[Freightos Weekly Update] China lockdowns latest shock to ocean and air

Key insights:

1. The COVID lockdown in Shenzhen – scheduled to last until the 20th – has closed factories and warehouses, though ports remain open so far.
1. The lull in manufacturing may be driving the dip seen in ex-Asia ocean rates this week (8% to the US East Coast, 6% to N. Europe). It should be felt as a surge in demand for freight once factories reopen, but could provide an opportunity for ports to clear existing backlogs before the surge.
2. If ports close we could see delays and congestion at area ports similar to the three week slowdown following an outbreak at Yantian’s port last May.
3. That shutdown pushed transpacific and Asia-Europe ocean rates up by more than 20%. But with Asia-US rates already more than double their level last May, the impact on rates may not be as pronounced.
4. Signs that Asia-Europe demand has been decreasing as inflation gets worse – Asia-N. Europe rates have fallen 8% since the start of the year – could mean the disruption won’t send rates spiking, though it could slow their decline.
2. Less severe restrictions in Shanghai are having less of an impact on manufacturing and ocean logistics so far. But the cancellation of international passenger flights for the next six weeks will put even more pressure on Shanghai air cargo rates, which have already increased 42% to the US East Coast this month on rising fuel costs and decreased capacity resulting from the war in Ukraine.

Asia-US rates:

• Asia-US West Coast prices (FBX01 Daily) decreased 1% to $16,242/FEU. This rate is 209% higher than the same time last year.
• Asia-US East Coast prices (FBX03 Daily) fell 8% to $17,063/FEU, and are 199% higher than rates for this week last year.

Analysis

Just as global trade is coping with impacts from the war in Ukraine, new covid outbreaks in the major Chinese export hubs of Shanghai and Shenzhen, has the supply chain bracing for the latest in a too-long series of shocks.

So far, Shanghai has not entered a full lockdown, though new rules may slow trucking operations, and international passenger flights have been canceled for the next six weeks, which will impact cargo flows and rates.

Tight capacity and rising fuel costs resulting from the war had already been pushing air cargo rates up, with Freightos Air index (FAX) Shanghai-US East Coast rates climbing to more than $16/kg last week, a 42% increase so far this month. Rates from Europe to Asia are also rising, with prices from Frankfurt, for example, increasing 17% to Shanghai and 110% to Hong Kong as it struggles with its own surge. The removal of Shanghai’s passenger capacity will only put more pressure on rates.

In the tech and electronics manufacturing hub of Shenzhen, however, a full lockdown closing all manufacturing, warehouses and commercial activity has begun and is set to last until March 20th. The dip in ex-Asia ocean rates since last week (8% to the US East Coast, 6% to N. Europe) may already reflect that dip in available shipments.

But the pause in manufacturing will likely cause a surge in freight demand once factories reopen, and the degree of impact on ocean logistics will depend on how long the lockdown actually lasts, and the extent to which the ports are affected.

Shenzhen-area ports, including the critical Port of Yantian – which is responsible for about 25% of US-bound, Chinese origin ocean volumes and 50% of Shenzhen’s total exports – officially remain open and carriers have yet to cancel port calls, though an update from Seko Logistics indicates that the port will not handle any new exports next week.

If the ports stay open, the lull in manufacturing (and available trucking) could be an opportunity to clear some of the ports’ export backlog, though with warehouses and factories closed, finding space for arriving empty containers could be a challenge.

If some of the ports close, US and EU destinations could experience a welcome lull of arrivals in the coming weeks, followed by an unwelcome surge as pent up demand is rushed out.

The outbreak at the port of Yantian last May and into June saw operations decrease by about 75%. It took about three weeks to recover, causing a backlog of ships at Yantian and congestion at alternate area ports. Capacity idled by congestion also led to ocean rate increases of more than 25% from Asia to the US, and a 21% rise to Europe.

But rates from Asia to the US West Coast are already 86% higher than they were even after the June increase pushed rates to $9k/FEU, and Asia-N. Europe rates of $13,283/FEU are 21% higher than last June.

The latest indicators suggest that transpacific demand remains strong, and current rates are still about 20% below the records set during the height of peak season in September. So, depending on the extent of the current disruption, it could be enough to send transpacific prices up once again, though perhaps not to the same degree as last spring.

Asia-Europe demand, however, appears to be waning. With rising costs and inflation made worse by the war, and some additional ocean capacity as carriers boycott Russian cargo, ocean rates have fallen more than 8% since the start of the year. So the impact of closures in China may not result in a spike, but could be enough to keep Asia-Europe rates from falling or drive a more moderate increase than last time.