Reasons for Value Chain Disruptions

There are multiple reasons for global value chain disruptions, among which higher fuel prices and insurance costs, trade restrictions, destruction of key infrastructure, and the halting of Ukraine’s port operations. Additionally, transit costs and times and shipping distances have increased due to the ongoing conflict.

Shipping Cost Hikes Causing Food Price Increases

Grain is shipped over longer distances, thus causing food price increases, along with the fact that grain demand exceeds supply. Shipping costs and grain prices have been rising over the last two years but the Ukraine -Russia conflict has further exacerbated the situation. The UNCTAD report shows that shipping prices for grains and other dry bulk cargo have gone up by nearly 60 percent between February and May alone. The price increase would result in a close to 4 percent increase in food prices not only in Europe but globally.

Also, the Russian Federation is a major exporter of fertilizers and fuel, both of which are major inputs for farms. Supply disruptions would result in higher prices and lower grain yields, threatening food security in highly food-import dependent and vulnerable countries.

Higher Energy Price Also Causing Price Hikes

The Russian Federation is major exporter of gas and oil, with export partners such as Germany, the Netherlands, Poland, Italy, and the United Kingdom. Due to logistical issues and trade restrictions, gas and oil prices have increased, forcing EU countries to look for alternative sources of fuel.

The daily rates for small tanker hire, which are used in the Mediterranean Sea, Baltic Sea, and Black Sea have skyrocketed. Small tankers are mainly used for regional oil shipping. Energy price increases have also resulted in bunker price increases, resulting in higher shipping costs for sea freight in Europe. Data from the UNCTAD report shows that the cost of low-sulfur oil has gone up by 64 percent from January to May 2022.

Taken together, high grain demand and higher energy prices mean higher consumer good prices while threatening food security and widening the poverty gasp.

What Should Be Done

Collaboration between port and vessel flag states, European logistics actors, and other stakeholders is needed to provide key services such as regulatory compliance certification, health services for crews, and bunkering supplies. This could have a positive effect on operations, insurance premiums, and shipping costs.

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Limiting Imports of Scrap Plastic

In 2017, China announced a policy called Operation National Sword, effectively limiting the import of plastic waste. Developed nations rerouted their waste exports to Indonesia, Malaysia, and other nations in South East Asia, which in 2019 announced they would limit imports or no longer accept deliveries. Due to scrap plastic bans, US exports have plummeted by over 70 percent.

Also as a result of import bans, carriers have become increasingly weary of shipping plastic waste. As the country of destination may refuse the delivery, carriers are faced with the prospect of either shipping it back or dumping the cargo. As there is an increased risk for shipping lines, it makes no economic sense to ship this particular type of cargo. The fact is that major shipping lines such as Hapag-Lloyd, MSC, and Maersk stopped shipping waste exports to China in 2020. Presently just a handful of carriers accept shipments while major waste importers such as Thailand, Vietnam, Canada, and Turkey have imposed import restrictions.

New Policies and Regulations on Plastic Waste

As many countries have imposed bans or restrictions, developed nations will need to scale up plastic recycling. The European Union has already implemented extended producer responsibility policies under which manufacturers of packaging and plastic products should pay for their disposal or recycling. In addition, the EU has established regulations limiting the volume of packaging that businesses are allowed to use. Companies are now required to use recycled plastics while manufacturers have announced plans to produce 3.4 megatons by 2030. The new standards also set criteria and technical rules for various products, including electrical and electronic equipment, automotive products, construction, and plastic packaging.

In comparison, the US is lagging behind on both scaling up recycling and regulating plastic waste. Local and state governments have begun passing laws but as of now, in only a handful of jurisdictions.

Currently, plastic is on the list of UN’s hazardous goods, but the good news is that according to estimates, about 70 percent of plastic production will be recycled and reused by 2050. Experts acknowledge that plastic pollution is a problem of global magnitude, contaminating marine, freshwater, and terrestrial ecosystems. Microplastics are very small particles that circulate in the carbon, water, and dust cycle, harming wildlife species and contaminating air, water, and food. To help protect the environment, there needs to be incentives for recycling, recycled content standards as well as a cap on virgin plastic production. Each country needs a strategy and policies to achieve reduction targets.

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Domestic Impact

According to domestic freight forwarders, trucking is the main problem at present. Booking truck services has proven extremely challenging and even impossible at times. Also, flight activity has shrunk to 3 percent from what it was in March, with medications and essential goods making for the bulk of air freight shipped into the Shanghai Pudong airport.

As cargo is not moving, it is diverted to other regions and away from the port of Shanghai, which can affect virtually every industry and trade in the country.

In Shanghai we have witnessed the worst Covid-19 outbreak the last couple of weeks, with close to 20,000 cases on Thursday. Major carriers warn that the lockdown measures and restrictions will affect trucking services in Shanghai, reducing trucking activity by 30 percent.

A 9-day lockdown was ordered initially, but it is still unclear when the restrictions are going to be eased. According to Japanese bank Nomura, 200 million people and 23 cities are currently under a partial or full lockdown. Mobility is restricted in many areas across China, and mass testing has been ordered in many cities. The exit and entry points on major highways are blocked, straining the domestic supply chain. Express delivery carriers report that small shipments cannot be delivered to any region with a surge in Covid-19 cases.

Global Impact

Experts warn that domestic supply chain disruptions can cause ocean shipping delays and spot rate increases. This is mainly due to the build-up of orders and the volume of cargo that needs to be shipped. While there are no long queues of vessels waiting to call in Shanghai, the volume of cargo shipped to the port of Shanghai has dropped by 30 percent. Once the city reopens, we will see a surge in activity, causing pressure on spot rates.

Financial analysts also point to the fact that China’s closed borders and mass lockdowns are set to have a significant negative impact on the global economy. Business exchanges between China and other countries have plummeted in number, causing foreign direct investment to shrink since the onset of the pandemic. The limited share of FDI has affected developing countries with significant financial needs.

On the good side, global demand for goods has started to ease in recent months as consumers across Europe and the US are spending more on travel, entertainment, and dining. The fact that both emerging economies and developed countries are reopening means that local businesses are already able to meet some of the pent-up demand. Most experts believe this will help avoid the suppl chain disruptions we have seen in 2020 and 2021.

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Shenzhen is the home to the world’s third largest port while Shanghai is home the world’s largest. The extent to which the trans-Pacific route will be affected depends on how long factories and ports will be closed. According to experts, the worst-case scenario would be a major shockwave putting pressure on already strained global supply chains at a time progress has been made in the U.S.

Implications

Carriers report that the major ports are operating on schedule and as usual. Warehouses in Qingdao and Shanghai are operating normally while those in Shenzhen will reopen on Monday. Truckers loading and unloading at Qingdao and Shanghai require negative Covid-19 tests.

Experts also point out that a good scenario for ports would be if they continue to operate as usual while factories operate at a reduced capacity. This will help reduce backlogs so that more ships can be loaded and set sail. In the worst-case scenario, freight forwarders will be forced to cancel sailings. This can happen if Chinese ports close temporarily, with a short-term positive effect elsewhere, and in the U.S. in particular. A large volume of containers is currently stuck at U.S. ports, and the closure of Chinese ports will help alleviate this problem.

From what we have seen during Golden Week and the Chinese Lunar New Year, the longer containers are held in China, the fewer the issues at U.S. ports. At the same time, demand is still high and needs to be compensated for.

When the Yantian port reopened last year, the number of ships queuing at ports in South California skyrocketed. Freight rates also reached a record level.

Yet, the situation is somewhat different now in terms of demand. In 2021, the U.S. saw a record high surge in demand which seems to have slackened to some extent in 2022. While carriers report more bookings in April, this has not been so in March or February.

Conflict in Ukraine

Experts warn that the situation in Ukraine has already put inflationary pressures, causing commodity prices to surge. As a result, we are likely to see a drop in consumer spending and demand. The conflict has also caused supply chain disruptions, slowing down economic recovery.

At present, some 140 ships are stranded in the Black Sea, as many ports have temporarily closed. Global grain, coal, and oil flows have also been affected at a time when the worst supply chain backlogs seemed to be easing. Also, as ships stopped calling at Russian ports, ports in Germany, Latvia, and Estonia have experienced a surge in traffic, causing more delays, congestion, and disruption.

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New Challenges Ahead

The tightening restrictions in the Jilin province and cities such as Shenzhen and Shanghai may cause further delays, stain port capacity, and increase freight rates on major routes, which already have reached sky-high levels.

Major carriers have warned that test requirements for truck drivers and restrictions may cause delays in transport to and from major Chinese ports. Delays in transport are mainly associated with frequent testing in ports such as Yangtze, Shanghai, West Pearl River Delta, Shenzhen, Hong Kong, and elsewhere. Some carriers have already been forced to temporarily close warehousing facilities in the city of Shenzhen despite the fact that port terminals still operate as usual. Due to 3,400 cases of infection, the Chinese authorities announced a week-long lockdown of Shenzhen and undertook a mass testing. Subway and bus lines have closed temporarily and so did businesses, except for companies that provide essential and indispensable services. Businesses have also implemented work from home protocols.

While Covid-19 restrictions have not been introduced at Yantian Port, controls have already been upscaled. All ships that are due to depart this week have been loaded and sailing on schedule. However, no loading of vessels will take place from next week on, and some carriers may be forced to skip the port.

There have also been outbreaks in Shanghai, resulting in restrictions on bus transport and intra-city transit. International flight arrivals may also be rerouted which is what the authorities demand. Tight regulations have been implemented in the Jilin province as well due to new coronavirus outbreaks.

As a result, factories in Indonesia, Malaysia, and Vietnam could see an increased demand for goods. Some have already moved their factories and facilities for storage and distribution close to where their customers are. Others have moved their plants to neighboring countries in response to congestions and supply chain bottlenecks.

Implications for Carriers

The new restrictions, which are in line with China’s zero-Covid policy, may cause shutdowns of ports that will disrupt the global flow of goods at a time when the Ukraine crisis unfolds. The Ukraine crisis already resulted in the closure of ports. Additionally, some carriers have announced they will no longer be calling at Russian ports. Cargo shipped to Ukraine and Russia has been rerouted to ports across Europe, causing further delays and congestions. According to experts, we could see freight rates fluctuate regionally. China’s zero-Covid policy and restrictions have a negative impact on global supply chains while ships ending up at Europe’s ports could affect regional routes. Both regional and global developments increase pressure on stretched supply chains which could mean that normalization is pushed back into the future.

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Going Forward

Shipping experts point to the fact that while we are moving toward a post-pandemic future, we don’t really know what it will look like. The global community doesn’t have much experience with that type of scenario. Some analysts believe that ship backlogs will begin to ease during the third quarter of 2021, which is a source of optimism for an industry plagued by supply chain disruptions, repeated port congestions, and labor shortages. There is one big unknown, however, which is whether demand for goods will continue once the pandemic is over.

According to analysts, there is still uncertainty as to what will happen when container capacity stuck in Long Beach and Los Angeles gets released, bottlenecks ease, and staff returns to work. While there is a glimmer of optimism, we shouldn’t be overly optimistic about how things are going to work out. For one thing, timing is difficult to predict because of China’s zero-Covid policy and lockdowns.

When it comes to freight rate normalization, it may take between 18 and 30 months to return to normal levels. While shipping rates have declined recently, on some routes where demand is robust, rates are almost 300 percent higher than in 2020.

What Carriers Have Done

Major ocean carriers have gone to invest their windfall profits in strengthening their trucking and air freight capacity and diversifying their logistics chains. A number of liner carriers chose to diversify their assets beyond sea freight.

During the past century, international freight forwarders gradually adopted the asset-light model, using contract labor and leasing aircraft, trucks, and warehouses to cut capital expenditures and maintain flexibility. Many carriers have logistics divisions but the main focus is on intermodal transport, transloading, and short-haul port drayage. In 2021, a year after the onset of the global crisis, major carriers transitioned to becoming integrated logistics powerhouses with a focus on customized services.

Such are, for example, end-to-end supply chain management, port-to-port transportation, and customized brokerage. Also, the bulk of acquisitions that carriers focused on aim at upgrading their e-commerce capabilities and modernizing port terminal operations to improve handling and access. Some commercial liners also expanded their regional distribution and warehousing capabilities and invested in expanding their air cargo volume. Having recently purchasing freighters, big ocean carriers are now serving major destinations such as Dubai, Beirut, Istanbul, New York, Chicago, and Atlanta. Other ocean liners already have a logistic arm and offer non-port services, including door-to-door delivery combined with barge, rail, and truck transportation.

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Study Findings

According to associate professor Cara Wang, the vast majority of people (over 90 percent) would return to their old familiar ways of shopping. The reason is that the increase in online shopping is likely due to external disruption /Covid-19/ and not market competition. Once this factor is removed from the equation, the gains made by online businesses would fall off at least to some extent.

Building on computer modeling and surveys, professor Wang found that consumers fall in four categories: permanent new, temporary new, and prior adopters and non-adopters. Also, consumers mainly buy items in four product categories: home goods, food, groceries, and other items.

Additionally, the study suggests that the use of e-commerce and delivery services varies by product category. Grocery deliveries have the highest share while other or nonessential goods have the lowest share. What this means is that the health crisis has a more significant impact on essential goods purchases. And while grocery deliveries have skyrocketed by over 110 percent due to the 2-year pandemic, nearly 50 percent of new adopters are unlikely to be shopping online post-Covid-19.

Implications for Shipping Services

Researchers and transportation experts have shared the view that shoppers would still use e-commerce platforms once the pandemic is over. Yet, it becomes clear that the shift to digital and technology adoption are more complex and dynamic during crisis periods. Seniors aged 65+, for example, shifted to digital in increasing numbers while other risk groups such as disadvantaged minorities and low-income households fell behind, most likely due to lacking resources.

One explanation here is that the income gap widens during crises of such proportion, making it unlikely that low-income households would adopt online delivery services. This is mainly associated with the cost of delivery for small shipments, including driver tip, handling fee, service, fee, delivery fee, and so on. Due to the high cost of delivery, many low-income households would be left with no choice but shopping in-store even at the risk of infection.

The take for forwarders is that the increased demand for online deliveries is mainly associated with the pandemic. The popularity of online delivery is likely to be short-lived due to heterogenous shopper behavior. Not only there are shifts in consumer behavior during a pandemic but multiple factors play a role, including demographics such as age, ethnicity, and income level as well as psychographic factors such as behavior and perceived risk of infection.

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Why Drivers Refuse Contracts

As omicron spreads quickly, truck drivers and ship crew are faced with border closures, long weeks of quarantine, and the risk of becoming infected. Some workers are looking for jobs elsewhere while others have already refused contracts. In Romania, for example, truck drivers are refusing long-haul jobs, especially in countries where the pandemic is raging. It is a scenario reminiscent of 2020 when truck drivers were stranded waiting for 18 hours at border crossings due to traffic jams.

The shipping industry is facing a labor crisis in light of the fact that worker shortages were already acute before the onset of the pandemic. Some forwarders were forced to raise wages by 1/3 between 2018 and 2021.

Seafarers Also Refuse Contracts

Some operators in Singapore report that about 1/5 of their ship crew are not interested in renewing their contracts. Operators have been forced to offer higher salaries and hire mariners working for other companies. A major problem is the fact that some crew refusing contracts are senior staff, including officers with tenure and experience. Sea shipping experts note that it was not easy to find chief officers with training and experience even before Covid-19. Amidst a prolonged pandemic, finding the right person has proven even more difficult, compromising the safety of crew and ships. Some shipowners are forced to hire officers who are not qualified. They undergo shorter training and are then promoted to positions previously filled by staff with extensive training and experience. Experts warn that this may result in groundings, accidents and incidents onboard, and pollution.

Crew shortages are expected to get worse as many charterers and carriers only hire vaccinated staff. The new omicron variant also requires booster jabs, making it even harder for international freight forwarders to find qualified crew. Statistics show that less than 30 percent of mariners from the Philippines and India were fully vaccinated as of November, 2021.

Air Crew

Airlines already report record levels of crew calling sick as the new variant spreads. With pilots and crew testing positive for Covid-19, thousands of flights were cancelled before New Year’s Eve. Pilot shortages are especially acute due to regulations regarding how many hours they are allowed to work a week. While laws vary by country, flight time typically includes tasks such as waiting time, deicing, and taxiing and not just the actual flight time.

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1. Handling of Suspect Cases

Medical handling of suspect cases can be a challenge due to shortage of equipment and supplies such as hand gloves, face masks, chlorine, hand sanitizer, sodium lactate solution, and pain and fever medications. Transferring crew ashore has also proven a challenge, given that in many countries crew is not allowed to disembark for treatment.

2. Crew Changes and Repatriation

The global crisis has led to a situation where crew are either not repatriated or not allowed to disembark. In light of the fact that long sailings increase health and safety risks for crew members, the problem now extends far beyond labor agreements and for many, the current situation is a humanitarian and health issue of significant proportions.

3. Vessel Attendance for Statutory Purposes and Certification

When it comes to certification, the main problem is the transportation of club and class surveyors, vetting officers, inspectors, superintendents, and other personnel. Scheduling a proper arrangement for inspections, audits, and crew changes can also prove challenging.

4. Repairs and Shipbuilding

Repair and shipbuilding facilities across the globe have been affected to various degrees by the ongoing pandemic. Some shipyards temporarily closed and resumed operations while others limited their operations to critical activities only. The shipbuilding industry has been especially hard hit due to shortage of workers and materials needed for construction.

5. Supply Chain Disruption

The Covid-19 pandemic has made managing supply chain risk increasingly difficult. To deal with uncertainty, shipping executives are increasingly restructuring their supply chains to make them more resilient, agile, and flexible. A recent McKinsey survey shows that the overwhelming majority of supply chain executives (92 percent) have undertaken steps to improve resilience.

Last year, most businesses planned to improve resilience by focusing their efforts on both diversifying their supply bases and increasing their inventory of materials, components, and critical products. In reality, most businesses took steps to increase their inventory and underplayed the importance of regionalization, nearshoring, and supply chain diversification.

6. Warehouse Logistics

The pandemic dramatically affected warehouse logistics and forced manufacturers and shippers to adapt to changing warehousing requirements. Recent research shows that 40 percent of ecommerce businesses experience difficulties due to lockdowns and movement restrictions affecting warehouses. Also, one of the main problems is capacity issues due to labor shortages.

One way for businesses to go about this is to collaborate with third party logistics providers. This can help them overcome capacity constrains and adapt to quickly changing requirements. Third party providers that have multiple warehousing locations can help businesses with risk mitigation and continuity. When transportation shuts down and travel restrictions are set in place, having one location only can negatively affect supply chain operations.

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The Reasoning behind China’s Strict Covid-19 Policy

According to a study conducted at the Pekin University, dropping China’s zero-Covid policy could result in over 630,000 new infections a day. Using data from countries such as Israel, France, Spain, Great Britain, and the U.S., the researchers came up with figures and potential results if China was to implement identical policies to those in other countries. If the Chinese authorities implemented the U.S. pandemic control strategies, cases could soar to over 637,000 a day. Cases would hit over 275,700 if China adopted Britain’s policy and over 345,000 if it took the same approach as the French government. According to the researchers, a massive outbreak would place a huge burden on the country’s healthcare system.

A study by the Chinese Centre for Disease Control and Prevention published in Chinese CDC Weekly highlights the importance of strict control tactics unless specific treatments and more efficient vaccinations are available. Based on the findings, the researchers conclude that at present, the country is not ready to adopt open-up strategies solely relying on vaccination-induced herd immunity. The Chinese government also said that the benefits of maintaining a zero-Covid policy outweigh the disruptions resulting from lockdowns and extended quarantines. On December 12, China reported 61 new Covid-19 cases, down from 149 two days earlier.

Recently, the World Health Organization designated the new Omicron variant as being “of concern”, with countries in Europe and elsewhere imposing travel restrictions and curbs. Among the countries barring entry are the U.S., Israel, the UK, and the Netherlands.

Implications for Global Supply Chains

Data from the World Shipping Council shows that 7 of the 10 world’s biggest and busiest ports are found in China, including Shenzhen, Ningbo-Zhoushan, and Shanghai. Hong Kong ranked the 8^th busiest port in 2020. Lockdowns in China can have a significant negative effect on maritime shipping, with backlogs for consumer, automotive, and electronic products and shortages of manufacturing materials.

China’s zero-Covid policy involves closed or heavily controlled border crossings mandatory quarantines, contact tracing and testing, and mass lockdowns. Lockdowns have been imposed even when one or a handful of workers were found to be infected. With the new variant spreading around the globe, doubling down could be expected, further hitting the capacity of international freight forwarders. Shutdowns and strict control on shipping and air crews would make it increasingly difficult for exporters to meet orders in a timely manner.

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