Party Congress in late 2022.
Unlike in May 2021, when a small number of COVID-19 cases caused the port of Yantian in Shenzhen province to substantially reduce its operations, Shanghai authorities have strived to keep the port operating at full capacity – for example, by implementing a closed-loop system that keeps staff onsite. However, the stringent measures on inter-provincial travel, mentioned above, have caused a severe shortage in truck drivers – up to nine out of ten drivers at its peak. The shortage has resulted in a backlog of vessels off the port of Shanghai as the port struggles to offload cargo due to a lack of truck transport. With warehouses and ports struggling to provide onward goods transport, vessels are unable to offload containers, with some vessels as of 16 April waiting between three and five days for cargo to be picked up, as illustrated by the figures quoted by Project44 on 21 April. Given that trucking is most severely affected, there has been a rise in transport via major rivers and other waterways to secure onward transport of goods to other major coastal ports like Ningbo-Zhoushan.
Shipping containers onshore and offshore at Yantian port, 24 April 2022 (Photo credit: Yin Liqin/China News Service via Getty Images)
It will likely take at least several weeks after Shanghai controls its COVID-19 outbreak and reopens logistics networks (assuming that it is able to do so) for supply chain logistics to return to late 2021 levels. According to a statement seen by Reuters, the EU Chamber of Commerce in China on 20 April said that the number of available trucks were down between 40% and 50% compared with normal operations, with fewer than 30% of employees able to return to work.
Loadstar, a supply chain publication, on 19 April reported that about 506 containerships were waiting off Chinese ports, an increase from 260 halted offshore in February. According to Bloomberg, bulk carrier traffic has risen markedly in Shanghai as well as Ningbo-Zhoushan, Rizhao, Dongjiakao and Qingdao ports.
As a result of the backlog in the port of Shanghai, operators have rerouted cargo to alternative ports including Shenzhen, Beijing and Ningbo-Zhoushan. Diversions to other ports and blanked sailings (where scheduled sailings are cancelled) have compounded delays. Tankers and bulk carriers have also been affected by reduced fuel demand due to a closure of manufacturing. The average wait time at anchor for tankers has increased significantly.
Global shipping container rates will likely continue to fluctuate as maritime supply lines continue to adjust to Chinese port disruption. Disrupted factory operations and decreasing shipping demand have led to lower container shipment rates. According to Freightos, a container freight index, the global average rate per container dropped 5% between 12 March and 8 April. Conversely, rates on other shipping routes have risen in response to demand as businesses seek to avoid the backlog occurring across several Chinese ports. For example, while rates have dropped 9% per container for Europe-China routes, Europe-South America route rates have surged by 10%. As demand returns to late 2021 levels, these rates will likely re-adjust. However, given the likelihood of future outbreaks and subsequent shipping disruption, rates will likely remain vulnerable to fluctuations.
Ports in Europe and the US are bracing for the wave of backlogs starting to ease in Chinese ports. Already, some ports are experiencing additional disruption as shipping operators adjust routes. For example, the US ports of Los Angeles and Long Beach, which already suffer significant delays and capacity constraints, have reportedly seen a combined 35% increase in containership backlog. Once restrictions ease, cargo volume will likely far exceed port capacity leading to terminals elsewhere receiving containers faster than they can be transferred for onward transport toward destination. As a result, vessels will likely face continued longer queues further delaying operations.
Outlook for supply chains
Businesses will likely face persistent delays in imports from China as disruption to shipping continues in the coming months. Shipping delays affecting raw commodities and manufacturing among others have already had an impact in Europe. In mid-April, the Germany Chamber of Commerce said that roughly half of German companies’ logistics, warehousing, and supply chain operations were experiencing disruption related to the Chinese lockdowns.
Given the likely continuation of China’s zero-COVID policy throughout 2022, the potential for further COVID-related disruption in China and the knock-on impact on port activity worldwide will sustain global supply chain disruption throughout 2022.