John Whelan: Irish exports caught in quagmire of disrupted Chinese ports

China is working to eliminate the spread of the Omicron variant with ultra-strict lockdowns and border controls

Deliverymen wearing protective suits carry bags of food at the gate of a residential community in Shanghai on Monday, April 11.

Almost 500 container ships are stuck in congestion outside Shanghai and other major Chinese ports, amid China’s continuing efforts to eliminate the spread of the highly contagious Omicron variant with ultra-strict lockdowns and border controls. The lockdown is aggravating disruptions to global trade amid the country’s worst outbreak yet.

In Shanghai, which is the world’s busiest container port and in lockdown for more than two weeks, shortages of staff to unload and truck drivers to transport goods from the hundreds of ships at anchor have significantly extended lead times. Sales orders for Chinese businesses and consumers have been delayed.

Irish exporters and importers have been hobbled by these latest ports closures, as they had increasingly come to rely on trade with China to offset lost sales in other international markets, particularly the Brexit-hit British market. Exports to the market ratcheted up to €11.9bn last year.

This latest log jam in Chinese ports will also create production snags for many Irish traders who imported €8.4bn of supplies directly from China, bypassing traditional UK distributors.

Many Irish traders had already experienced lost exports sales in March due to Russia’s invasion of Ukraine and are facing rapid energy and other commodity price rises. When the added scale and persistence of the Chinese supply-chain bottlenecks are taken into account, many exporters are planning for a significant slow-down in both sales orders.

Exporters are responding to the latest Asian sea port congestion by moving goods by air freight to international markets, where possible.

However, the air cargo demand has outpaced capacity in the market, with freight capacity remaining restricted and dedicated freighters proving unable to meet demand. According to the International Air Transport Association, cargo capacity remains around 9% below January 2019 levels.

With the airspace restrictions brought about by the Ukraine crisis affecting over 30 countries, flight times between Europe and Asia and Asia and North America are being significantly increased, as air cargo flights are rerouted.

There has been a rush by many aviation companies to meet the gap between supply and demand in the air cargo market.

Irish-based aircraft leasing firm Avolon last month signed an agreement to convert 30 Airbus 330 passenger aircraft to air cargo freighters. However, the delivery of these converted air cargo planes won’t start until 2025.

Dómhnal Slattery, Avolon chief executive, said at the time that the global airfreight market is worth over €130bn and that air cargo traffic is expected to double over the next 20 years. This agreement signals Avolon’s intention to be a leading player in that expansion.

For exporters and importers, the current lack of capacity has fed into higher air freight rates, as passenger aircraft belly-cargo capacity remains restricted.

Sentiment in the air cargo industry indicates rates are expected to continue to increase in the near term and remain high for the rest of the year, as surging fuel prices and the war in Ukraine affect operators.

FedEx, one such notable operator, recently applied surcharges to most of their shipments.

As of February, air freight rates per kilogramme on the Hong Kong and Asia to North America and European routes had increased between 50% and 35%, respectively.

Arguably, the rising inflationary trend last year resulted from the first wave of shipping congestion in Chinese ports, but has now developed into a rampant global trend following the outbreak of Russia’s war on Ukraine.

US consumer price inflation climbed to 8.5% in March and eurozone inflation reached an all-time high of 7.5%.

In the same month, Irish inflation rose to 6.7% and the Central Bank and the Economic and Social Research Institute have projected it will peak at 8% or 8.5% in the early summer months.

The World Trade Organization has slashed its forecast for world trade growth this year in half because of the war in Ukraine. In October, the WTO was forecasting 4.7% growth in 2022. It has now revised this down to between 2.4% and 3%.