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Supply Chain Disruption?

  • China’s strict zero-COVID policy has led to several instances of port closures over the past year, exacerbating the crisis in global supply chains. But issues stemming from the COVID-19 pandemic in logistics chains around the world are also to blame.

  • The ongoing supply chain crisis has led to rising costs of raw materials and shipping containers, which is impacting manufacturers and end-consumers alike.

  • Sustained disruption in global supply chains is likely to impact China’s imports and exports in 2022, but the government is prepared for this outcome.

On January 14, 2022, the Port of Ningbo – the third busiest in China after Shenzhen and Shanghai – resumed full operations after being partially closed for 14 days. Operations in several warehouses and depots had been suspended and trucking services ordered to operate at a reduced capacity after several people were confirmed to have COVID-19 in an area nearby.

This wasn’t the first time COVID-19 had impacted operations at the port, nor is it the only port that has been affected by COVID-19 lockdowns. In August 2021, the Meishan terminal of the Port of Ningbo was shut down for two weeks, just a few months after the Yantian port in Shenzhen had finally reopened after portions of it were shut down in early June.

China’s hardline ‘zero-tolerance’ policy toward COVID-19 means that measures that would be considered drastic elsewhere are often taken when only a few cases are detected.

The reopening of the Port of Ningbo came as a sigh of relief for importers and exporters who were getting ready for the upcoming Chinese New Year period, one of the busiest of the year. The sporadic shutdowns have led to discussions about the pressure it places on already strained supply chains, and whether, as ports are reopened, congestion and backlogs can be processed and alleviated. However, there’s a lot more going on in both the domestic and global supply chain than China port closures.

In this article, we discuss the different factors contributing to the global supply chain disruption and discuss the impact it has had on global trade and shipping. Finally, we take a look at whether more China port closures are likely and when supply chain woes are expected to ease.

What caused the supply chain crisis?

The current supply chain bottlenecks are undeniably a result of the COVID-19 pandemic. The initial lockdowns in China in early 2020 saw factories across the country suddenly halt production or operate at significantly reduced capacity.

The subsequent lockdowns around the world initially decimated consumer spending in much of the developed world, putting a sudden break on demand. With factories closed in China and consumers tightening their belts overseas, global trade stalled, and Chinese imports and exports in Q1 2020 contracted by 6.7 percent, with exports falling 11.4 percent.

By Q2 2020, trade had begun to recover as people locked in their homes in other countries began to spend on e-commerce, and factories in China gradually began to reopen. By June 2020, imports and exports were back up to 5.1 percent growth.

However, this sudden increase in consumption quickly led to an imbalance in supply and demand and overwhelmed logistics infrastructure. Labor shortages due to the pandemic meant reduced capacity at ports, which in turn created bottlenecks as ships unable to berth sat idle or were rerouted to other ports of entry. Understaffed logistics centers were unable to arrange enough drivers for trucks to move the goods out – further clogging up ports with ships that could not be unloaded.

Slow shipments and high shipping costs

The logistics bottlenecks have led to long delays for shipments and significantly slowed average shipping times. According to the online international freight marketplace Freightos, shipping times between China and the US were 85 percent longer than in 2019, taking an average of 80 days to reach its destination.

Another consequence of the supply bottleneck is a severe shortage of shipping containers. Fierce competition between companies to lease or purchase containers has driven up the costs of containers and freight services. In August 2021, the rate for container shipping between the US and China surpassed US$20,000.

Although rates have cooled in the subsequent months, freight rates from Shanghai to New York remain at US$13,987 per 40 feet (about 12 meters) container as of January 20, 2022, a 115 percent increase from the previous year, according to data from maritime and shipping consultancy Drewry.

The rates and slow shipments are expected to continue to rise amid increased demand in the days leading up to Chinese New Year. Shipments at the Yantian port in Shenzhen are delayed for an average of seven days, according to reports, due to an increase in shipments prior to Chinese New Year and COVID-19-induced labor shortages at foreign ports, particularly in the US.

Rising costs of raw materials

The high cost of freight containers is partly to blame for the skyrocketing prices of raw materials, impacting Chinese manufacturers of everything from toys to car batteries. This in turn is further driving inflation in economies around the world, as the high costs get offloaded to end consumers.

One such raw material is lithium carbonate, which is a critical component for the production of batteries for electric vehicles (EVs). China’s lithium prices in December 2021 had increased by 485.8 percent compared to the same period in 2020, exceeding US$40 per kilogram for the first time, according to Benchmark Mineral Intelligence (BMI). This is expected to increase the price of EVs in 2022.

Factory closures

China’s COVID-19 outbreaks have also forced the closure of factories across the country, further impacting supply chains and contributing to the slowing economy in the latter half of 2021. Outbreaks of the Delta variant over the summer of 2021 led to factory closures in cities such as Nanjing, which was one of the centers of the outbreak.

More recently, an outbreak in Zhejiang province in December 2021 (which also prompted the partial Ningbo port closure) led to the closure of several factories in cities including Ningbo and Shaoxing, many of which are key exporters.

More recently, factories belonging to Volkswagen and Toyota in Tianjin had to halt production in early January 2022 following an outbreak of the Omicron variant.

Although not the only factor, the unpredictable nature of the COVID-19 outbreaks and strict policies to contain them has contributed to a slowdown in manufacturing output in the second half of 2021. Production output slowed to just 3.1 percent year-over-year growth in September 2021, down from 5.3 percent in August. By December 2021, growth had recovered to 4.3 percent year-over-year. However, the high likelihood of sustained supply chain bottlenecks and further COVID-19 outbreaks means the outlook for the coming months is uncertain.

What is the 2022 outlook for supply chains?

Most analysts agree that the supply chain disruption will continue well into 2022 and possibly 2023. A high incidence of COVID-19 in countries around the world means that there are still serious staffing shortages at ports and logistics centers in countries such as the US. This means congestion will continue to be a problem for the coming months.

At the same time, an outbreak of a new variant of COVID-19 cannot be ruled out, which would cause further disruption as new lockdown measures are imposed and workers are off on sick leave.

On the other hand, barring a new COVID-19 variant, as other countries move to a “living with COVID” model, easing lockdown restrictions could mean a decrease in demand for imported goods as societies go back to service-oriented consumption. This could help alleviate some of the strain on the world’s overburdened supply chains.

How will this impact Chinese exports?

Despite the supply chain disruptions experienced in 2021, China saw extremely strong exports, growing 29.9 percent year-over-year to reach a record high trade surplus. This was in large part thanks to high demand in developed countries.

However, there are signs that the export boom may not continue in 2022. First of all, although the average growth in 2021 was high, the rate had slowed somewhat in the second half of the year. Exports in December grew 20 percent year-on-year, slower than the forecast 27.8 percent year-on-year growth and a slight slowdown from November’s growth rate – 22 percent – according to data from China Customs.

Secondly, although the total value of exports increased in 2021, the volume of some types of export goods was down. This is in part due to the high price of raw materials and freight forcing manufacturers and exporters to prioritize low-volume, high-value goods in order to protect margins. In short, the combination of the high cost of shipping and raw materials is making it infeasible to produce and ship very cheap goods.

The shift to service-oriented consumption in import countries that could help alleviate supply chain pressure is also a worry for Chinese exporters, as people spend less on import goods. The combination of expensive raw materials and shipping, inflation, and a stronger RMB may also make Chinese goods less attractive to overseas importers. Factories restarting overseas as lockdowns ease will also increase competition for Chinese manufacturers.

The Chinese government has also warned China’s exporters of tough times ahead, with the State Council stating in a circular released on January 11 that “China’s foreign trade faces a growing uncertainty, instability, and imbalance”. The circular also offered several opinions on strategies for stabilizing foreign trade. These include encouraging financial institutes to extend inclusive financial support to help companies pay for logistics, in particular to small and medium-sized enterprises, and accelerating the processing of tax rebates for exports.

Despite the slowdown in trade, a wider perspective is also necessary when looking at the data. Growth may be slowing, but China is still the largest exporter of goods in the world – and will be for the foreseeable future. Imports, although also slowing, are still strong (up 19.5 percent year-on-year in December), offering ample opportunities for overseas businesses.

Can we expect more China port closures?

As it currently stands, China has shown no indication of easing its zero-tolerance stance toward COVID-19. This is especially true in the lead up to high-profile events, such as the Beijing Winter Olympics and Paralympics, which will take place this year from February 4 to 20 and March 4 to 13, respectively.

Other potentially sensitive events on the horizon include the 20th Party Congress, which will be held in the fall of 2022. Given the high significance of this event – when President Xi Jinping is expected to be sworn in for a third term – ensuring a high level of confidence among the population will be paramount for the government in the lead up to this period. Maintaining low COVID-19 numbers will be crucial for achieving this.

In addition, despite warnings over the impact of lockdowns on the global economy, the Chinese government has stressed that stability is of utmost importance in 2022. Although zero-COVID policy causes disruption to domestic consumption and production, the highly targeted lockdowns and contact tracing mean that most people have been able to experience relative freedom and have not been affected by pandemic prevention measures.

The alternative – moving to a “living with COVID” model – remains untested in China, and it is unclear how consumer confidence would be impacted. With a population that is used to living without COVID-19, it is likely that a sudden spike in numbers would cause more economic disruption than the prevention measures.

For this reason, lockdowns and prevention measures are expected to continue, and it is therefore highly likely that we will see more China port closures soon. However, China’s outbreaks are for the most part highly targeted and precise to ensure minimal impact on the rest of society. This was also the case at Ningbo Port, where much of the port remained operational. According to the shipping giant Maersk, ship dockings and departures, as well container load and discharge operations, were normal throughout the duration of the outbreak.

Ports have also taken considerable measures to reduce the risk of further outbreaks, which may go some way to reduce the frequency of China port closures and help minimize the impact should an outbreak occur. These measures include preventing crew members from disembarking unless absolutely necessary and requiring crew members to take COVID-19 tests before dock workers can board the ship to unload the cargo.

The obstacles to supply chain recovery

China port closures are contributing to the continued disruption in the global supply chains, but it is by no means the only factor impeding recovery. Fixing global supply chains will require stable operations and high productivity at ports for an extended period of time. The fragility of the current system means that small bumps in the road can significantly set back any progress that has been made to ease congestion. This includes China port closures due to COVID-19 outbreaks and continued staffing and container shortages, but also force majeure events such as weather-related disruptions and even unexpected blockages at key shipping lanes.

Given the high likelihood of further COVID-19 outbreaks in both China and foreign countries, some degree of disruption in the coming months can be expected, and recovery isn’t likely until a final solution to the pandemic – in China and elsewhere – has been found.

Foreign companies engaged in imports or exports are advised to monitor government incentives and tax breaks, as well as international treaties, such as free trade agreements, that could help alleviate the costs of trading with China.

Source: China Briefing


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