China zero-Covid lockdowns, CNY vacation impression provide chains, ports

Streets in Tianjin, China, empty on January 10, 2022 as the city goes into partial lockdown following a surge in Omicron cases.

Geno Hou | Future Publishing | Getty Images

Covid lockdowns, quarantines and restrictions are causing a backlog at some of China’s major ports, causing “chaos” and increasing air freight by up to 50% in some cases, analysts tell CNBC.

Ahead of the extended Lunar New Year holiday in China, air freight rates have skyrocketed and some shipping companies have suspended services, putting a renewed spotlight on congested supply chains.

It comes as China presses ahead with its zero-Covid strategy – meaning a recent spike in infections has led to lockdowns and restrictions in major port hubs and major cities across the country.

“Although ports are still open, current restrictions — such as mandatory quarantines and testing — continue to slow transportation and cause delays,” Atul Vashistha, founder and chair of supply chain consultancy Supply Wisdom, told CNBC.

China’s top priority right now is to limit the spread of Covid cases ahead of next month’s Winter Olympics and the upcoming Lunar New Year, he added. However, the resulting curbs at the ports have also created a certain “chaos”.

“Products are piling up while ships are banned from entering. Between negative PCR test requests and last minute rerouting, 2022 starts as 2021 ended – chaos,” Vashistha said, referring to the polymerase chain reaction Covid tests.

Cases have been reported in the main port cities of Shenzhen, Tianjin and Ningbo, as well as in the United States Industrial center of Xi’an, spark arrestors and other curbs.

Infections were also reported in other cities, e.g Dalian and anyang.

The capital Beijing reported its first locally transmitted Omicron infection on January 15. On Sunday, less than two weeks before the Winter Olympics, Beijing authorities introduced new restrictions to stem a recent outbreak after nine locally transmitted cases were detected in Beijing the day before.

the Ningbo eruption in December also triggered some curbs and disrupted traffic in the world’s third busiest port, Ningbo-Zhoushan.

Operations have now largely resumed, but shipments have been diverted to Shanghai — the world’s busiest port — causing congestion and delays there too, Judah Levine, head of research at freight-booking platform Freightos Group, told CNBC.

Supply chain tech firm project44 said the shift from the Ningbo port to Shanghai “backfired on some carriers” as congestion mounted in Shanghai. As a result, Shanghai saw an 86% increase in empty runs year-over-year, it said, referring to an industry term for when an airline decides to skip a particular port or the entire journey altogether.

In an email to CNBC last week, Freightos’ Levine said all eyes are on China and the impact strict outbreak containment measures could have on logistics. “Steps have been taken to quell the spread of positive cases, which have been detected in multiple locations including Beijing, Shenzhen, Tianjin, Dalian and several others,” he said Jan. 19.

Rising air freight rates

Spot prices for ocean shipping en route from Asia to the U.S. West Coast were up 4%, Levine said, but they’re unlikely to rise much further because production is on hold as the Lunar New Year holiday approaches and factories shut down for a while be closed for a longer period of time.

However, air freight rates are still rising, he added.

“With enough time to still move cargo by air, the pre-holiday rush coupled with pandemic-constrained capacity is driving air freight rates higher,” he said, adding that the Freightos Air Index showed that the Rate from China to Northern Europe was $9.59 per kg in mid-January – up over 50% from under $6 per kg in early January.

The Lunar New Year is China’s biggest holiday, and hundreds of millions of people traditionally travel back to their hometowns from the cities where they work.

According to Vashistha, some major shipping companies such as Ocean Network Express and Hapag-Lloyd have suspended their services and operations even earlier than last year to celebrate the season. That puts a strain on already fragile supply chains, he said.

This latest shock comes at a bad time for global supply chains. They were already stressed out by the holiday season combined with the omicron variant, but port troubles in China take these complications to a new level.

John Ferguson

economic impact

Shipping costs have fallen in recent months as supply chain backlogs have reduced, but the recent Covid surge and possible port closures will dwarf any progress made, said Paul Gruenwald, chief economist at S&P Global Ratings.

“I would say that this will slow down the improvement that we’ve seen over the past few months,” he told CNBC’s Squawk Box Asia on Thursday.

Impact of China’s zero-Covid on the Winter Olympics

China’s zero tolerance for Covid will have a major impact on global supply chains, said John Ferguson, globalization, trade and finance practice leader at think tank Economist Impact.

“This latest shock comes at a bad time for global supply chains. They were already stressed out by the holiday season combined with the Omicron variant, but port issues in China are taking those complications to a new level,” Ferguson said.

“China’s zero-Covid strategy is critical as further outbreaks will lead to more closures or lockdowns in key areas,” he told CNBC. “With China approaching the Winter Olympics, as well as major political events later in the year, China is unlikely to abandon its Covid strategy in 2022.”

One bright spot is that many companies have already prepared for stressed supply chain scenarios and are now implementing their plans, he said.

Still, not everything will go smoothly.

“While global companies have become more nimble during this crisis, we should still expect some delays from this latest round of supply chain stress,” he added.

Supply Wisdom’s Vashistha summed it up: “Combine the closures with the increase in Covid-related port congestion, China’s zero-tolerance policy and reduced air transport capacity and the problem becomes even clearer: cargo continues to increase, without there being any way to move it or places to go.”

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Japanese-style pubs report losses however gross sales at fast-food chains soar

The Japanese restaurant sector has reported mixed results on its recent earnings as the number of people hard-eating at izakaya pub operators declined due to the coronavirus pandemic, while takeaway demand boosted fast food chains.

Pub operator Watami Co. reported a loss of 11.59 billion yen ($ 105 million) on Friday for fiscal year ended March when the government asked restaurants to reduce opening hours for alcohol and anti-virus measures to close early in the course of the year.

“If the current situation continues, we expect red ink to reach 5 to 6 billion yen in fiscal 2021,” Watami chairman Miki Watanabe said in an online briefing, adding that the company had a capital injection of 12 billion yen from the state applies for Development Bank of Japan.

Colowide Co., which has restaurant and pub units, including Japanese set menu chain operator Ootoya Holdings Co., posted a record loss of 9.73 billion yen in fiscal 2020. It has decided to close 48 of its restaurants as part of its business review.

Among the fast food chain operators who benefited from the boom in the delivery and take-away groceries, KFC Holdings Japan Ltd.’s net profit increased. in fiscal 2020 by 82.9% to a record value of 2.81 billion yen.

McDonald’s Holdings Company (Japan) achieved record sales of ¥ 155.78 billion from January to March, an increase of 9.8% over the previous year.

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