LOSERS OF CHINA’S COVID CLAMPDOWN

Projects Suffer Spiraling Costs, Schedule Nightmares

With unprecedented disruption to China exports because of zero-Covid policies, there have been inevitable implications for global projects.

Within China, the initial outbreak of the coronavirus created internal barriers between regions that in some cases hindered the delivery of medical supplies desperately needed in places attempting to care for overwhelming numbers of infected patients. China’s zero-Covid policies, stricter than policies implemented in other parts of the world, created hardships across the nation for domestic and international travel in the form of lengthy quarantine periods. Meanwhile, the impact on trade movements resulted with stakeholders scrambling to identify and implement contingency plans aimed at fulfilling contracts and market demand, equally for the construction, manufacturing and transport sectors.

For cargo transport, China’s policies have not only burdened domestic movements but have also created challenges for global exports and imports of all freight types, creating situations in which many faced dire consequences while others reaped unanticipated benefits. Breakbulk spoke with two industry experts who shared their insights regarding how China’s approach has affected the global transport sector.

“Clearly the China Covid restrictions, but also general China policies and the overall decline in the economy, have had an effect on the shipping industry,” Broekman Logistics’ Global Commercial Director Rutger Bonsel told Breakbulk. “At the container transport side, we saw massive declines in prices in late 2022. It is fair to say that the shipping carriers had been the ones profiting most, and forwarders consequently as well, and that with the current decline they are the ones that feel the biggest pain at the moment.

“With breakbulk, we experienced an increase in spot rates at terminals. There was a clear trend of moving goods which were normally containerized into breakbulk vessels. That trend is still going on.” Bonsel further underlined that there has not yet been a significant drop in breakbulk spot rates compared with what has been seen with container freight rates.

Consequences For Projects

Meanwhile, deugro’s President for Greater China and Pakistan, Dirk Wittkowski offered a granular analysis linking China’s domestic Covid policies to resultant consequences for project development and the transport sector. “China started to close its borders to foreigners in early 2020, shortly after the start of the pandemic. As a result, business travel both for Chinese going abroad, but also foreigners visiting China, was greatly impaired and remains so with the continuation of strict zero-Covid policies domestically coupled with 8 to 10 days mandatory centralized quarantine requirements for international arrivals. On the one hand,” Wittkowski continued, “these policies continue to have an adverse effect on new contract negotiations, on the other hand, they also result in increased challenges for required personnel able or even willing to travel to China.

“Also, the requirement for a more resilient supply chain became even more predominant with the March 2022 mass lockdown in Shanghai extending from an initial four days to more than two months, followed by lockdowns all over China, literally paralyzing global supply chain predictability.”

Before long, the extent of the impact of China’s policies became clear. “The Shanghai lockdown showed the world the effects of a greatly disrupted supply chain, with people unable to move, factories being forced to close or not able to receive raw materials, terminals being congested, truck drivers unable to pick up or deliver cargo, and a sheer massive number of ships piling up at anchorage.”

The implications for global industrial projects were multifaceted. With a strong dependency on China, the need for a more resilient and diversified supply chain became imminent, Wittkowski said. However, China with its unparalleled production capacity and efficient domestic supply chain is not easily available nor replicated in other countries. “Overall, nearly three years of zero-Covid in China have been characterized by a significant increase in overall procurement costs, with transportation cost surges being a particular cost driver. In combination with a negative impact on long-term contracts entered into pre-Covid, severe delays caused by capacity constraints, both on the transportation side but also in manufacturing, as well as restrictions on people’s mobility, have contributed to significantly longer project and construction times.”

Wittkowski believes that despite recent refinements to China’s zero-

Covid policies, trade is still in the midst of having to accept a degree of predictable unpredictability for as long as China maintains its unique, or ‘dynamic’ zero-Covid approach.

Opportunity Versus Danger

It has been said that the Chinese word for crisis means opportunity. It has also been said that the same word means danger. Linguistics aside, the pandemic and China’s response to it undoubtably provided opportunities for some while others struggled.

“The status quo was certainly shaken in its foundation as a result of the pandemic in general, but especially due to China’s zero-Covid approach,” Wittkowski said. “With a focus on logistics and China exports, I would certainly rate shipping companies, container manufacturers and warehouse operators as high-yield winners, looking at their balance sheets. But so, too, are online retailers, who benefited from consumer spending during lockdowns.”

Of course, new situations brought with them new, and often undesirable consequences that had to be overcome. “In the industrial project segment, higher procurement costs, construction delays, unpredictable transportation schedules, and lack of availability of qualified personnel being available for dispatch caused adverse implications to project clients,” Wittkowski said. “In particular, a surge in consumer demand in the post-lockdown period in most of the world resulted in overbooked container vessels, with surplus containers being absorbed by multipurpose and heavy-lift tonnage.” Overall, this reduced shipping capacity for the industrial cargo segment, which led to vessels being fully booked for months in advance, making it even more difficult to plan shipments.

Looking ahead, Wittkowski expected that new winners will arise as result of more diversified and resilient supply chains. Nearshoring momentum is one driver here, but so too is building up a multitude of suppliers in different geographies.

Losers Suffer From Poor Planning

But there have also been losers. “Projects were budgeted, and contracts concluded for the sale of electrical equipment two years prior to the Covid mandates,” Wittkowski said. “Upon tendering the logistics part in the first half of 2022, the actual transport costs exceeded the considered shipping budget multiple times and caused a significant loss to the industry, not only on the shipping side, but also on the production and material procurement side.”

He explained that some industries secured project contracts some years back and then failed to secure the required and substantial shipping space in advance. At the time of project execution, these companies did not manage to secure sufficient shipping capacity, and whatever space was available resulted in substantially higher costs than often were economically viable for the project. “Consequently, delays and heavy cost overruns impacted projects and, in some cases, projects even had to be cancelled.”

The list of stakeholders who have reaped benefits from China’s strict zero-Covid policies can be expanded further to include the lawyers who gained work not just from renegotiating contracts related to business that was impacted but also probing those very same contracts seeking potential means to find applicable provisions providing their clients with viable exit strategies. Similarly, China’s dominance in sectors such as chip manufacturing has resulted in initiatives to establish chip manufacturing plants in regions far from Asia, which in turn generate