Production orders from China are down 40% as demand collapses

Aerial view of stacked containers at Qinzhou Port on August 15, 2022 in Qinzhou, Guangxi Zhuang Autonomous Region of China.

Chinese news service | Getty Images

US logistics managers are bracing for delays in the delivery of goods from China in early January due to canceled container ship sailings and the halting of exports by maritime carriers.

Carriers are pursuing an active capacity management strategy by announcing more blank sailings and suspending services to balance supply and demand. “The relentless decline in container freight rates from Asia, triggered by a slump in demand, is forcing ocean carriers to blank more sailings than ever before as vessel utilization hits new lows,” said Joe Monaghan, CEO of Worldwide Logistics Group .

U.S. manufacturing orders in China are down 40 percent, according to the latest CNBC Supply Chain Heat Map data. Due to the decline in orders, Worldwide Logistics informs CNBC that it expects Chinese factories to close two weeks earlier than usual for the Chinese Lunar New Year – Chinese New Year’s Eve falls on January 21 next year. The seven days following the holiday are considered a national holiday.

“Many of the manufacturers will be closed for the holiday in early January, which is much earlier than last year,” Monaghan said.

Supply chain research firm Project44 tells CNBC that after reaching record trade levels during the pandemic lockdowns, the TEU (twenty-foot equivalent unit) volume of ships from China to the US has declined significantly since late summer 2022 — including a decrease of 21% in the total shipping container volume between August and November.

Asia-based global shipping company HLS warned customers about the maritime transport business climate in a recent communication.

It seems to be a very bad time for shipping. We have the combination of declining demand and excess capacity as new tonnage enters the market,” it wrote.

HLS analysts predict a further 2.5% drop in container volumes and an almost 5-6% increase in capacity in 2023, which will continue to negatively impact freight rates in 2023.

“The container shipping market will be further complicated by economic uncertainty, geopolitical concerns and also increasingly fierce market competition,” wrote HLS.

OL USA CEO Alan Baer tells CNBC there are some early signs of a stock correction. Overall business volume and order flow from Asia remains subdued as carriers cancel more ships and there is little upside momentum ahead of Chinese New Year. But Baer said: “Space has already tightened, so while demand is weak, space could be tight in January and into the first quarter. On the upside, the depletion of inventories and the need to supply cycle to restart, slowly moving up.”

The ports on the west coast of the US will be hit the hardest

HLS cited trade data showing US imports from Asia fell to a 20-month low in October. The spot price for a container from Asia to the west coast of the US has crossed breakeven, “with little room for further reductions,” it wrote.

According to Josh Brazil, vice president of supply chain insights at Project44, the major ports on the west coast of Los Angeles and Long Beach have experienced the biggest drop in trade as shippers have also diverted some of their shipments to the east coast to mitigate the risk of a major union strike in the ports on the west coast.

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HLS expects most carriers to extend their West Coast rates through Dec. 14, at $1,300-$1,400 per forty-foot equivalent container (FEU). However, US East Coast rates are expected to fall by $200 or $300 in the first half of December to average $3,200-3,300 per FEU.

The recent increase in Covid lockdowns in China continues to impact manufacturing activities and slow down cargo output. There are also local barriers to transportation access between provinces and cities, mostly related to testing requirements for truck drivers, where trucking capacity will be largely impacted.

The battle for ship space, cargo overturning and slow transportation is tracked by the CNBC Supply Chain Heat Map.

Blank (cancelled) sailings show that the reduction in ship capacity on the transpacific route (China to the US) continues at a significant pace. Maersk and MSC’s 2M Alliance has suspended nearly half of its US West Coast services for December. The Ocean Alliance (CMA CGM, Cosco Shipping, OOCL and Evergreen) and THE Alliance (Ocean Network Express, Hapag-Lloyd, HMM and Yang Ming Line) have reduced total ship capacity by 40-50% through Chinese New Year.

As a result, space for shippers is considered tight for freight bound for the Pacific Southwest route and service reliability has declined, with carriers including MSC and Hapag-Lloyd rolling (not accepting) freight on sailings in a trying to make up time. According to logistics managers, this causes a two-week delay. MSC said in its latest message to customers, “ETAs are indicative and subject to change without notice.”

The fall in production orders from the US and the EU also affects Vietnam, which has boomed as a manufacturing hub as more trade moved away from China.

Since the beginning of this year, 12,500 businesses have been closed per month, an increase of 24.8% year-on-year, according to the Vietnam General Statistics Office report. The combination of the lack of production orders and rising interest rates on loans in Vietnam from 6.5% to 13.2% led many companies to close factories instead of signing new order contracts, according to HLS. Canceled ocean sailings bound for Vietnam are up 50% in December.

Surprise the increase in European production

In contrast to the decline in orders from China, trade data analyzed by Project44 indicates that the route from Europe to the US is “one of the possibly most surprising and certainly most important developments since the beginning of 2020,” according to Brazil.

“This sharp increase cannot be explained by the pandemic alone. But a strategic shift from over-reliance on trade with China and geopolitical tensions over Russia are the main drivers of the trade boom between the EU and the US,” he said.

The world trade map is rapidly being redrawn, with EU-US trade and investment in the US soaring as economic relations between the West and China come under scrutiny. This year, the U.S. imported more goods from Europe than from China — a big shift from the 2010s, according to Project 44.

For their part, European manufacturers, battling skyrocketing energy prices and inflation, are increasingly exporting to and investing in the US, Brazil said.

German exports to the US were almost 50% higher year on year in September. The German mechanical engineering sector has increased its exports to the US by almost 20% in a year-over-year comparison of the first nine months of 2022, according to Project 44.

The CNBC Supply Chain Heat Map data providers are Everstream Analytics, an artificial intelligence and predictive analytics company; global freight booking platform Freightos, creator of the Freightos Baltic Dry Index; logistics service provider OL USA; supply chain intelligence platform FreightWaves; supply chain platform Blume Global; external logistics service provider Orient Star Group; global marine analytics provider MarineTraffic; maritime visibility data company Project44; maritime transport data company MDS Transmodal UK; benchmarking of sea and air freight rates and market analysis platform Xeneta; leading research and analytics provider Sea-Intelligence ApS; Crane Global logistics; DHL worldwide forwarding; freight logistics service provider Seko Logistics; Planet, a provider of global daily satellite imagery and geospatial solutions, and ITS Logistics provide port and rail freight services in 22 coastal ports and 30 rail ramps across North America.

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