As China faces its most challenging outbreak since the coronavirus first emerged in November 2019, the authorities are now ordering mass testing and imposing new travel restrictions. These current measures can be attributed to the recent surge in cases of the highly transmissible Delta variant which has reached almost half of China’s 32 provinces in just two weeks and placed millions in lockdown.
When the Delta strain broke out in July at Nanjing airport in Jiangsu Province, the second-largest economy in the world was reminded of the chaos that the first COVID-19 outbreak in 2019 brought. Further spreads of infection have reached some of China’s major cities, including Beijing and Wuhan, prompting governments to institute localised lockdowns and sever those transport links that are deemed to be high risk.
"Zhangjiajie has now become the new ground zero for China's epidemic spread”, according to Zhong Nanshan, China's leading respiratory disease expert.
The impact of COVID-19’s re-emergence is considerable, from local reports of supermarkets stockpiling their shelves in Wuhan to logistical problems affecting global trade. Since the initial disruption to the major export hub in Guangzhou in June, a further acceleration in cases has continued to increase congestion at the world’s busiest ports, triggering yet more slowdowns in global container turnaround times. Even a partial port closure is projected to jeopardise billions worth of global trade. Following the six-day closure of the Meishan terminal at Ningbo port, US$172 billion in global trade is at risk according to analysts from the Russell Group’s ALPS Marine platform. With cancelled sailings, ships at anchor and tankers being diverted from Ningbo-Zhoushan for an extended period, the estimated costs are predicted to surpass those of the Suez Canal blockage earlier this year.
The Port of Ningbo-Zhoushan - the world’s third-busiest port
Photographer: Suo Xianglu/VCG/Getty Images
Issues stemming from port closures have also been exacerbated by the authorities’ intensified efforts to curb the spread of the disease. New government regulations require all ports to conduct a nucleic acid test (NAT) for all crew members, forcing vessels to remain at anchor until negative results are confirmed. Reports from Braemar ACM also state that the implications for freight markets may be compounded by “a hit to China’s oil demand if widespread lockdowns are imposed”. This is widely connected to the reduction in jet fuel consumption as well as potential disruptions to cross regional trucking activity with a predicted “downside risk” to China’s diesel demand in August of as much as 100,000 barrels a day.
Although cities have taken action to combat the resurgence of COVID-19, further interruptions to freight and shipping are imminent. Increased scrutiny on the cross-border movements of cargo, numerous plant closures and a decrease in factory production of 50-70% in China are placing cargo owners and supply chains under intense pressure. This poses severe threats to those supply chains that are undiversified and dependent on single-sourcing strategies. With limited short-term alternatives, they are highly vulnerable to surges in procurement and logistics costs. This exposes shippers to the risks of operating in unpredictable freight environments; for some, most worryingly, this potentially includes a significant proportion of their margins being cut and therefore a new wave of demand for capital. With a severe lack of liquidity, disruptions to financial planning and escalating freight rates, firms are racing to access flexible financing solutions.
According to Drewry Shipping, transporting a 12.2-metre (40ft) steel container by sea from Shanghai to Rotterdam, South Holland, now costs a record US$10,522 which is nearly 300% more than last year.
Zero-COVID vs. Delta Surge
Actions to mitigate a return of the coronavirus are also being propelled by concerns surrounding the efficacy of China’s most commonly used vaccines. Both the Sinovac and Sinopharm vaccines have been proved by the World Health Organisation to be 50% and 79% effective, respectively, in preventing symptomatic COVID-19 infection in clinical trials. However, China’s continued reliance on aggressive pandemic prevention measures is perceived to be a “function of (their) lack of confidence” in its home-grown COVID vaccines by Yanzhong Huang (a senior fellow for global health at the Council on Foreign Relations). This is backed by high rates of rare COVID-19 infections among the country’s fully vaccinated individuals spurring authorities to take additional precautions.
According to Professor Cowling of the School of Public Health, preliminary studies have suggested that inactivated virus vaccines such as Sinopharm and Sinovac could offer 20% less protection against the Delta variant than against the original virus.
The Delta variant may therefore prove to be the ultimate stress test for China’s expensive “zero tolerance” strategy. This infamous yet disputed approach involves quarantining every case, closing borders and isolating entire cities, an approach believed to have played a pivotal role in restoring China’s economic growth. However, experts are concerned that this policy will fail to remain sustainable following recent analysts’ reports that have downgraded China’s GDP growth forecasts. Specifically, Goldman Sachs has revised its Q3 real GDP forecast down by 3.5pp to 2.3% QoQ (vs. 5.8% previously).
JPMorgan predicts GDP growth now at 6.7% year-on-year in the third quarter, down from 7.4% previously, while Goldman downgraded its 2021 forecast to 8.3% from 8.6%.
Clearly, we are seeing the damaging knock on effects for both global and domestic supply chains as a result of port closures and lockdowns, some of which were initiated by just one case of COVID-19. This could lead to the possibility that China may transition to the less rigorous Western approach to deal with a surge in COVID cases. Alternatively, the magnitude of the spread of the Delta variant may prevent or delay the adoption of an exit strategy. Either way, with the prospect that the Chinese vaccines will experience waning success, “many organizations and reinsurers are waking up to the new reality of trade disruption, which is here to stay for the foreseeable future,” according to Suki Basi, CEO of the Russell Group.
Ultimately, this reaffirms the importance of safeguarding against unknown and uncontrollable risks. Implementing strategies to diversify and build resilience across supply chains is, therefore, the next focus for many. Read more about how OCI assesses risk in the supply chain here.
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