Global Port Congestion and What it Means for Businesses
The world’s third-largest shipping port, Ningbo-Zhoushan, was recently partially closed due to a worker testing positive for the Covid-19 delta variant. According to the detailed report by the port authorities, the worker had received his second dose of the Covid-19 vaccine in March and was healthy until early August. He started showing symptoms after coming in contact with a foreign merchant mariner and subsequently got tested and tested positive a few days later. Ningbo-Zhoushan port authorities took immediate action to control the spread of Covid-19 and shut down the Meishan terminal, where the worker in question tested positive worked.
While the Meishan terminal only handled 17% of the shipping operations at the port and the rest of the port is still operational, closing it has had drastic effects on the overall productivity of the port in just a few days. Since there is no certainty as to when the terminal will reopen, the effects of its closing are expected to worsen every day. As per the latest Bloomberg report, the Ningbo-Zhoushan port authority will reassess the operation at the Meishan terminal soon, which may lead to parts of the terminal resuming operations with the hope of full resumption at the beginning of September.
As of now, port authorities have redirected the shipping containers coming toward Meishan to other terminals, leading to their congestion. However, the shipping containers and boxes present at the Meishan terminal are not being sent out. This is in accordance with China’s ‘zero Covid’ policy. The policy implies that all Chinese authorities will prioritize the control of Covid-19 over everything else, including economic and trade disruptions and price-hikes. The stance of Chinese authorities over this policy has been taken to prioritize human health over businesses.
Port Congestion Effects on the Business World
Many business industries rely heavily on the shipping industry, especially on shipping to and from China. Dawn Tiura, CEO and President of Sourcing Industry Group, while talking about the recent events at the Ningbo-Zhoushan port, described the possible impact of the partial closure of the Meishan terminal as, “We heard that the backlog is getting bigger and the port congestion is getting worse. The disruption across shipping ports is related. If you’re buying goods that originate or move through China, you need to increase lead times of find another source of supply.”
Port congestion is nothing new. Since March 2019, the global shipping market has been continuously affected as the world went under a pandemic. As the Covid-19 virus continues to mutate and spread, it is getting increasingly difficult for authorities and governments worldwide to contain it. The nationwide lockdowns imposed by different countries as they continue to experience Covid-19 virus mutations added to the issues the shipping industry is facing worldwide.
Considering how much China relies on its ports for its economic growth, it was quick to implement screening measures and other essential SOPs as soon as the Who declared the spread of coronavirus as a global pandemic. The impact of coronavirus on China’s shipping industry was minimal though its workers had to quarantine when traveling to other shipping ports of the world. But as coronavirus outbreaks at various ports continued to occur, many ports had to either conduct limited operations or go under complete lockdown.
Coronavirus was first detected in December 2019, yet it wasn’t as late as February 2020 into the coronavirus pandemic that the shipping industry in China experienced a significant drop in exports. The uncertain lockdowns greatly impacted the availability of workers who moved on to other means of earning a stable income. According to a Shanghai International Shipping Institute report, the biggest Chinese ports were only utilizing 20% to 50% of their capacity in February 2020. The shortage of workers further affected the shipping industry and posed an obstacle as the country tried to stabilize the industry. China had been supplying raw materials to finished goods to businesses worldwide for over a decade. Still, the demand for businesses continued to deteriorate even as China tried to supply the goods.
As Europe went into lockdown, the director of Maritime Research at Drewry, Navin Kumar, said, “The impact is already visible. Trade has been severely impacted. Charter rates are down. Supply Chains have been disrupted. The world has been too dependent on China for everything. And this pandemic has come as a rude shock to them.”
Simon Heaney, manager of supply chain at Drewry, also commented on the situation, “Most ports are already experiencing congestion or delays, so any additional and uncatered for volumes will heap on more pressure.”
Mr. Heaney’s commented on the current port congestion at Ningbo-Zhoushan as, “The world’s biggest shipping lines including AP Moller-Maersk A/S and CMA CGM SA are skipping Ningo-Zhoushan port after the closure. The companies prefer to divert shipments to other ports rather than wait outside Ningbo for an unknown length of time while the Covid-10 outbreak continues.”
A similar incident had occurred at the Ningbo-Zhoushan port this time last year as well. A worker was tested positive, making the port authorities impose restrictions on port activity, which resulted in 40 vessels waiting at the outer Ningbo anchorage and almost the same number of vehicles re-routed. The vessels that weren’t made to wait were redirected towards ports in Shanghai, resulting in the worst port congestion to take place at Shanghai ports in the last three years.
The current port congestion is significant, for it is happening at a time where a decrease in overall shipping industry operations combined with a shortage of workers has already driven freight rates to an all-time high. This congestion is likely to force companies to increase the prices of their goods further, especially if they deal in home décor, furniture, food, or electronics and electronics accessories.
Implications for Businesses in the US
As Otorbaev wrote for CTGN, port congestion always results in the butterfly effect. As per Bloomberg’s data, one worker testing positive for Covid-19 in China has made 30 ships wait outside Long Beach port in Los Angeles. The number of anchored ships has rose throughout the Pacific Ocean, resulting in port congestion at both Shanghai and Vietnam ports.
So, what does this butterfly effect mean as it continues its course towards businesses in the US?
As per the Freightos Baltic Global Container Freight Index, the shipment cost of containers from Shanghai to Los Angeles has almost tripled, with 10% of the increase in the past month alone. From China to West Coast and = East China to East Coast, the prices have increased 270% and 220%, respectively. With about one-fifth of operations halted at the Ningbo-Zhoushan port, a further rise in the cost of freight shipment is expected.
The 10% increase in freight costs in July is to be blamed on the worldwide port congestion in July. A total of 116 ports reported disruption in July 2021. About 328 ships anchored at ports waited to be unloaded. These were anchored from the Asian transshipment Port of Singapore to San Pedro Complex.
According to the Marine Exchange of Southern California, shipping ports in Southern California experienced port congestion last week as a result of the partial lockdown of shipping ports in other parts of the world. As many as 38 cargo ships anchored and waited at the west coast ports to be able to unload and reload.
An influx in the activity is another problem that arises due to lockdowns at shipping ports. Long Beach and Los Angeles ports were empty in June as no exports were being sent out from the ports in China. The Yantian port in China, which is the major export point for sending goods to the US, was closed in June to control the covid-19 outburst. The other ports in China were operating for their respective points and dealing with port congestion due to the closure of operations at Yantian port. With Ningbo-Zhoushan port closing down its one-fifth of operations, ports at West Coast are expecting another period of low traffic.
As the economy has suffered, consumers in the US have begun leaning towards buying cheaper goods. In the US, where locally made products cost a lot more than imported one, the demand for imported goods has increased. This increase in demand has been followed by a decrease in supply due to three factors. These two factors are:
- Limited operations at shipping ports due to lockdowns and shortage of workers
- Increased demand for cheaper goods worldwide
The increased demand for cheaper goods worldwide has resulted in a shortage of containers required to ship them to their buyers. However, the shortage of shipping containers can be resolved if shipping ports all over the world resume regular operations and port congestions stop happening. According to Vespucci Maritime, an estimated 10% of shipping capacity was affected due to port congestion in July, resulting in at least 304 ships standing at ports, empty and useless.
As of now, the shortage of containers means an uncertain and prolonged delay for goods to reach the local businesses in the US. When business owners don’t receive materials, they cannot supply finished products to their customers. This, on the one hand, makes the businesses suffer the loss of customers. While, on the other hand, it also makes customers spend extra on locally made products.
Even if they get lucky to get their goods on time, the business has to charge customers more as they’re paying more in the shipping of raw materials. Local businesses that exported their goods have also seen a decrease in international orders after increasing their customers’ shipping prices. US exports have experienced an average decrease of $7 billion since the coronavirus outbreak.
While President Biden has taken notice of the situation and issued an executive order to crack down on those having a monopoly over the shipping container market, experts believe that the prices of goods will continue to rise in the US as the demand is expected to further grow during the upcoming holiday season.
Major companies such as Procter & Gamble and Coca Cola who have been known for their steady prices have been forced to hike them up during the pandemic. These companies, which depend on China for packaging and raw materials, have also been facing similar issues. Some smaller-scale brands in the US that did not win the fight on shipping container spaces have been forced to discontinue certain products due to shipping issues.
Empty shelves and increased prices in the supermarkets across the US have added to the customers’ disadvantage. The disadvantage is expected to rise. Mario Ciabarra, CEO of Quantum Metric, told CNBC, “Inventory levels will be retailers’ primary concern as they are faced with the decision to either have limited or no stock of certain items or manage higher costs associated with air shipping goods instead.”
In the end, all who are associated with the business of the shipping industry are facing a difficult time. Businesses have to either cut their profits or lose customers, and consumers have to pay more for the goods they need. This had presented an opportunity for most of the consumer base in the US to work on their purchasing habits. It is a fact that the US is still the number one consumer of goods in the world. After living in uncertainty and a worldwide pandemic for over a year, most Americans have now begun to invest rather than spend. They’re becoming mindful of their needs against their wants.
The consumer habits in the US have seen a slow but steady shift in preferring to buy from and support small and medium local and family-run businesses since the pandemic began. As people’s movements and reach became limited, they became more aware of their surroundings. This reminded them of the values of the community. Local businesses help promote the growth of the entire community since as they grow, so does their need for workers, creating opportunities for their community members. Supporting and buying from local businesses also helps preserve the environment as local businesses have a much smaller carbon footprint than big corporations.