While the Lunar New Year will provide the container industry with some breathing space, it won’t fundamentally change the port congestion picture, writes MSI senior analyst Daniel Richards
Since the spectacular increase in container freight rates and spread of supply-chain chaos took hold at the end of 2020, the Lunar New Year holidays in China have been seen as a possible tipping point.
Normally, factories wind down operations in the weeks approaching the holiday as workers – including China’s extensive migrant labour force – return to their home provinces. Factory operations are then suspended during the holiday period, and once restarted, usually take several weeks to regain full capacity.
This implies a temporary fall-off in container liftings at Chinese ports. In the last three years when the Lunar Year fell just before the middle of February – 2010, 2013 and 2018 – container handling at Chinese ports fell between 16% and 22% month-over-month relative to activity in January. In each of these years, handling volumes in March were also below January’s levels. If repeated this year, this could help relieve congestion at Chinese terminals in the near-term, and at US ports several weeks further ahead.
Of course, this is not a normal year. Against a backdrop of rising Covid-19 cases, the Chinese authorities and several provinces are discouraging travel during the holiday period.
On a broader scale, workers in key cities are being provided with financial incentives (so-called ‘red envelopes’) to stay home. While the scale is uncertain, importers should expect a less abrupt cessation to factory output compared to normal years.
There will still likely be a slowdown in volumes in February, however. During a press conference held on 20 January, an official from China’s Ministry of Transportation estimated that travel over the holidays would be around 40% below 2019 levels. This is a significant reduction relative to normal levels, but still one that implies an average of 40M passengers per day. With this level of travel, and even if this proves an overestimate, not all factories will remain open at full capacity.
There are also signs that demand for Chinese exports began to cool in January, potentially a result of high freight rates themselves. Growth in new export orders as tracked by PMI indicators fell back. Freight rate data providers have also commented on a slowdown in the pace of activity, albeit with little movement in freight rates.
It is possible, then, that the Lunar New Year will provide the industry with breathing space. It is unlikely to fundamentally change the picture, however.
First, it is possible that those factories that do reduce or shutter operations will face a hefty backlog of orders upon reopening. The reported fall in export orders may represent a decision to defer purchases given expensive freight and shambolic logistics. The US import wave, for one thing, still seems to be in rude health. And given the recent announcement of ‘structural’ blanked sailings by two of the three container alliances, weekly shipping capacity will fall later in February, potentially prolonging the export backlog at Chinese ports.
Second, the congestion that is afflicting the industry will take longer to resolve, even if Lunar New Year does provide some breathing space. Port congestion has tied up equipment, partly driving the recent – if now lessening – empty box shortage in the Far East. It has also tied up vessels, preventing liner companies from adding incremental weekly capacity.
While we expect congestion to begin to ease later in February, this process could take months to play out. The queue of vessels outside the San Pedro Bay terminals on the US west coast was still growing at the start of February.
The impacts of Lunar New Year, while still likely to lower pressure on liner networks and port operations, do not represent a quick fix for the industry. The coming weeks should begin a process of rebalancing across the industry, but in the meantime, expensive freight and supply chain delays will remain the norm. This may be the case until vaccines permit consumers to spend on services on a greater scale and cause the level of illness and social distancing at ports to fall.