What the reopening of Shanghai heralds for capacity and costs

On June 1st, Shanghai reopened – and if we thought companies around the world were excited to once again have goods being manufactured, imagine the joy of the city’s 25 million residents who are now free(er) to move about than they have been for weeks. We know first hand the challenge this has posed as our Shanghai office team members have worked remotely on behalf of our customers, staying in touch with factories and the local and national governments to know what airports and seaports were viable alternatives and operating at a time when China was pursuing a zero-COVID policy in an attempt to eliminate cases.

From the point of view of companies buying and selling goods in China, the next few weeks will offer both great excitement and great trepidation. Excitement because exports will begin to once again flow from the world’s factory floor, but trepidation because once finished goods which were trapped at ports, in containers or in factory warehouses have shipped and the on-hand supply of components to manufacture has been exhausted – there is a widely-anticipated gap that will occur as manufacturing ramps up and raw materials arrive and become available.

That first wave of exports has the potential to overrun American ports upon arrival and those ports are already making preparations. At Omni, we are monitoring conditions for sea freight and air freight markets and are committed to relay in near real time what we are seeing and experiencing.

Space early, costs late.

With inventory at high levels in the United States, cargo owners were committed to moving goods sooner to be on hand. Gene Seroka, Executive Director of the Port of Los Angeles, said as much at an appearance at the National Custom Broker and Forwarders Association of America (NCBFAA’s) annual conference in May – calling out back to school and holiday merchandise moving in April and May that more traditionally moved during the customary peak season of July through September. Whether these high inventory levels correlate to reduced future orders – and thus reduced demand that lowers freight rates – remains to be seen.

 

cargo plane over shanghai

Air freight: Limited passenger flights + backlogged demand = seller’s market

While carriers may have removed scheduled port calls early in the pandemic (there is a case to be made that too many blanked sailings and the late return of scheduled service put us in this predicament), they put the ships back and have been placing orders for new builds and chartering existing tonnage as quickly as they could.

For non-cargo airlines whose fortunes rise and fall with passengers, the slow return of international travelers has meant that traditional belly space has been non-existent. The reopening of Shanghai – and Pudong Airport – will bring those flights back, but given the amount of cargo to urgently move into and out of China, there will not be enough capacity.

Omni has a variety of competitive and cost effective solutions to help our customers navigate this environment.

With 90% of flights in and out of Shanghai canceled during this period, the demand is understandably astronomical. We forecast rates could reach early COVID levels and are doing everything in our power to mitigate these spikes, even in the face of an 8% decline in air freight volumes in the month of May, according to Clive Data Services.

At Omni Logistics, we have invested heavily in people and technology that deliver stability to cargo owner’s supply chains. It creates an incredibly challenging climate for us when the asset-owning companies on whom we rely think that the short-term opportunism to be disproportionately profitable outweighs the long-term relationships which predate the current environment and will eventually reach equilibrium between supply and demand.

While we manage these relationships, we continue to underscore the importance of communication – the more transparent our clients are with demand forecasting, prioritization and pricing flexibility in this fluid environment, the greater our ability to deliver on those most critical of needs.

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