Analysts and transportation companies agree that despite ongoing COVID challenges in China, it will not result in a widespread crisis leading to a shortage of goods and congestion in supply chains.
The decline in China's industrial production cannot be solely attributed to a lack of Chinese labor due to the pandemic. It is also a result of falling demand in the West, highlights Peter Sand, chief analyst at Xeneta. “There is no doubt that outbreaks of COVID are fierce right now, and that production levels have decreased, but demand is certainly also reduced,” he said.
Sand and other analysts expect freight volumes to fall in 2023 under any circumstance, and COVID outbreaks in China will not worsen developments. “I expect a clear effect from COVID in China, which, however, won’t alter the year as a whole,” he noted.
Sand said the decline in freight volumes is expected to peak in the first half of the year. “We expect a drop in volumes in H1 and a slightly smaller drop in H2 with an overall decline potentially reaching 2.5% in 2023.”
A global freight forwarder observed that freight markets were in shock over the sudden decline in spot rates and are in “an adjustment phase”. However, the executive said current developments do not “exactly align with overall economic development” and that a summer rebound is expected.
Two key container liners with activities in China, Maersk and Hapag-Lloyd, are not too worried about developments in China either. Offices are staffed and operations are working normally.
According to analyst firm Sea-Intelligence, the dominant problem in the freight market is the current normalization trend following two years of unprecedented rate surges. “This means that we see sharply dropping demand combined with a significant injection of capacity due to reduced bottlenecks. Adding insult to injury for the carriers, 2023 will begin to see deliveries of the sizeable orderbook, based on orders made during 2021,” wrote Sea-Intelligence in a comment on the developments on Jan. 8.
Sea-Intelligence notes that a complete stabilization of the market could likely appear within the first quarter of this year if there are no disruptions from the U.S. West Coast port labor negotiations.
Source: Shipping Watch
The Shanghai Containerized Freight Index (SCFI) declined by 2%, reaching US$1,031.42, marginally higher than the three-year historical low of US$1,022 recorded in January 2020. The index will likely reach the pre-pandemic mark heading into the Chinese Lunar New Year, considering a negative demand scenario with inbound volume into the U.S. recording negative growth.
Drewry’s World Container Index (WCI) stabilized during the first week of January 2023, after 43 weeks of decline. The composite index remained relatively stable but is 78% lower than a year ago.
The key Trans-Pacific routes in China-Europe and China-U.S. East Coast recorded weekly price increases of 1% and 5%, respectively. The China-U.S. West Coast trade lane recorded a -5% rate decline. The Trans-Atlantic route, which saw prices appreciate and remain at a high despite the spot rate falls, saw prices on the Rotterdam-New York trade lane edge to their lowest since February 2022. Xeneta’s Shipping index shows rates for China- South America’s East Coast have dropped -90% from their highs.
Source: Container News
Economic pressures continue to hamper consumer spending, and industry players are not expecting to see the usual increase in demand as factories close for the two-week holiday.
According to a global freight forwarder, the year-end holiday in 2022 did not deplete stock levels. For this reason, a limited uptick in demand is expected after the Chinese Lunar New Year period.
Rate data provider TAC Index said rates were trending downwards, which seems to confirm the lack of a Chinese New Year rush. “There were no signs yet of any rise towards a ‘mini peak’ ahead of Chinese New Year, with outbound Shanghai [rate index] falling steeply by 10.3% week on week, leaving that index down 40.8% year on year,” TAC Index said in its weekly market summary.
However, there are indications factories were preparing for a rise in COVID cases after the holiday due to more mixing as people return home for the break. “Some sources said Chinese suppliers were ramping up production ahead of a potential rise in infections over Chinese New Year, though others suggested local COVID levels may have already peaked in December,” TAC noted.
Data provider CLIVE also identified the potential impact of rising COVID cases: “What lies ahead remains uncertain. After a surprisingly strong start for the air cargo market in January 2022, this new year will likely be impacted by the earlier Chinese New Year and growing concerns of rising COVID levels which, in China, is already impacting some factory production.”
Source: Air Cargo News
With reshoring decisions dictated by costs and logistics factors, U.S. manufacturers are unlikely to shift manufacturing operations out of East Asia in 2023, separate reports indicate.
“The ultimate extent of how much production will be reshored or moved closer to home remains an open issue and will depend heavily on the relative costs of production in various parts of the world,” a Citigroup Inc. report on supply chain finance noted.
A significant share of global manufacturing is in East Asia as it is cost competitive. In addition, China’s substantial investment in port infrastructure and new container ships over the past two decades to create efficiencies have protected manufacturers’ bottom lines. However, COVID lockdowns, tense relations with the West, and Russia’s invasion of Ukraine is creating a different operational landscape for some manufacturers in 2022, which saw some manufacturers moving production to countries such as India.
Supply chain congestion and port infrastructure will likely limit how much manufacturers can change strategy this year though, a study by project44 showed. Ultimately, the health of the economy will determine supply chain development this year.
A survey of over 2,600 industry professionals by logistics services platform Container xChange said 88% believe that inflation and recessionary fears would be the most significant factor impeding businesses in 2023.
Source: Bloomberg
