Shanghai Port Congestion and the Brewing Global Supply Chain Crisis

One out of every 5 container ships worldwide is waiting outside a Chinese port due to heavy congestion brought in by covid lockdown in China [1]. This could mean that another supply chain crisis is looming large on the horizon, waiting to crumble the global supply chain. The first signs became visible in March 2022, when the volume of goods being shipped by sea out of Shanghai dropped by 26%. It was seen that between March 12, when the targeted lockdown was introduced, and April 4, the volume of goods leaving the Shanghai ports by trucks fell by 19% [6]. The scale of the problem hanging over our heads can be sensed by the AIS data of the ships around China, which depicts 300 container ships and 500 bulk ships waiting off the coast of China [3].

The story begins with the outbreak of the omicron variant in China, following which the Chinese Government resorted to its tried and tested method of initiating its zero covid policy. China’s zero covid policy is directly responsible for such a steep drop in cargo movement. There are enormous backlogs of cargo to be shipped and to be received. At this point, even if the lockdown were to be magically removed, it would be cold comfort to the supply chain professionals as it only opens the floodgates for the crisis to progress.

Understanding the zero covid policy of China

The policy entails confining people to their homes where they are not allowed to get out, even for the essentials. The government is reported to make supply drops of essential goods at people’s doorstep. The military patrols the street and enforces the lockdowns. Mandatory testing is carried out, the infected individuals are taken away, and their pets are culled to prevent unchecked transmission.

The lockdown curbs have forced factories either to cease operations or to operate via a “closed-loop” in which selected staff stays on-site to keep lines running while outside shipments are restricted. Realistically, even closed-loop operations cannot be maintained for long. As the magnitude of the crisis has increased dramatically in the past couple of weeks, the incoming shipments remain stuck at the ports, pushing the factories to run on fumes with rapidly depleting stocks.

Supply chain crisis compounding in China

In the modern world, one can say that when China sneezes, the world catches a cold. Lars Brandstäter, CEO of FleetMon states: “China fulfills the role of a global supplier, and with the lockdown in place, the inventories across the globe have started to dry up.” The situation is not the same as that of February 2020 because this time, the world is open, adding to the demand for consumables, but Chinese factories are shut.

“The heart of the problem does not lie in the lockdowns themselves but the unforeseen side effects. This time China has not closed its ports but instead introduced quarantine measures which have created a severe scarcity of truckers for moving goods inland”, Brandstäter continues. Stringent lockdown measures dictate that the truckers hauling the freight inland must produce a new covid negative certificate every 24 hours when entering or leaving lockdown zones. Such rules and long waiting hours have forced truckers to avoid heavy restrictions-districts such as Shanghai, creating a critical shortage of willing truck drivers to move goods between factories and ports.

Derek Bushaw, Head of Network Operations, Asia at Flexport, said that trucks are vital elements of the supply chain, as they make up the first and last mile of the supply chain. Trucks are required to pick up the cargo that arrives at the port and take goods to ports to be shipped out. The delay in loading and discharging has led to more extended port stay for vessels and has ultimately brought down the system’s overall efficiency.
As per Everstream Analytics, some shipping companies reported a 30% drop in efficiency due to insufficient transport facilities at ports. Container volumes from China have dropped by 31% from April 6th to April 15th [3]. Freightos Container freight index states that the freight rates fell by 5% between March 12th and April 8th. The situation could be better understood because when global routes such as Europe-South America witnessed a 10% in freight rate, during the same period, Europe-China freight went down by 9%.

However, freight forwarders state that they cannot take up the shippers at discounted rates if they cannot load the cargo onto ships from the ports. Hence some ships are preparing to announce more blank sailings in the future [6]. This spells trouble for the markets downstream of the Chinese economy.

Handling the crisis at ports

Panos Mitrou, Global Gas segment manager at Lloyd’s Register, states that in the LNG segment, more than half of the LNG vessels will not be able to achieve A, B, or C ratings in 2023. He explains that these vessels are equipped with old technologies and require expensively sustainable retrofitting to achieve satisfactory CII ratings. He fears that with CII requirements becoming progressively stringent every year, as an immediate measure, the shippers are avoiding calling on congested ports and are diverting the vessels. Containership companies such as Maersk, One, and 2M are not calling on Shanghai as a stop. European shippers are also seeking sourcing from nearby sources such as Turkey. FleetMon registered more than 45 changes of destinations by containerships headed to Shanghai.

The Chinese government is also making efforts to ease the lockdowns and restart the economic machinery by introducing tax cuts and issuing a white list of companies that can operate in a closed loop, which means that the workers cannot leave the premises of the factory to limit infections. While the Chinese people wait for the economy to reopen, the pending crisis keeps growing by the moment.

Realizing the scale of the crisis

CII is dependent on the fuel consumption over the journey, which in turn is dependent on the operation. In 2020, the U.S. imported roughly $435 billion worth of goods from Chinese cities. According to the Office of the United States Trade Representative, the country’s exports to China stood at $125 billion. This shows the reliance of the U.S. consumer market on Chinese imports. Currently, the U.S. inventories are at an all-time high, but uncertainty is the factor of worry. Given the opaque nature of China, with no ground data in hand, it is challenging for supply chain managers around the world to predict and plan cargo movement.

Precise prediction of the china-lockdown impact on the US market would be difficult, but a trade comparison will help understand the picture. Two of the three largest cities of China are under lockdown, Shanghai, the global financial center, and Guangzhou, the manufacturing and distribution hub. Shanghai has the world’s largest port, whereas Guangzhou is the home to the world’s fourth-largest port. Combined, the two cities handle almost three times the cargo volume that the total US imports every year [14].
In April, the German Chamber of Commerce in China conducted a flash survey and found that approximately half of the German warehousing, logistics, and supply chain operations were either completely shut down or severely impacted by the current covid-19 outbreak in China [14].

The worst is yet to hit the global supply chain

During the lockdown in China, the factories failed to meet the demand for goods, and thus demand kept on piling up. When the lockdown is lifted, factories will rush in to meet these heightened demands. Accompanied by the economic stimulus provided by the Chinese government to jump-start the economy, China will witness a boosted production. There will be a need for added resources and efforts to pass this temporarily heightened volume of goods through the supply chain.

A more significant number of truckers will be required to ship finished goods to the port at the supplier end. The suppliers will need more shipping containers to export their goods, and ultimately more container ships will be needed to export containers out of China.
On the receiving end, more container ships will be calling to unload the finished products. Thus a greater number of truckers will be required to move containers inland.

Each link will require additional resources for only a brief period, which would exert considerable strain on the supply chain. The investments in more truckers, workers, and a greater number of ships, containers, etc., seem unjustified. Mainly because after this period, these resources and workers will become superfluous.

The sentiment moving forward

The recent cascade of crises has exposed the fragility of the approach of such a heavy dependency on China. Many private entities are looking to diversify, if only to have a contingency plan to deal with temporary lapses in supply. There is a lot of buzz in the industry around reshoring and minimizing China’s role in the supply chain. “Heartland Forwards” February survey showed that 70% of the companies that participated were highly likely to move operations to the United States. Resilience 360’s research has shown that 24.7% of its survey participants planned to move some of its operations out of China, and 1.8% planned to move their operations entirely out of China [8].

However, some conservative industrialists and research with predictive models show that the reliance on China is not going away anytime soon. From the perspective of private companies, the astronomical costs of reconfiguring a supply chain and abandoning a lucrative source like China are too much. Even for governments, pulling back from China leads to a drop in the GDP of both the country itself and China.

Conclusion

The ubiquitous nature of E-commerce and the ease with which we can get goods from across the world simply by a click make it easy to remain oblivious to the complicated machinery in place for the goods to arrive. It is undeniable that a supply chain shock is incoming. Even though supply chains have demonstrated their resilience in the past few years, this time, there is expected to be some reshuffling of global trade as we move forward.

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In many shipping and shipping logistics instances, processes are still heavily paper-based. Digitization is progressing very slowly in this industry, which means that goods cannot be tracked efficiently. The entire supply chain is still barely transparent. As a result, problems or even accidents are detected too late.

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• current position
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List of references

[1] https://www.hellenicshippingnews.com/1-in-5-container-vessels-globally-is-waiting-outside-a-congested-port-of-which-27-7-in-china/

[2] https://www.npr.org/2022/04/19/1093620434/45-cities-in-china-are-in-some-sort-of-covid-lockdown-heres-the-toll-thats-takin

[3] https://www.freightwaves.com/news/chinese-lockdowns-will-create-shocks-to-american-supply-chains-but-china-is-the-biggest-loser

[4] https://www.reuters.com/world/china/shanghais-high-asymptomatic-covid-rate-could-be-due-including-mild-cases-2022-04-08/

[5] https://www.deccanherald.com/business/business-news/shanghai-lockdown-snarls-worlds-busiest-container-port-and-china-supply-chains-1098772.html

[6] https://qz.com/2152861/chinas-lockdowns-are-adding-to-supply-chain-chaos/

[7] https://www.scmp.com/economy/china-economy/article/3173996/chinese-debt-sell-likely-continue-yield-advantage-over-us

[8] https://www.supplychaindive.com/news/supply-chains-reshoring-decisions-sourcing-manufacturing-china/597596/

[9] https://www.supplychaindive.com/news/china-supply-chains-procurement-sourcing-resilience-vietnam/606321/

[10] https://www.freightwaves.com/news/shanghai-tries-to-ease-supply-chain-crunch-amid-lockdown

[11] https://www.cnbc.com/2022/04/15/bernstein-chinas-2022-covid-lockdowns-inflation-risk-bigger-vs-2020.html

[12] https://market-insights.upply.com/en/supply-chain-diversification-china-retains-a-strategic-role

[13] https://theloadstar.com/aggressive-carriers-biting-the-hand-that-feeds-them-as-importers-shun-china/

[14] https://www.reuters.com/world/china/european-business-chamber-writes-chinas-state-council-challenges-covid-policy-2022-04-11/

[15] https://www.bbc.com/news/business-60835389#:~:text=Tesla%20boss%20Elon%20Musk%20has,car%20plant%20in%20recent%20history

[16] https://macropolo.org/analysis/supply-chain-diversification-quitting-china-is-hard/

[17] https://hrcak.srce.hr/en/229746

[18] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8488164/