The logistics sector has faced a spring season filled with stumbling blocks, from massive port delays to rampant container shortages. Now, Covid outbreaks in southern China stand to further derail the recovery of global trade.
In late May, residents of Guangzhou province, north of Hong Kong, were hit hard by a resurgence of the coronavirus. Since then, operations at the Yantian port in Shenzen have been hobbled, leading to a massive backlog of goods awaiting transport out of one of China’s busiest shipping hubs.
Worse than the Suez
The Yantian port is responsible for transporting about one-quarter of China’s total export volume to the U.S., according to Brian Whitlock, senior director and research analyst for Gartner’s logistics and fulfillment arm. The viral outbreak that the region has faced in recent weeks represents “a big, big deal” for companies shipping cargo all across the globe, he said—both in terms of shipment delays and astronomical price increases from freight forwarders.
“One of the problems that we’re facing today is that we can’t get stuff out of Yantian,” he said, “and it’s tying up all of these containers, and causing shortages in capacity.” This comes amid already unprecedented backlogs that have seen 20 to 40-foot metal crates stacking up at ports across the globe throughout 2021.
Whitlock said China’s current conundrum stands to have an even greater impact on trade than the Suez Canal debacle in March, which saw a 1,312-foot container ship trapped in the too-narrow waterway for nearly a week. “That locked up hundreds of thousands of containers over six days,” he said, reducing the overall global supply and driving up prices for ocean freight through the late spring. “Yantian is locking up something like 25,000 containers, now for three weeks,” he added. The event poses “a much bigger problem than the Suez, because of the length of time and the number of containers that continue to be impacted to this day.”
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After weeks of operating well below normal levels, the port upped its labor capacity to 40 percent on Monday, Whitlock said, doubling productivity from recent weeks. But it could be more than a month before Yantian’s operations return to full speed, he opined. In the meantime, containers stuck there remain out of commission, and many ships are canceling their sailings to Yantian for the rest of the month—some into early July. “If they go there, they’re going to be anchored for days trying to get in,” Whitlock said.
In a desperate bid to find shippers, some brands are trucking their goods to alternate ports in Hong Kong, or even Shanghai, some 370 miles to the north. Whitlock said that added ground transport expense is currently running companies up to $4,000 per container.
“I mean, [Yantian is] one of the busiest ports in the world,” added Brian Glick, founder and CEO of supply chain tracking platform Chain.io. “The total disruption from the Ever Given being stuck in the Suez is smaller than this,” he agreed, noting that while that catastrophe was “more photogenic,” China’s recent Covid outbreaks have the potential to stymie brands’ shipments for months to come—potentially dampening the spring 2022 selling season.
“What I’m hearing from customers is that they’re trying to book space [on ships] now two and three months out,” Glick said, up from just days or weeks in advance. “The congestion is going push all the way through into peak season”—which runs from mid-August through the end of October—and “it’s already starting to ramp up.”
In addition to fretting over delays, pricing pressures have become prohibitive for brands looking to ship items from China, even if they can manage to find the space on vessels. “The timing is one thing, but the pricing is a bigger issue when you have containers at $15,000 to $25,000,” he said, representing rates 5 ro 10 times higher than typical prices. “When you’re shipping a container full of T-shirts, that’s your margin. Either prices on those goods are going to go up, or people aren’t going to ship them at all.”
The lack of availability on vessels has created a bidding war atmosphere where companies are “scrambling to get whatever they can” in terms of container space. There will always be a party willing to pay more, Glick said, and the freight forwarding market has turned into “the Wild West, in terms of pricing.”
The conditions are especially devastating for smaller brands that simply can’t pony up the cash to ship at heightened rates. Not only will they miss seasonal sales, he said, but they risk souring relationships with retailers that are waiting on goods to stock their shelves. “I think the second biggest problem is visibility into supply chains—people don’t even know what commitments they can make, because they don’t know where anything is, or when it’s going to get on a vessel,” he added. “The can’t plan; they can’t react; they can’t take action.”
Ander Shulze, vice president and global head of ocean freight at logistics and customs brokerage company Flexport, told Sourcing Journal that the company has noted a 70-ship-strong backlog at Yantian. “And, due to labor shortages from Covid, vessels that do go into port are taking an average of twice as long to load cargo,” he said. The situation is not only sure to cause pervasive delays—it will also put pressure on other regional ports, like Xiamen and Hong Kong, as companies attempt to divert cargo to shipping venues unencumbered by these issues.
While Yantian is not China’s largest port (that distinction belongs to the ports at Ningbo and Shanghai), most of Flexport’s clients shipping from Asia stand to be impacted by delays, Shulze said. Many ocean freight services count Yantian as a “part of their string,” and are now making contingency plans to skip stopping there, lest they risk becoming stuck.
Shulze estimated that in late May, when port officials closed down certain areas and operations at Yantian for disinfection, Flexport clients saw $400 million an hour in goods—“$5.1 billion a day going eastbound, and $4.5 billion a day going westbound,” blocked from reaching their destinations.
The port has since ramped up production to modest levels. But amid this spring’s existing challenges to global trade, “any disruption right now is very hard to quickly recover from,” Shulze said. “This is akin to an accident on an already packed highway. Those sorts of events are felt for long after the incident clears.”
Global logistical impacts
The aftershocks of these recent outbreaks will continue to reverberate outward—first, forcing China’s manufacturers to rethink their production plans. In neighboring Guangdong, suppliers are likely to see a reduction in orders from international partners who are taking a “wait-and-see approach,” according to Mirko Woitzik, senior manager of intelligence solutions for supply chain risk management firm Everstream Analytics.
“Export orders are expected to slow in the second half of the year due to the spike in cargo costs as well as shipping delays,” he said. Woitzik also noted that these restrictions are likely to exacerbate operational challenges in the Nansha district of Guangzhou, leading to a domino effect of business interruptions in industries located in neighboring provinces like Guangxi, Yunnan, Guizhou, Sichuan, Hunan, Hubei, and Jiangxi.
Once Yiantian’s pileups are resolved and cargo starts to flow more freely, it could cause an unhelpful deluge of containers at destinations across the globe, Gartner’s Whitlock opined. “It’s going to flow heavily into Rotterdam and Los Angeles-Long Beach, and other ports around the world,” he added. “These ports are already trying to dig themselves out of backlog.”
“The situation in Yantian will create a surge of containers as all the delayed shipments will arrive at U.S. ports at around the same time,” Nimesh Modi, CEO of tech-enabled shipping and freight-forwarding platform Book Your Cargo, echoed. Meanwhile, drayage providers, which move goods short distances using ground freight, face a finite availability of chassis, which are used to haul the containers once they arrive at the ports.
“Every container that comes inbound needs to be hauled on chassis, and with the present labor shortage to empty those containers, chassis turnaround time at these ports will increase,” he explained. Even if a carrier is ready and willing, they may not have a chassis to use when the time comes. “The more imported containers that get stuck at ports just increases the port congestion and results in huge importer fees for demurrage at port,” Modi said.
“This is a situation that the port is monitoring very closely,” Phillip Sanfield, a spokesperson for the Port of Los Angeles, told Sourcing Journal of Yantian’s recent challenges. About one-third of the Port of L.A.’s service string emanates from southern China and the Yantian area in particular, he said. “A lot of our cargo is tied to that region.”
While the port hasn’t yet felt any sluggishness in imports from Asia, Sanfield said it is tracking changes in volume, having noted the interruptions to productivity and output at Yantian. He hopes that any eventual fluctuations in cargo coming into L.A. will ultimately be more akin to a small swell than the tsunami that the port faced earlier this year, which saw dozens of container ships lined up waiting to berth. The Port of L.A. processed a record 1,012,048 twenty-foot equivalent unit (TEU) containers this May—making for the busiest month the facility has seen in its 114-year history.
“We’re hearing that [Yantian has] seen the worst of it, and that they’re moving toward an upward trajectory,” Sanfield said. “If data is accurate, if the workers are truly getting back to work, and the production facilities are up and the ports are running, it will probably have a minimal impact” on the Port of L.A., he said.
A look forward
“I’m not predicting things get back to normal until after Chinese New Year in February of 2022,” Gartner’s Whitlock projected, given the likelihood that Covid infection rates will continue to surge at significant shipping locales across the globe this fall.
Players in the fashion space need to start taking a hard look at the products they plan to ship from China and diligently plan ahead for forthcoming shipments, he said. They should empower their suppliers to get a jump on spring product now, he argued, or risk getting caught up in gridlock later this fall.
“They need to prioritize what gets into a container and what gets shipped, and really work closely with their planning teams and third-party logistics providers,” he asserted. “If all else fails, they may have to pay the premium fees to get in capacity where they need it, and even shift over to air freight if it’s absolutely necessary.”
Moreover, in the long term, brands must work to mitigate risk across their supply chains. Gartner’s research shows that brands can strategically avoid disruptions that are likely to impact trade by tracking regional issues, from public health crises like Covid to political challenges like Brexit, along with natural disasters and civil unrest, shaping their supply chains to avoid getting caught up in circumstances that could complicate the on-time production and shipment of goods.
“It’s no longer good enough to put together contingency plans to respond to challenges, because if you look at disruptions over time, they just continue to increase year over year,” he said.
Chain.io’s Glick described the concept of “sure-shoring,” or sourcing from disparate hubs across the globe, as the only insurance policy against the issues stuck brands are currently facing in Yantian. “As a brand, I need to be able to have sourcing from Latin America, sourcing from Southeast Asia and elsewhere, so that I’m not just concentrated in one spot,” he said. “That is really the trick to getting out of this in the long haul.”
While the idea of supply chain diversification isn’t novel, Glick said it’s taking Chain.io’s clients—especially larger organizations—some time to make game-changing decisions. “A lot of that ties back to their IT systems,” he argued. “It’s one thing to say, ‘We want to buy from somewhere else,’ but when you’ve got these systems connected to your suppliers and your freight forwarders, you have to go through the change management” to make it happen, he said.
It’s a worthwhile pursuit, he argued, as the sector’s trials continue to mount. “Companies need to do the work to make sure that they are agile and nimble enough to be able to adjust to unknown changes in the future,” Glick said. “I think the only thing we can promise at this point is that it’s never going to go back to the very stable supply chain we had in 2010.”