China’s zero Covid strategy to disrupt shipping as Ningbo-Zhoushan port closes

China has closed a key terminal at its port of Ningbo-Zhoushan, the world’s third busiest port, after a worker was discovered infected with Covid – a move that will likely put additional pressure on supply networks already stretched.

It was the second time this year that the country has suspended operations at one of its key ports.

Analysts say China’s “zero tolerance” approach to Covid will exacerbate already stressed supply chains this year. Some warn that it may not be the last port closure as long as Beijing continues to take that stance.

Dawn Tiura, CEO of Sourcing Industry Group, an association for the sourcing and procurement industry, said China’s stance would have “serious” consequences for the supply chain.

“China has zero tolerance for COVID. One person testing positive is enough to shut down (the) port,” she told CNBC in an email.

Ningbo-Zhoushan is the third busiest in the world by container volume. In 2019, it processed 27.49 million twenty-foot equivalent units (TEUs) of container throughput, according to the World Shipping Council. Container volume in 2020 increased by almost 5% to reach 28.72 million TEUs.

All inbound and outbound services from Meishan Terminal to Zhoushan Port were suspended until further notice on Wednesday, according to Chinese state media. The terminal is essential for servicing shipments to Europe and North America.

Supply chains have already been severely disrupted this year by crises such as the shortage of shipping containers and the Suez Canal incident. In June, Covid infections sparked disruption at southern China’s shipping hubs, including major ports in Shenzhen and Guangzhou – the first time China has suspended port operations due to Covid case.

China’s zero tolerance for the Covid approach suggests this latest port disruption might not be the last, said Nick Marro, head of global trade at the Economist Intelligence Unit.

“China’s ‘zero Covid’ approach means authorities will prioritize pandemic mitigation over everything else, especially given the highly contagious nature of the Delta strain and the risks that the he current epidemic weighs on future economic performance in the third quarter, ”he said in a note Wednesday.

“As long as authorities maintain this ‘zero Covid’ position, the risk of sudden disruptions caused by testing or blockages will persist, which tightly ties any hope for normalcy to factors such as national vaccination timelines,” he said. -he adds.

The suspension of services at the Meishan Terminal comes as container freight rates continue to soar this year. Container shipping rates from China and East Asia to the west coast of North America have risen more than 270% this year to over $ 15,800 per TEU, according to the Freightos Baltic Global Container Freight Index. Meanwhile, fares to the east coast climbed more than 220% to over $ 17,500 per TEU, according to the index.

Analysts warn there will be further delays and consumers will likely have to bear the costs as the holiday season approaches.

Tiura pointed out that the Covid epidemic in June led the key Yantian terminal in Shenzhen to cut exports by 70%. It tripled the wait time for processing shipments from 3 days to 8 or 9 days.

“If we experience something similar here and the time to move ships in port doubles or triples, we will see a substantial and long term impact on exports which will affect the holiday shopping season and drive inflation.” , she said.

“Container shortages were already straining global supply chains. As Ningbo-Zhoushan is the third largest container port in the world, this closure exacerbates an already bad situation,” Tiura said.

She said container capacity would likely become more expensive and shippers would likely pass the costs on to consumers, increasing global inflation ahead of the key holiday season.

Mario Ciabarra, CEO of data analytics firm Quantum Metric, said retailers will face many uncertainties as the holiday season approaches, and inventory challenges will be one of them. them.

“Inventory levels will be the primary concern for retailers as they are faced with the decision to have limited or no inventory of certain items or to deal with the higher costs associated with air freighting goods instead,” he said. she told CNBC.

EIU’s Marro also highlighted the disruption that will be compounded by key demand ahead of the holiday season.

“Trade disruptions pose problems not only for shipping and consumers, but also for manufacturers who depend on critical imported components,” he said.