China Lockdowns: Mixed Signals and Uncertainties of What’s to Come

If there’s one word to describe the industry’s expectations and perspectives on China’s COVID lockdowns right now, the word would be “uncertain”. Uncertain of how long the lockdowns will continue for; uncertain the ramifications it will have through the rest of the year; uncertain about how strongly cargo movement will recover; and uncertain about so many other things.

Shanghai put a lockdown in place due to COVID-19 outbreaks as a new variant makes its way around, and the regulations are putting undue stress on the shipping industry at large. While the lockdowns have actually resulted in a bit of relief for the Southern Californian ports and their severe congestion, the length of time these shutdowns last for could have a major impact on carriers and ports for the remainder of the year.

The difficulty with the current situation at Shanghai is that industry experts have differing perspectives on what’s to come next. Some believe that when restrictions are lifted, recovery will happen slowly and naturally, while others believe that the recovery will result in a sudden surge of imports that will overwhelm ports and carriers. There’s also a lot of uncertainty as to how long the restrictions will last – it could be another two weeks, or it could be another 12 weeks.

The major issue with the mixed signals and uncertainties regarding what’s coming next is that the information gap poses significant threats to non-vessel common carriers attempting to plan out their supply chains for the remainder of the year.

Supply Chain Recovery Expectations: Gentle or Abrupt?

There are two and very strong opposing opinions regarding how the market will recover after restrictions are fully lifted from Shanghai and Shenzhen.

One school of thought is proposing that supply chain recovery for cargo coming out of China will be rather gradual. The thought process is that factories will steadily ramp up production, and eastbound transpacific trade will resume gracefully and encounter the regular seasonal ups and downs.

There’s good reason to believe this may be the case. For one, there’s no major source of urgency right now. While the lockdowns certainly have had an impact to a degree, warehouses, generally speaking, are quite stocked from the last peak season. This could mean that factories have less haste to kick production into overdrive in an attempt to overcompensate for missed deliveries and production schedules.

The opposing opinion is that the lockdowns will cause a severe recovery attempt from Asian-based producers who have fallen behind schedule when the lockdowns are over. Many stakeholders believe that pent-up demand will result in a huge surge of imports almost immediately after restrictions and regulations are lifted from Shanghai and Shenzhen. They are essentially referring to the current relief being experienced in Southern California as “the calm before the storm”.

Potential Rate Increases

Cargo rates have fluctuated greatly over the last couple of years. It’s been a wild ride for everyone, and most shippers have learned by now to overestimate when budgeting their logistics for the fiscal year. The same should apply now.

Even experts simply don’t know which way things are going to go. Spot rates have actually been matching contract rates for a while now due to the reduction in congestion at U.S. ports. But as restrictions in Shanghai and Shenzhen are lifted and demand increases, we could see spot rates skyrocket – both momentarily and during peak season later in the year.

Due to the uncertainty surrounding when restrictions will be lifted and what supply chain recovery will look like on a global scale, the safest bet for U.S. based importers is to budget liberally for logistics in the back half of 2022-2023. Only time can tell exactly how the market will recover as lockdowns are lifted.

If you’re interested in starting a conversation like this, please don’t hesitate to contact one of our team members. We would love to hear about your current shipping processes and help devise a strategic approach to reducing your shipping costs and increasing your company’s efficiency. In addition, we have our weekly market updates that provide relevant freight news, updates, and developments across the industry.