The Purple Ostrich: A China lockdown scenario

Disclaimer: This is not a quantitative analysis, but rather an opinion piece reflecting the perceptions and opinions of the Sea-Intelligence management team, as expressed by the author.

Author: Alan Murphy, CEO & Founder

Over the past week, several journalists have asked me what would be the consequence for container shipping, if the chinese government was to insititute a country-wide lockdown in response to the return of the pandemic to China. Regular readers will know that I would be quite hesitant trying to answer such a question, as I have spent the better part of the past year, warning our readers of the Sea-Intelligence Sunday Spotlight that they should not trust any charlatan who claims he can predict the near-to-medium-term future of container shipping, when every important quantifiable industry metric is currently outside any historical norm, completely invalidating any econometric and quantitative forecasting models. So here, in a world of black swans, I'm now trying to predict a purple ostrich.

Firstly, I would assume that the Chinese government already have a comprehensive response plan ready for the possibility of a China-wide spread of the Delta-variant, but in all honesty, I do not know if such a plan exists, if any parts of such a response have been made public, or how such plans would impact supply chains and logistics in general and container shipping in specific. So all of the below is written from the perspective of pure ignorant bliss.

Secondly, we do actually have some data on how a Coronavirus spread and lockdowns in China could impact container shipping, as that is exactly what happened in February 2020, when Coronavirus first spread in China, prior to it becoming a global pandemic. For container shipping and trade in general, the immediate impact of the Coronavirus outbreak in China was a vast drop in Chinese production and exports, with the most direct impact being an unprecedented level of blank sailings.

At the time, matters were complicated by the fact that the spread and lockdowns happened right at the start of Chinese New Year 2020, where Chinese production and exports every year see their biggest seasonal drops, as workers travel home from the big cities, to celebrate the holiday week with their families, creating yearly peaks in blank sailings. Fortunately, we were able to differentiate the "normal" seasonal CNY 2020 blank sailings from the unplanned "China Outbreak" blank sailings, as the former had been scheduled at least 3-4 weeks in advance of CNY, while the unplanned blank sailings were executed with little to no advance notice. Figures 1-4 show the number of blank sailings in weeks 5-26 of 2020, across the four main trade lanes out of China. In rough numbers, 30-40% of February 2020 capacity was removed from the Transpacific Eastbound and Asia-Europe trades, with roughly half attributable to the "normal" seasonal CNY drop and the other half due to the China Outbreak and lockdowns, with some weeks seeing upwards of 60% of capacity removed.

There are clearly also some factors that are not comparable, most notably that there was (presumably) no comprehensive Coronavirus plan in place in February 2020, and probably more importantly, the February 2020 outbreak happened as most factory employees, supply chain workers, and stevedores were far away from their places of employment, and the biggest challenge to production and exports at the time was that people could not travel back to the cities they were employed in. That should not be as much of a challenge at this time of the year. That said, a strict lockdown regime could entail closures of workplaces to prevent spread, and unfortunately, in the real world of manufacturing, trucking, and stevedoring, a home office setup doesn't quite cut it.

Assuming that a strict China lockdown would lead to a scenario as in February 2020, we would expect a drop in production of 15-20% for about a month. While that at first might not sound too detrimental, after all that is in rough numbers what happens every normal Chinese New Year, 2021 is unfortunately not a normal year. Cargo owners, already stressed beyond sanity from devastatingly high freight rates and absurd surcharges, and with no way to secure neither equipment nor space, would suddenly see their procurement costs sky-rocket in addition to their back-breaking logistics costs. Many would simply go under, and few would come through unscathed. Meanwhile, and somewhat absurdly, there could possibly also be a silver lining: As the production decreases start to wave out to the Chinese ports, pressure would start to ease off on the ocean bottleneck, which could start to bring down freight rates, and as the now less-than-full vessels reach American shores, we could start to see pressure coming off terminals and yards, rail lines getting unclogged, trucks and chassis starting to return to their natural habitats, and with just a little twinkle of fairy dust, even US exports might start moving. Sure, demand would not be met in the US and Europe, leading to price spikes and shortages, but it almost sounds like it would be worth sacrificing one round of Thanksgiving and Christmas, just to jolt the system back in place.

The observant reader will have caught on to one important unstated assumption in the above scenario: I've assumed that the Chinese ports are still running at full capacity through this lockdown. What if instead the ports can now only handle 80% of planned vessel calls? Now we still have full vessels, just fewer of them. We might get some of the silver lining in America, but space and boxes are now even harder to get. A few weeks ago, I wrote somewhat tongue-in-cheek about 100K freight rates in my weekly editorial for the Sea-Intelligence Sunday Spotlight; in this scenario this is no longer a joke. What if they can only handle 50% of planned vessel calls? What if we see a China-wide repeat of the Yantian port closure? Then forget about high freight rates and clogged supply chains, as global trade has now come to a standstill. And closing Chinese ports does not lower the US demand, so a likely consequence of any supply-side disruptions is simply a ketchup-effect, where the US ports get overwhelmed again, once lockdowns are lifted again. And honestly, it is hard to see how vessels stuck outside of Chinese ports is much better than vessels stuck outside US ports.

Even more observant readers will have figured out that this is where the little dog tugs at the curtain and exposes a charlatan rather than a wizard. The above "scenario" is pure speculation, as we have no way of actually knowing what will happen in a China lockdown. It's not that the above scenario is wrong or even implausible, there's just no way of knowing if it's even relevant. Why should it only last a month? Why should production drop by 15-20%? Why not more? Why not less? What if the challenge is not restrictions, but actual infections and quarantines? The Yantian port closure shows just how devastating that can be. Would a 1-month, 20% drop in US imports really have any healing effect on the US landside and hinterland infrastructure congestion? Not really, we'll probably need at least six months of "normal" volumes to clear it, and then another six months to restock inventories, and at the moment, we're not fixing the pot-holes, we're digging them deeper.

So why waste your and my time with exercise in futility? To game out a realistic devastating scenario, even if we have no way of knowing if it will happen, as we all need to acknowledge that the entire system - the entire supply web - has been pressed to the absolute limit of what it can bear, and what in "normal" times would be a small incident now has long-lasting and deep effects, and any major systemic issue, like a China lockdown, will have devastating consequences. If you're a logistics or supply chain professional, you are now duty-bound to not only raising red flags, but to waive them constantly, so your stakeholders, customers, vendors, senior management, etc. understand that it is not your fault that you didn't predict the next disaster, as they are not predictable, but they are still waiting around the corner. If nothing else, to make sure you still have a job when they eventually happen.

So what can we say, with any degree of certainty: A China lockdown would certainly be more bad than good, for cargo owners, for logistics companies, for importers, for retailers, and for consumers. And quite possibly also for shipping lines, even if freight rates could go further up in the short term.

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