Presently Shanghai is under lockdown as the Chinese authorities is attempting to halt the spread of Covid. The terminology being used is “Dynamic zero-covid”. But irrespective of terminology, the reality is that a city of 25 million people remains under lockdown and with that comes the closure of manufacturing plants, warehouses as well as an acute shortage of truck drivers in possession of the proper test certification to be allowed to drive.

On 4 April part of the city was planned to see a gradual easing of restricting, but more than 13,000 positive Covid tests postponed the gradual easing. The timeframe for re-opening is highly uncertain.

It is by now very clear that this is reducing manufacturing output, but it is highly unclear by how much and for how long.

It is also clear that for the time being the port itself keeps operating and vessels keep calling at the port.  For carriers, to a large degree, maintaining their schedules is logical from an operational standpoint. The vessels going to Shanghai will have a mix of cargo destined for Shanghai as well as a large number of empty containers. Skipping the port in Shanghai would tend to make the operational problems even worse as the Shanghai cargo would then be in the wrong location - not to mention that the empty flow would be severely disrupted as well - and containers would not be available for the post-lockdown phase.

One of the drivers behind the problems in the market over the past two years has been the disruption to the flow of empty containers, and in this light, it is a positive sign that the carriers are still calling at Shanghai.

In the very short, term this of course means that demand out of Shanghai is being reduced. This in turn means that there will be more vessel space available for other ports in the region and the expectation should therefore be for downwards pressure on the freight rates.

However, once we see a re-opening, the expectation should be a surge of cargo coming out of Shanghai. This will be a mix of cargo which has not loaded during the lockdown as well as factories playing “catch-up” with lost production whilst under lockdown. This will lead to a sharp upwards pressure on freight rates.

However, once we see a re-opening, the expectation should be a surge of cargo coming out of Shanghai. This will be a mix of cargo which has not loaded during the lockdown as well as factories playing “catch-up” with lost production whilst under lockdown. This will lead to a sharp upwards pressure on freight rates.

The duration of the lockdown is unknown but is a key factor in ascertaining how big the impact will be.

A good comparison might be made with last year when Yantian shut down from a port worker testing positive on 21 May until a full reopening on 24 June .

At that time, the port closure led to increased upwards pressure on the spot rates. This is because the port itself severely curtailed operations and  vessels were stuck in growing queues awaiting a re-opening to discharge cargo bound for Yantian. The consequence was a reduction in available vessel capacity not just in Yantian but in the entire region. The shutdown in Shanghai – at least at this early stage – appears to mainly impact the Chinese export cargo, but not as much the vessel operations as yet.

When Yantian re-opened this led to a very sharp surge in spot rates - especially on the Transpacific as the high demand to the US suddenly had to play catch-up. We might very well see the same phenomenon play out when Shanghai re-opens this time.

Given the extremely long delays in the supply chain, importers in the US and Europe are highly likely to start peak season early. If Shanghai stays under lockdown for several weeks, the beginning peak season could coincide with the post-lockdown cargo surge creating added upwards price pressure.

There are then two added wildcards which makes the development over the coming weeks highly unpredictable as the pull in opposite directions. Given the extremely long delays in the supply chain, importers in the US and Europe are highly likely to start peak season early. If Shanghai stays under lock down for several weeks, the beginning peak season could coincide with the post-lockdown cargo surge creating added upwards price pressure.

The other wildcard is growing concern in the US as to the impact inflation has on consumer spending. If consumer spending drops, this will lead to rapid increases in inventories – which in turn would put a large dampener on export volumes out of China.

For now, it still appears that an early peak season is more likely than a sudden collapse in consumer spending cancelling the peak season.

 

About Lars Jensen, CEO, Vespucci Maritime

Lars is a leading expert and thought leader in analyzing global container shipping markets. Lars has 19 years’ experience hereof the last nine within multiple companies he has founded, with the main focus as CEO of Vespucci Maritime.
 

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