China’s covid-zero lockdowns loom over the global supply chain

Unsure what 2022 will bring.
Unsure what 2022 will bring.
Image: Reuters/Carlos Barria
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A new covid-19 lockdown imposed last week (Dec. 7) in the port city of Ningbo, China, is raising the specter of further disruptions to an already battered global supply chain.

There are more than 200 cases so far in the most recent cluster in the manufacturing province of Zhejiang, which includes the city of Ningbo. The outbreak is said to be spreading “relatively rapidly,” and has led to the closures of dozens of factories. So far, the lockdowns have restricted trucks going in and out of the port, slowing operations. While there are no reports yet of the port closing, the lockdown, combined with weeks of intensifying covid-zero restrictions, is worrying logistics professionals.

“The rising covid infections may lead to shutdowns at Ningbo and some other ports in China, adding to congestion and cargo backlogs,” a source from a UK-based logistics company said on Dec. 7 to S&P Global Platts, an analytics firm. “This is only the beginning—the first quarter of 2022 is going to be a complete wreck.”

China’s pursuit of covid-zero has led to swift, severe measures to control the spread of infection, and policies to contain covid have only intensified since the omicron variant began to spread. On Monday (Dec. 13), Xinhua, the state-run news agency, singled out ports as the entry point for the most recent cluster of infections, and reported that the government will be tightening covid controls at port cities.

China’s policies at port have an outsized impact on the overall functioning of the global supply chain. The country is the world’s largest exporter of goods, as well as the largest importer of commodities. More ships call into the ports of China than any other country.

“The global supply chain recovery relies on China,” said Atul Vashistha, CEO of Supply Wisdom, a New York-based risk intelligence company. “That’s an alarming and troubling truth considering China’s centricity to the supply chain. While it may be a sound public health policy, China’s zero-tolerance covid policy makes supply chain matters worse.”

China’s covid-zero port rules snarl transport

Ningbo is one of the world’s largest container ports. When one of its terminals was shut down for two weeks in August 2021 after one worker tested positive for covid, the congestion, ship diversions, and resulting delays took weeks to unwind. A month of reduced operations Yantian port in southern China from late May buckled the global supply chain with vessels waiting a week or more to berth, and containers losing their spots on ships, resulting in compounding delays worse than those caused by the Ever Given blocking the Suez Canal.

In November, Bloomberg reported that various covid-zero requirements (pdf) at Chinese cities and ports were accumulating into quarantines as long as seven weeks for returning Chinese seafarers, resulting in some shipping companies diverting their ships to avoid quarantines. Seafarers are required to quarantine for at least two weeks before travel in China, according to Chinese foreign ministry documents, and then again on arrival. The report’s suggestion that China’s covid-zero policies might hinder the global supply chain’s recovery incited a denunciation from a Chinese nationalist paper, an indication of the topic’s sensitivity in China.

Covid-zero policies have led to snarls in other links of China’s supply chain. Quarantine requirements for river pilots on the Yangtze, a major artery for the movement of goods, including exports, has led to a shortage of pilots, backing up traffic into seaports, including Ningbo.

Port congestion in China has fluctuated in recent months, at par with or surpassing congestion levels in the Port of Los Angeles. In September, there were 168 ships waiting outside the Ports of Shanghai and Ningbo. According to data from eeSea, a Copenhagen-based maritime intelligence company, as of Dec.15, the Port of Ningbo has more ships waiting to pull into berth than the Port of LA.

Complying with covid-zero policies is also contributing to increased costs. The Port of Ningbo announced that it will increase its handling charges by 10% on Jan. 1, 2022, for import and export containers, a move that could be replicated at other Chinese ports.

Air freight is also being impacted

In response to increasingly punitive covid-zero rules in Hong Kong, which is part of China but sets its own covid policy, FedEx, the freight delivery giant, announced in November that it would be shutting down its crew base in the major international cargo hub, and relocating personnel to California.

After international travel plummeted at the start of the pandemic, passenger freight boomed as cargo filled the seats once occupied by tourists. Last week, China’s Civil Aviation Administration (CAAC) announced that from Jan. 1, 2022, passenger planes would no longer be allowed to carry cargo in its cabins.

In a statement, the CAAC cited safety as the reason for the prohibition but acknowledged that the move would further reduce air freight capacity, keeping rates high, and adding that, “The tightness of air transport capacity may lead to part of the demand for air transport being transferred to shipping, leading to a further increase in shipping rates and, overall, freight prices are expected to continue to rise.” (The US and EU continue to allow passenger freight.)

Chinese New Year weighs on the supply chain in 2022

Freight rates are ticking up, and are expected to spike before Chinese New Year, which falls on Feb. 1 next year.

This month, major shipping lines including Hapag-Lloyd and ONE, warned of disruptions from late December into mid-February as feeder services—the ships that transfer cargo to and from regional ports to a central port for long-haul ocean voyages—suspend operations until after the weeklong holidays, traditionally a time when many workers leave jobs and head to their home villages. Covid restrictions have led to a lack of crew to man the ships, which may have ripple effects on China’s supply chain, and can exacerbate the global container shortage. The suspensions will affect services at ports in southern China.

The Loadstar, a trade publication, reported that jittery carriers are not committing to long term deals on rates before Chinese New Year, leaving one freight forwarder with the assessment that as far as the freight market of 2022 goes, “we really do not have a clue.”

“The world’s reliance on China for manufacturing and logistics means we’re in for a long ride,” Supply Wisdom’s Atul Vashistha said. “The blockages, shortages, and delays will last well into the second half of 2022, and will likely persist until we see fundamental change in labor, demand and supply chain practices.”