Asia-Pacific under lockdown: Supply chain snarls tangle trade lanes

Spring 2022 has seen the lifting of mask mandates and lockdowns in many parts of the world as vaccination rates have increased or countries opt to return to normal for economic, political and quality-of-life reasons. One holdout, an enormous one, is China. As the world’s manufacturing center — China accounted for 28.7% of global manufacturing output in 2019, according to the United Nations — the country has been the focus of airfreight exports amid the capacity crunch and demand spikes from the COVID-19 pandemic. Early on, personal protective equipment (PPE) for health care workers was a massive demand driver from China. Now, supply chains for industries from automotive to electronics and fashion are turning to airfreight to ensure their goods arrive from China in a timely manner. Government-imposed lockdowns began in March in Shanghai amid rising cases of the omicron variant, affecting not only connectivity with the city, but also manufacturing in neighboring regions. Meanwhile, strict quarantine requirements in Hong Kong also reduced Asia-Pacific capacity. Alongside the China lockdowns, Russia’s invasion of Ukraine in late February added another complicating variable to the supply chain mix. The resulting sanctions and the ongoing war are lengthening trade routes as carriers avoid the affected airspace, costing airlines more as jet fuel prices rise, and leaving cargo capacity from Ukrainian and Russian carriers out of the commercial market. The world was hopeful that these major humanitarian and economic concerns would resolve quickly. But now in mid-May, operators foresee more highs and lows for air cargo and global supply chains that are making 2022 yet another challenging year. Lockdowns abound Government-mandated lockdowns that led to the cancellation of thousands of flights late in March at Shanghai Pudong International Airport (PVG) and Shanghai Hongqiao International Airport (SHA) have extended into May, despite original plans to reopen in early April. As lockdowns have continued, so have cancellations. In a late April update, U.S. logistics provider C.H. Robinson noted in a global market overview that passenger and cargo cancellations continue out of PVG. Air traffic data from Flightradar24 shows that, as of May 10, hundreds of arrivals and departures at PVG remain canceled. Of the 36 arrivals recorded by the site for May 10, many were freighters, as passenger flights are more severely restricted. “Increased infections and travel restrictions have been implemented in Guangzhou, China, as well, which will drive air rates even higher,” according to C.H. Robinson. “Disruptions to electronics and automotive supply chains will be acute.” While lockdowns continue, manufacturing is gradually reopening in Shanghai. Government officials began relaxing return-to-work restrictions in mid-April, and production is gradually returning to full capacity. While air traffic to the city is kept at unusually low levels due to lockdowns, some operators are having success with trucking cargo to other parts of the country. As with other periods of lockdown in China, though, trucking faces its own issues. “Trucking hasn’t been easy, and the impact has been on the larger Yangtze River Delta region — Shanghai, the provinces of Jiangsu, Zhejiang and Anhui,” Joyce Tai, managing director for APAC at Freightos, told Air Cargo World . “From late March to mid-April, provinces shut down their highway tolls, blocking trucks from Shanghai from entering. There have been reports that miles and miles of trucks had to park on the highway waiting for further notice.” The worst of the trucking issues may have eased since the week of April 25, however. One indicator of improvement is the number of highway tolls and service areas that have reopened, according to Tai. Citing an April 28 report from China’s Ministry of Transportation , she noted that a majority of highway tolls and service areas of Jiangsu Province, Zhejiang Province and Anhui Province had reopened. Ocean shipping has also continued from Shanghai, and the production pauses have contributed to easing ocean shipping rates that could make ocean shipping a more attractive modal option. Ocean rates have declined from Asia to Northern Europe by nearly 20% since the lockdowns began to $10,829 per 40-foot equivalent unit (FEU) — still well above pre-pandemic levels, but also the lowest rate on the trade lane since June 2021, according to the Freightos Baltic Index. “Though some carriers are omitting Shanghai port calls or canceling some upcoming services, the ports are still open and operational, and most ships continue to arrive,” Tai said. “Together with the decrease in available exports due to the slowdown in manufacturing and trucking availability, this trend is one factor in the decrease in ocean rates since the lockdown.” Difficulties to the east and west Far from the early months of the pandemic, when demand for personal protective equipment shipments from China kept trans-Pacific airfreight rates and demand sky-high, the interruptions in Chinese manufacturing have led to slackening in demand from China. The most recent monthly analysis from the Association of Asia Pacific Airlines (AAPA) reported a 1.3% year-over-year decline in cargo traffic among Asia-Pacific carriers in March — the first break in a 14-month growth trend. Following the traffic declines, after an initial increase during March, rates have also softened slightly compared with record highs set during the pandemic, according to Freightos. Initially, the Freightos Air Index for PVG to Northern Europe showed a 43% increase in airfreight rates from early March to early April, to $11.94 per kilogram, Tai said. Since then, however, rates have come down, falling 38% since the end of March to $7.37 per kg, “though this rate is more than triple pre-pandemic norms for this time of year,” Tai explained. Recent declines aside, rates are still sharply higher than pre-pandemic norms and up from even 2021, according to recent analysis from investment bank and financial services company Stifel. “The rumors of a peak spot market demise may have been greatly exaggerated,” said Stifel’s Bruce Chan, director and senior analyst for global logistics and future mobile equity research in a research note this week . The Baltic Air Freight Indices (BAI) for Asia-to-Europe increased 30% from Hong Kong and 70% from Shanghai compared with 2021 levels, Chan noted. Meanwhile, rates to North America from Hong Kong and Shanghai rose by 13% and 27%, respectively, YoY. Trans-Pacific airfreight has struggled primarily with drops in manufacturing and renewed fluctuations between capacity supply and demand, but Asian exports to Europe are also dealing with the impacts of the war in Ukraine, including airspace closures and the loss of Russian and Ukrainian cargo capacity from the market. The fact that airfreight has not seen “even more upward rate trajectory” from the loss of that cargo capacity is likely due in large part to the drops in production in China, according to Chan. “For context, the percentage of the population under lockdown in China right now is estimated to be larger than the entire population of the United States,” wrote Chan. While some “critical economic functions” continue, the widespread quarantines have pushed productivity at some of China’s largest manufacturing centers to their lowest levels since the initial shutdowns in 2020, he added. As production has begun to resume, international connectivity is also resuming on a small scale. Taiwan-based China Airlines recently launched twice-weekly 777F service between Taipei (TPE) and Frankfurt (FRA), FRA’s cargo team announced in April . April also saw the operation of three-times-weekly charter connectivity from China’s Xiamen Airlines, connecting Xiamen (XMM) with Belgium’s Liege Airport (LGG). April also saw the launch of Leipzig/Halle Airport (LEJ) connectivity with Shenzhen (SZX) from Germany’s AeroLogic . Whether connectivity resumes quickly enough to prevent another spike in airfreight rates remains to be seen, however. More peaks ahead The COVID years have brought many a hard lesson to airfreight operators, and by now, leaders have learned what to expect from many of the pandemic market dynamics. Now, logistics providers are preparing for another demand surge and subsequent price increases once lockdowns are lifted and factories are back to full production capacity. “We shouldn’t underestimate the power of China and the reincarnation of the trades in China — it depends on production and manufacturing capacity, raw material inputs, but we would see that getting back to whatever is normal within weeks,” said Detlef Trefzger, CEO of forwarder Kuehne+Nagel, during the company’s earnings call on April 26. Although concerns about inflation and consumer spending are tempering demand expectations for 2022, freight forwarders are already looking ahead to the peak season and the holiday trade that emerges each year, pandemic or not. With production expected to ramp up again soon, logistics providers will begin their holiday transportation planning if they haven’t already done so. “We are at the end of April now,” said Trefzger during the call. “In three months, we will have the winter and Christmas business to start — I’m not kidding — for the sea logistics network. And for that you need production up and running.” For those forwarders and shippers looking ahead to the peak season, the rest of 2022 is unlikely to see less disruption than the market is dealing with now and has dealt with mostly successfully since early in 2020. As with Kuehne+Nagel, logistics giant DSV expects disruption as the norm for the rest of the year. “The markets are still characterized by disruptions in the supply chain, most recently by the lockdown in Shanghai, and we do not believe that we will see a very big change in the disruption even if we get to the later part of this year,” DSV CEO Jens Bjorn Andersen said during the forwarder’s earnings call in late April. “It’s not unlikely that the whole of 2022 will be characterized by these challenges that we have been facing at the beginning of the year.” In the short term, though, once lockdowns are lifted, “we can expect that for both Asia-Europe and the trans-Pacific capacity will increase and there will also be a surge of pent-up demand,” said Tai. Alongside the upcoming demand spike, airfreight rates will likely soar again “as soon as full manufacturing capacity returns,” Tai noted. “Ocean carriers and airlines have queued up piles of orders awaiting lockdowns to be lifted, hopefully by mid to late May.” Now roughly halfway through May, lockdowns show no sign of lifting, and on May 10, The Economist declared that “ Shanghai’s COVID-19 lockdown is not even close to over .” When lockdowns will finally lift remains to be seen, but global supply chains are braced and ready.

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