Outbreak Extends Supply Chain Repair Time, But Has Limited Impact

Omicron variant virus may again extend global supply chain repair time. According to data released by the National Institute of Communicable Diseases in South Africa, the Omicron variant is spreading faster and is more transmissible than the previous variant. We expect the supply/demand imbalance in shipping to persist until the end of 2022, which may be prolonged by recurring outbreaks. Inspection and quarantine requirements at terminals, warehouses, yards and other parts of the supply chain may increase again, exacerbating labor shortages and extending the time to repair the global supply chain.

The epidemic is only one of the reasons for the decline in supply chain efficiency, and the relationship between the improvement of the epidemic and supply chain efficiency is weakened. We summarize the reasons for the low GSC efficiency as follows:

1) Epidemic prevention and inspection requirements reduce operational efficiency: The inspection and quarantine requirements for employees in terminals, warehouses and yards, the requirement to maintain social distance and other epidemic prevention requirements, as well as the quarantine requirements for crew members reduce operational efficiency in the port segment.

(2) Cargo volume exceeds the carrying capacity of the terminal, and a large amount of cargo backlog reduces the operational efficiency: The high cargo volume and the high capacity of the main routes have far exceeded the original design carrying capacity of the port, especially in some older ports in Europe, America, Southeast Asia and other regions. A large amount of cargo accumulation crowded the space of the yard, making it difficult to pick up and store containers and significantly reducing the operational efficiency of the terminal. At the same time, the disruption of shipping schedules caused by various factors such as bad weather has aggravated the deterioration of terminal operation efficiency, and even the more advanced Chinese terminals have experienced congestion. 3) Shortage of labor such as truck drivers and warehouse workers, and low traffic efficiency in the surrounding area: In addition, the capacity of terminals is limited by labor shortage, insufficient trucking capacity, insufficient railroad capacity, and road yard facilities. Traffic efficiency is also low, and congestion at the terminals is difficult to be relieved in a short period of time.

In fact, two years have passed since the outbreak of covid-19 in early 2020, and liner companies have adapted to the "new normal" of the epidemic. Against the backdrop of a reshaped industry landscape, the three major alliances will maintain steady operations, and even if the epidemic is completely over, industry profitability and freight rates will not return to their original state.