Covid outbreak at Chinese port exacerbates global supply chain delays

Weeks of disruption at one of the world’s largest container terminals in southern China have put a huge strain on the already-stretched global shipping industry, worsening supply chain delays for manufacturers and retailers around the world.

Yantian terminal in Shenzhen closed for almost a week in late May after port workers tested positive for Covid-19; weeks later, productivity has only recovered to about 70 per cent of normal levels.

Yantian handles 13m 20-foot shipping containers a year, making it the third-largest terminal in the world. But congestion at the facility, operated by Hong Kong-headquartered Hutchison Ports, has spilled over to other nearby terminals such as Nansha and Shekou. Local authorities in the region blocked roads and closed off some business zones in a bid to stop the spread of the virus.

The situation exposes the vulnerability of global shipping to future delays if even relatively minor outbreaks occur in Chinese port cities. Lars Jensen, chief executive of consultancy Vespucci Maritime, said the incident highlighted the risk of an even more disastrous shutdown if the virus hit bigger ports such as Shanghai.

“The Chinese authorities are attempting to crack down hard on the smallest outbreaks . . . It only takes a few single cases to shut down large areas. We could see much larger impacts,” he said.

At the height of the disruption, Leslie Wang, a clothing factory owner in Guangzhou, told the Financial Times the situation was “like a nightmare”.

Although she tested all her workers for the virus and kept production lines running, “the goods have been piled up at the freight company and cannot be shipped at all”, she said earlier this month.

Ocean shipping has been under immense stress since late last year as pandemic-related controls, such as border restrictions, caused a shortage of empty containers. The situation was worsened by the Suez Canal blockage in March, which resulted in further delays.

Shipping companies are also struggling to keep up with rising demand for their services after the pandemic fuelled a boom in online shopping, and as advanced economies recover from last year’s historic recession.

As a consequence, the cost of sending a 40-ft container on the Asia to North Europe route recently topped $11,000 for the first time, up from about $8,500 in mid-May and $2,000 last October, according to Freightos.

Although Rolf Habben Jansen, chief executive of Hapag-Lloyd, said that “I would like to think that we’ve had the worst behind us”, he warned that “we also didn’t see Yantian coming and there have been other surprises over the last couple of quarters”.

The disruption at Yantian and its impact on shipping costs could add to global inflationary pressures, some economists warned when the outbreak first hit. This added to concerns that surging factory gate prices in China, fuelled by a commodities rally, will raise prices for its exports.

But Larry Hu, chief China economist at Macquarie Group, said that overall, Chinese exports helped keep the rate of price growth down. “The share of China in global exports has reached [a] new high, in response to the pick-up in goods demand globally and the constrained production elsewhere,” he said. “Otherwise, the global inflation pressure could be even higher.”

Peter Sand, chief shipping analyst at Bimco, said he did not think that “freight rates are putting wood on the [inflation] fire”.

In a bid to work around the disruption, shipping companies have been diverting hundreds of vessels to other ports and some ships are skipping southern China to dodge the backlogs. The average waiting time for ships entering the terminal has hit 16 days, according to Maersk, the world’s largest container shipping company.

Line chart of Global reliability schedule (% on time) showing The pandemic has created massive shipping delays

Electrical systems maker Eaton has 25 of its containers held up in southern China, according to Klaus Gaeb, its vice-president of supply chain in Europe. As a result, the company will have to wait an extra two weeks to receive the supplies. That followed a two to three month wait for items in 45 containers that it had to reorder because the original goods got stuck during the Suez Canal blockage.

Shippers have been hunting for alternatives such as air and rail to get goods from Asia to Europe but those options have become increasingly difficult to pursue. Gaeb said prices to haul goods across Eurasia have more than doubled from pre-pandemic levels to $36,000 per truck.

The delays will persist for manufacturers and retailers across the world for the rest of the year, as will limited availability on cargo ships and record-high freight rates, shipping industry figures said.

Otto Schacht, executive vice-president of sea logistics at Kuehne+Nagel, one of the world’s largest freight forwarders, said the timing of the latest disruption was particularly unfortunate because shipping is close to entering peak season when retailers stock up for the return-to-school and end-of-year buying.

“How quickly are we back at pre-Covid supply chain reliability? Probably six to nine months,” he said.

Jensen of Vespucci Maritime said the Yantian backlog “serves to push the point of time further into the future when we revert to normality”.

“There’s a significant risk that we push the point of return into 2022,” he warned.

Additional reporting by Wang Xueqiao in Shanghai, Qianer Liu in Shenzhen and Patricia Nilsson in London

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