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January 25, 2022

Supply Chain Pressures Intensify Amid China Port Problems

Delays in the global movement of goods, which can lead to inventory shortfalls, are likely amid challenges like port backlogs tied to COVID-related restrictions and reduced airfreight capacity.

By  Christopher Ruvo

A backlog at China’s Port of Shanghai, the world’s busiest container port, is costing an estimated $4.5 billion a week in lost global trade, according to an analysis by risk management specialists Russell Group Ltd.

Furthermore, the analysis asserts that potentially $635 million worth of trade from Shanghai to the United States is at risk due to the backlog.

supply chain

The situation in Shanghai highlights what analysts say is more issues for global supply chains in the promotional products market and many other industries, with challenges including increasing port congestion in China, rising air freight costs, a recent uptick in cargo shipping prices and the possibility that it will take longer to get products to North America from China-based manufacturers.

“Buckle your seatbelt,” Jing Rong, vice president of supply chain and compliance at Braintree, MA-headquartered Top 40 firm HPG (asi/61966), told ASI Media. “It’s going to get a bit bumpy again.”

In Shanghai, cargo ships are reportedly more than a week behind schedule – a result of the port facing a crush of demand as vessels diverted there following COVID-related lockdowns and mass testing initiatives at other major Chinese port cities, such as Ningbo.

Delays in landing product stateside from China, where most promo products sold here are made, can contribute to inventory shortages in the promo space and other industries – a phenomenon that occurred throughout 2021 in the branded merchandise marketplace.

China’s zero-tolerance COVID policy, which institutes mass testing and/or lockdowns of areas where COVID cases are identified, has been a catalyst for the slowing down of production lines and port congestion, analysts say. Cases have been reported in the essential port cities of Shenzhen, Tianjin and Ningbo, as well as in the manufacturing hotbed of Xi’an, which has triggered lockdowns or related restrictions.

“While global companies have become more nimble in this crisis, we still should expect some delays from this latest round of supply chain stress,” John Ferguson, practice lead for globalization, trade and finance for think tank Economist Impact, told CNBC.

Promo suppliers said they’ve experienced such delays, but that so far, the slowdowns have not been jarring.

“Ships are trying to avoid COVID-induced delays in Ningbo port by routing through Shanghai, and we are seeing departure delays of five to seven days,” Rong said. “These last-minute re-routings are escalating the congestion facing China’s ports as an increasing number of cities are hit with COVID outbreaks.”

Teresa Fang told ASI Media that the Ningbo closures and related vessel re-routing resulting in port backlogs have caused challenges, but that the impact to the supply chain of Top 40 supplier alphabroder (asi/34063) has so far not been substantial.

“We made bookings far in advance, so while there was some disruption, it has been minimal,” said Fang, vice president of supply chain at Trevose, PA-based alphabroder, promo’s second largest supplier. Nonetheless, the road ahead for supply chains continues to look challenging, said Fang, noting that space at ports and on cargo ships figures to remain tight and expensive. “We don’t expect to see any significant change for the first half of the year,” Fang shared.

China’s Lunar New Year, which begins Feb. 1, is another factor in play. During this time, factories in China shut down and workers typically travel from industrialized centers where they work to hometowns to visit with family. As such, the weeks before Lunar New Year are busy for companies that import from China, including those in promo, as they hustle to get goods out of China before the planned shutdowns.

The demand resulting from this natural business cycle, combined with the COVID-escalated port problems and related sea shipping complications, as well as a reduction in China airflights, has fueled a surge in air freight prices. In some cases, rates have risen more than 50% since the start of January. Higher rates for cargo transport – be it by air or sea – can ultimately contribute to higher costs for products in promo and other industries. Promo product prices were already on the rise again in 2022.

“Air freight rates are climbing, as there are less and less commercial planes allowed into China as they prepare for the Winter Olympics there,” Jeffrey Nanus, CEO of Norwood, NJ-based hard goods supplier AAA Innovations (asi/30023), told ASI Media. “We’re trying to avoid air freight until after Lunar New Year.”

While ocean cargo rates remain exponentially elevated over pre-COVID levels and even what they were a year ago, Nanus said the massive upsurge in container prices to at or near record highs that some feared in the run up to Lunar New Year has not occurred.

“Prices for us have remained stable so far,” Nanus said.

Nonetheless, while sea shipping rates remain down from the peaks seen in 2021, they have increased. The Freightos Baltic Index, which tracks container rates in particular, noted that container costs from China to the U.S. West Coast were up about 11% on Jan. 24 from Jan. 7 to $15,145. Year over year, the rate was up 215%. Some analysts think the rates will begin to decline somewhat after the Lunar New Year rush, but still stay at a level far above historic norms.

While troubling, the supply line challenges aren’t unexpected. Sourcing experts in the promo space believe various supply chain issues will persist well into 2022, with some saying they could stretch into 2023. They’re doing their best to adapt, and while the problems place pressure on supply lines, merch sourcing pros think the industry will continue weathering the storm.

“Everyone has been dealing with this up and down the supply chain for nearly two years now,” said Rong. “Everyone already knows the drill. Safety stock is already in place and customers know to be accommodating on product selection. I do not see any big impact to the promo industry.”