Supply Chains to a Standstill
Last year COVID caused unprecedented shutdowns across the global supply chains. China, which for apparent reasons is called the Factory of the World, was one of the first regions where whole factories closed down. The import of parts and raw materials, production, and the export of raw materials, parts, and finished products came to a standstill. This not only caused availability issues in many production facilities all over the world, but it also completely disrupted the ocean freight and air freight markets.
With hardly any commercial flights worldwide, the available air freight capacity became very tight. At the same time, there was tight capacity in ocean freight due to ports that essentially shut down and many blanked sailings. Just when it looked like the flow of goods across the world’s oceans was getting back up to speed, the Ever Given blocked the Suez Canal, causing a massive backlog in many ports.
While everybody is still recovering from the aftermath of the Suez Canal blockage, the port of Yantian closed due to a sudden outbreak of Covid. As of June 24th, the port is open again, but it will take weeks to clear the backlog. Some ships have been waiting outside the port for over 16 days.
Current Supply Chain Challenges in China
These events have created some significant challenges for supply chains in China and the rest of the world as well for that matter.
Challenge 1: Capacity Constraints in Ocean, Air, Road, and Rail Freight
The biggest challenge is capacity. The factory of the world is back up to speed, but the goods waiting to be transported out of China are piling up at ports and warehouses.
Ocean Freight: Shipping companies have blanked so many sailings that there are not enough ships available to carry the waiting goods to their destination all over the world. But that is only part of the problem. Fewer ships leaving China with containers filled with goods also means fewer ships sailing back to China with empty containers. This has caused a massive shortage of shipping containers in China, while at the same time, companies are ramping up their orders to make up for the slowdown of the past year. Chinese container manufacturers simply can’t keep up with this. If you order a new container today, it will be delivered in October!
Air Freight: When it comes to air freight, the global capacity is not yet back to pre-Covid levels. This is mainly due to a lower number of passenger flights. This impacts air freight because a large part of the air freight capacity is in the belly of passenger flights. Because most freight leaves China through other modes, the impact is not as significant as with the other modes of transport.
Road Freight: Road freight in China is impacted by congestions at the border and the quarantining of truck drivers, combined with higher demand. This road freight challenge is more for goods coming into China than goods leaving the country. Still, the stacks of containers waiting to be shipped out at the ports are growing, so companies are looking for alternative ways to get their goods out of China. Road and rail are both alternatives to consider then.
Rail Freight: There are two problems causing capacity issues on what is called the New Silk Road, the railway system running from China, through Russia and the CIS countries to Europe. One is similar to the problems we see with ocean freight. There simply aren’t enough containers that are suitable for transportation by rail. Another problem is the capacity of the railway system. There is a limit to the number of trains that can move at the same time. Another issue is the different requirements that each country has for transporting containers by rail.
Challenge 2: Market Rates for Ocean Freight
The ocean freight rates have gone through the roof. On some lanes, the price is ten times higher than it was before COVID! Container rates had never been higher than 3000 dollars, but recently the container rate for the route from China to Rotterdam exceeded 10,000 dollars!
The factory of the world, as China is known, came to a standstill at the start of the pandemic. It has since restarted, and production levels are approaching pre-COVID levels again.
One of the alternatives for ocean freight is flying your product out of China. But with the air freight capacity still not back up to pre-covid levels, the prices for air freight are going up as well. Demand for air freight is as high as ever, with the huge rise in e-commerce volumes of the past year.
The Road Ahead
Whether it is road, sea, rail, or air, all modes of transport are struggling to keep up with demand. This can’t be solved in the short term, so I don’t expect a drop in rates in the short run. It will take weeks for the shipping industry to get back up to speed, but it’s slowly moving in the right direction. There are calmer waters ahead.
Dmitry Akulinichev is Director General of Ahlers in China. Ahlers provides state-of-the-art logistics support in sustainable supply chain management, warehousing, projects & machinery logistics, secured transport, trade logistics, after-sales services, and data analytics. Their extensive experience and knowledge of the Chinese market make Ahlers your ideal partner for business in China.