‘Another year of crazy hiccups’: Russia and China pose new threats to global supply chain
The Washington Post March 18, 2022
Fallout from the war in Ukraine and a coronavirus outbreak in China’s manufacturing heartland are putting fresh kinks in global supply chains, dashing hopes of a return this year to reliably smooth freight shipments and adding to pressure on consumer prices.
Allied financial sanctions and the closure of Russian airspace are forcing cargo planes to fly longer, costlier journeys from Asia to Europe. Dozens of Chinese factories and port warehouses that supply the United States remain shuttered amid the country’s worst coronavirus flare-up since the original wave in Wuhan. And triple-digit oil prices are inflating fuel bills for ocean carriers and truckers.
On Thursday, Maersk, the world’s second-largest cargo carrier, warned of “unpredictable operational impacts” from the Russia-Ukraine war, while in southern China, waiting times grew for ships trying to dock at the ports of Yantian, Chiwan and Shekou.
The disruptions so far are not as extreme as in the pandemic’s worst months. Chinese authorities in recent days have allowed some manufacturers, including a top Apple supplier, to reopen under tight restrictions.
But supply chain specialists said they expect conditions to deteriorate, reversing the recent improvement in the container ship backlog off the California coast and complicating the Federal Reserve’s fight against inflation.
“What people expected to be a recovery year is going to be another year of crazy hiccups in supply chains,” said Johannes Schlingmeier, chief executive of xChange, a shipping container leasing company in Hamburg.
Over the past 30 years, ocean-spanning supply lines fueled prosperity, enabling the global economy to grow almost 212 times larger, according to World Bank data.
Now, they seem snakebit.
Factory closures. Wildfires. Worker shortages. A marooned container ship blocking the Suez Canal.
Even before the Ukraine war and China’s coronavirus setback, supply chain struggles were the pandemic-era economy’s one constant. Last week, in an echo of the 2021 Suez incident, a vessel from the same shipping line ran aground in Maryland’s Chesapeake Bay.
“These things are happening more often,” said Ami Daniel, chief executive of Windward, a maritime intelligence firm in London. “The world is just becoming more complicated to trade in.”
The crises in Russia and China emerged as some of the worst global backlogs appeared to be easing. The logjam of ships off the coast of Southern California, which peaked last year above 100, has been cut in half, according to the Marine Exchange of Southern California.
Cargo began moving more quickly late last year after port officials threatened to fine terminal operators for containers that lingered on the docks. During the first two months of this year, the Port of Los Angeles processed 5.4% more containers than during the same period in 2021, which had been a record high.
“Fluidity and velocity on our docks continues to improve,” Gene Seroka, executive director of the Port of L.A., told reporters this week.
But Lars Jensen, chief executive of Vespucci Maritime in Copenhagen, called the apparent progress “a mirage,” saying ocean carriers have been redirecting vessels to other U.S. ports, including Charleston, S.C., creating smaller jams there.
Port officials expect imports to keep rising this spring as retailers rebuild thin inventories. Many companies are bracing for continued difficulties getting what they need when they need it.
Hamilton Beach, a maker of coffee pots, blenders and toaster ovens, told investors this month it anticipates that supply chain constraints and higher transport costs will “continue through this year.” Executives plan to raise prices in response, an illustration of how supply line snarls are fueling the highest consumer price inflation in 40 years.
“If you look at the L.A. port, you don’t really see relief in sight yet. Solving these supply chain bottlenecks will still take more time,” said Michael Wax, chief executive of Forto, a freight forwarder based in Berlin.
After declining late last year, the cost of sending a standard shipping container from China to Los Angeles rose by 20% over the past two months to $16,353, according to the Freightos index.
That’s more than 12 times what it cost in the months before the pandemic.
The recent surge in oil prices hasn’t helped. The price of a metric ton of the low-sulfur bunker fuel used by oceangoing cargo ships topped $1,000 earlier this month, roughly twice its pre-pandemic mark.
Supply lines already were stretched when Russia invaded Ukraine on Feb. 24.
Apart from its role as a supplier of oil and gas, Russia is not nearly as significant to the global economy as is China. But the fighting and the sanctions that abruptly severed the country from routine commerce are sending shock waves through cargo channels.
As sanctions started to bite this month, the number of container ships stopping at Russian ports on the Baltic Sea, including St. Petersburg, plunged by 40%, according to data from Windward.
Nearby ports in Estonia, Latvia and Germany saw a roughly comparable increase in traffic, as ships were diverted from Russia.
Many shippers are exceeding the prohibitions detailed in the U.S.-led sanctions. Some companies are avoiding Russian-flagged vessels. Others balk at hiring a ship captained by a Russian.
“What we’re seeing is more disruption, more congestion and more delays,” said Daniel. “And that is not going to change.”
Major cargo carriers have stopped accepting new shipments to Russia, Ukraine and Belarus. Maersk has offloaded goods that were midway to Russia when the war began at a small Danish port, in Kalundborg, according to Jan Tiedemann, senior shipping line and port analyst for Alphaliner, an information and research firm.
Inspections by European customs authorities of goods intended for Russia are causing cargo to stack up at regional hubs and spread delays across the carrier’s global network, “impacting our customers’ supply chains,” Maersk said in an advisory posted on its website.
Hapag-Lloyd is dropping Russia-bound cargo at ports in the Black Sea, such as Constanta in Romania, Burgas in Bulgaria and Turkey’s Gemlik, the shipping line said in a customer advisory.
Sanctions have basically erected a wall around Russia. Cargo that normally traveled on rail links between China and Europe now is being shifted to ships or planes. On an annual basis, about 1.5 million containers could be affected, according to Niels Larsen, who heads North American operations for DSV, a Danish transport and logistics company.
But those shipments will add to existing congestion. Space aboard container ships already is at a premium. Aircraft traveling from China to Europe must divert around closed Russian airspace, adding up to six hours to travel time and requiring, in some cases, an additional refueling stop, Larsen said. That effectively reduces capacity on airfreight channels that are already operating well below pre-pandemic levels. And when the aircraft land, they will disgorge their loads at already crowded airport cargo-handling operations.
“This will have enormous ripple effects that no one has prepared for,” Larsen said. “We’ll be back to the early days of covid, when it really became bad.”
In China, the government imposed tight coronavirus restrictions on more than 50 million people in key cities, including Shenzhen, Shanghai and Changchun, starting on March 13. Companies in the affected areas account for three-quarters of China’s exports, according to Capital Economics.
The moves came amid an alarming surge in infections of the omicron variant of the coronavirus. Under China’s zero-tolerance policy, even a handful of cases is sufficient to trigger harsh restrictions on activity.
More than 50 Chinese factories in the electronics, automotive and consumer products industries were shut this week, according to Everstream Analytics, a supply chain risk analytics company.
“The risk that global supply chains’ links within China get severed is the highest that it has been in two years,” Capital Economics warned clients this week.
While southern ports remain open, nearby warehouses are closed and trucking services are limited. At Yantian, coronavirus testing has reduced trucking capacity by more than half, according to Everstream. Some shipments that normally would cross the border to Hong Kong via truck are now taking the short journey by sea.
Ships are waiting two days to dock there while nearby Shekou is not accepting vessels until March 19, when the wait upon reopening is expected to be three days.
“We’re anticipating six to eight weeks of manufacturing backlogs, shipping delays and congestion,” said Julie Gerdeman, Everstream’s chief executive. “We’ll feel the impact of this probably in four weeks.”
By week’s end, Chinese authorities had allowed Foxconn and a number of other manufacturers to resume operations using a “closed loop” system, ferrying workers between their company-provided housing and the factory.
Chinese cargo already is taking longer than ever to move from the factory gate to its port of departure, almost three times as long as before the pandemic, according to data from Flexport, a freight forwarder based in San Francisco.
In the short term, a slowdown in goods coming from China will be good news for California ports that still face a traffic jam of inbound vessels. But once Chinese factories and ports return to normal operations, a surge of seaborne traffic will head for the West Coast, executives said, probably aggravating existing jams.