How New Cases of COVID-19 in China May Hold Back Supply Chain Recovery

Since the onset of the global pandemic, COVID-19 has posed major challenges for the supply chain as we have discussed in great lengths in previous volumes.  

As a brief recap, in early 2020, safety protocols such as lockdowns and quarantines halted the production, manufacturing, and distribution of materials, essentially stopping the flow of goods around the world. Factories shuttered, warehouses closed, and shipping ports weren’t accessible. This affected the production of materials from component parts to finished goods, and shipping lines, as well as factories, predicted a global decrease in demand.    

Simultaneously, consumers, faced with those same stay-at-home orders, began panic buying and turning towards e-commerce, placing shock on the system. This increase in consumer demand while the production line was at a standstill made inventory hit all-time lows and caused prices to spike. 

While we’ve since managed to ease some of these pandemic-related disruptors over the past two years, the supply chain and specifically the cargo markets have been affected by the long tail of recovery. Along with many other factors, the recent surge in COVID-19 cases seen in China combined with the strict lockdown policies has led to additional port and factory closures. 

China is currently facing its worst outbreak since the start of the pandemic. In hopes of containing the disease, the Chinese government has placed entire cities including Shanghai and Shenzhen under lockdown. The strict zero-tolerance policy in the center of much of the world’s shipping and manufacturing hub has the potential to set back some of the headway that we have made towards a normal market.    

Shanghai is the world’s largest port by volume of containers handled and was responsible for 20% of China’s freight traffic in 2021 alone.

Currently, Chinese ports remain open, but many factories, plants, and warehouses are closed with heavy restrictions that have prevented factory workers, truck drivers, and port workers from doing their jobs. Manufacturing and transport are severely limited and with the accompanying lack of manpower, loading and unloading processes at the port and container terminal facilities have been reduced, forcing ships to either wait outside of Chinese ports or reroute to alternative ports of call.  

With such a huge reliance on Chinese exports, many companies are experiencing a shortage in the inventory of finished goods and raw materials.

Consumers have been bearing the brunt of some of the delays and increases in costs with the lack of availability of many goods and a greatly increased Consumer Price Index (CPI) which rose 7.5% from January 2021 to January 2022. Pre-pandemic, it took roughly 50 days for an item to travel from Asia to Europe, and now that timeline is closer to 120 days.

These delays are contributing to continued supply shortages and price surges, which will continue to have impacts on global inflation rates. 

It’s uncertain what the degree of damage will be or how long it will last, but we can expect shipment delays and price hikes to stick around long after the lockdowns are lifted. The uncertainty of the market has led countries and large multinational corporations to reevaluate their trade relationships, sourcing, and end-to-end supply chain operations. Globalization and outsourcing of labor and manufacturing has long been the trend in the market, but post-pandemic forces have shifted attention toward localization, investing in infrastructure, and finding ways to produce raw materials and manufacture products closer to home where disruptions are less likely to have such lasting effects.