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Container xChange: “Supply Chain pressures from COVID lockdowns in China, Russia- Ukraine war and rising oil prices”

“Logistics companies are wary of trade lanes, trade partners and shipments to and from Russia. Market volatility has caused uncertainties in the market which has caused massive delays and reduced capacities.”

“COVID induced lockdowns in China and the Russia-Ukraine war has torn apart the expectations of recovery of the supply chain, which has been grappling to keep up to the pressures of implications resulting from these and many more disruptions.”

“The War has impacted Europe greatly. First, Containers are stuck in the terminals waiting for transhipments to Russia and the result is a huge pileup there. The second significant impact is on the China- Europe rail. The northern corridor is still open, but volumes are massively reduced due to uncertainty in the market. That has pushed cargo towards sea freight and even in some cases towards air freight. Low-value cargo has largely suffered because high-value cargo has been pushed to the ocean transport.”

“On a more global scale, the rise in oil prices has been a major repercussion as a result of the war. More logistic players are unclear about the restrictions of doing business with many companies because there are second order and third order sanctions that are also required to be considered while doing business. Companies are hesitant to make decisions, selection of new partners is significantly impaired.

China lockdowns

There is market commentary about expectations of significant decrease in freight rates. I don’t think that will happen necessarily in the short term, but in the mid-term to long term, this will lead to increase in rates.

“It’s almost like in a traffic jam. Some people now stepped on the brakes really heavily and the problem is that this will lead to a significant sort of bulk up in demand for freight services which will essentially be unleashed once the factories reopen. And when the demand is back, the carriers will again not have enough equipment on the ground because not enough equipment went into China during the Port lockdowns and not enough vessels are available so that will push up prices once again. So this will continue pushing the volatility in the market and the congestion situation on the Transpacific will also not significantly improve because it’s almost like a start-stop situation. It will just come back worse than it was because the way you remove the traffic jam is not by stopping something violently and then hitting the accelerator again. It’s sort of making sure that the traffic flows at a certain speed.”

The impact of COVID lockdowns on key markets will have wider reaching impacts leading to equipment scarcity in China, hike up of rates and worsening of the traffic jam on transpacific.

The problem will continue to remain after that because there are also labour union disputes in the US waiting in the month of May which historically always leads to slow down at the west coast ports.

Into the Future?

“We will need more resilient supply chains and that means less concentration on high volume routes. While China-US will still be significantly massive, more smaller trade networks will increase to other countries in Southeast Asia, countries potentially in Africa and South America, who will pick up some of this uncertainty and some of the volume that now gets diverted from the big supply nation. This will be a very gradual process. And again, it doesn’t mean that freight demand from China will decrease now, but I think it might not grow as much anymore.”

Emergence of small trade networks

The implications of emergence of smaller trade networks. One is you don’t really need these huge vessels on smaller trade networks. There will be an increase in demand for smaller vessels. Secondly, the model of just a few stops in China, then crossing the Pacific, then a few stops in the US, and then going back will, I think, decrease in importance. And there will be an uptick in more complex networks with more stops and longer turnaround times, further increasing the turnaround times of containers because they just spent more time on the water or an increase in trans shipments. So, for example, more stops in Southeast Asia, then all of this goes into, let’s say, Singapore or Hong Kong in a major hub and then re-export to across, for example, the Pacific. That again, not only increases sort of intraregional traffic, but it also increases the importance of these transit hubs, which will need to build up further capacity to cope with the demand. And then lastly, I think it will increase the importance of smaller players in the market, and that can be smaller feeder operators and can be smaller who basically pick up this intra-regional traffic or even the transpacific traffic. But that doesn’t start from the big hubs, depending on, I guess, the network model of the carrier.

Pre-pandemic times, supply chain was all about efficient prices and just in time delivery model to make more profits.

Rising Oil prices

The rising oil prices are bound to have a limited impact on containerized trade in the short run. But generally high oil prices hit hard when the freight rates are very low. Currently, when the freight rates are astronomically high for the past two years (for instance, $10,000 for a 40 ft high cube from China to the US) the impact of a fuel prices hike will not have a large impact on the short term. What remains to be seen in future is how the war pans out in the future and how the supply chain builds resilience in the end.
Source: Container xChange

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