By Eric huang      Photo：Monstera

Globalization evolves as trade patterns shift. Supply chains will become more regionalized and shorter amid rising transportation costs.

The outbreak of the COVID-19 pandemic has put pressure on global supply chains, creating inflationary pressures and affecting the economic outlook. There has been an initial improvement in the supply chain as supplier lead times have shortened and more normal activities have resumed. However, the spread of Omicron variants in China and subsequent restrictions squeezed the supply chain again. The current wave of COVID-19 in China is bigger than in 2020. Preliminary indicators suggest that the impact on the supply chain will be less severe this time around. However, the continued tightening of policy controls by the Chinese central government means that pressure is unlikely to ease in the short term. Only a policy that balances controlling the spread of the virus with a broader resumption of economic activity is likely to reverse current trends.

However, regarding China's strict lockdown measures in Shanghai and other cities in response to the Covid-19 epidemic, Zheng Zhenmao, chairman of Yang Ming Line, the world's ninth largest container shipping company, believes that the global impact is only a "short-term phenomenon" and should be limited to the second quarterly operations. Chairman Zheng said the number of ships currently waiting outside the ports of Los Angeles and Long Beach has dropped to less than 40 from more than 100 earlier this year.  The waiting time for ships in Shanghai ports is two or three days, compared to 10 to 14 days in US ports. That's a good sign that congestion at U.S. ports is easing. We expect that in the second half of the year, everything will be smooth. All difficulties will become easier. 

He expects Beijing to adjust its Covid policy and the Chinese economy to rebound in the second half of the year. Zheng's point comes as supply chains face years of turmoil from the trade war and the pandemic. Russia's invasion of Ukraine and China's blockade threaten to escalate the disruption, and many in the industry expect the impact to ripple across the globe throughout the year. Although shipping in Shanghai is improving and factories are gradually reopening, containers are still piling up at the port due to a shortage of trucks. Once bundles of cargo ships start sailing again, logistics experts have warned that a flood of containers will clog U.S. and European ports. 

Chairman Zheng also said that globalization evolves as trade patterns shift. Supply chains will become more regionalized and shorter amid rising transportation costs. As tensions between the US and China persist, the supply chain will be split into two systems, each operating "in a bubble" and away from sanctions. A key uncertainty for next year is whether the market can digest the supply of new ships built over the past few years amid an industry upcycle. Alphaliner forecasts that supply growth in 2023 is expected to double from this year, outpacing demand growth.

Another major shipping company, Germany’s Hapag-Lloyd, the world’s fifth-largest container shipping company, said the focus was no longer on what happened a few months ago, but more on the current state of China’s blockade and consumer demand, as well as supply. What's coming up with chain and ocean freight rates. The implied message of Hapag-Lloyd's quarterly release and conference call was that the container boom peaked in the first quarter; from here, it went downhill. The spot exchange rate is falling. Commodity demand is falling. There are signs that the market has passed its peak in the second quarter of 2022.

The second quarter was better than expected, but "should be slightly lower than the first," CFO Mark Frese said on the conference call. In the third and fourth quarters, Hapag-Lloyd sees things going far more than "slightly downward." Its direction means earnings in the second half were down 50% compared to the first half. "For spot exchange rates, there are regional differences," Frese said, noting that North American import demand is better than Europe's. "But overall, the trend is the same: we're seeing a softening of spot rates almost globally." He added "What we're seeing now in what we're receiving from Hapag-Lloyd's booking system. With the Consumer sentiment is changing over time. Consumer behavior is changing. Inflation is rising. Disposable income is under pressure," he said. "We think volume growth is lower than previously expected due to ... consumer sentiment. We've all felt it."

Historically, congestion pushes up the spot exchange rate by reducing the effective supply of transportation. However, even if congestion remains high, the spot rate falls because consumer demand declines before the congestion is removed, ie after the congestion is removed, more ship supply is released into the market, accelerating the decline in the spot rate. Shipping rates outside of China are particularly low, and Hapag-Lloyd believes the current blockade in China has reduced outbound volumes by 20%-25%. But he said China's export hurdles due to the coronavirus pandemic coincided with a drop in import demand in places like Europe. He expects the spot rate to fall, "even if congestion remains at current levels, or even if congestion emerges for a new cause, because the general sentiment we're seeing now is that demand is weakening.

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