Global trade has rebounded from the 2020 lockdowns (Exhibit 1), with goods export volumes up 13% in the first nine months of 2021 vs the same period in 2020, and 5% higher compared to 2019. The rise has been driven by strong consumer goods demand, the result of a pandemic-driven shift in purchasing patterns away from services, a rise in e-commerce in the US, Europe and Asia, and fiscal support for households. As a key global manufacturing hub, Asia has benefitted.
Exhibit 1: Asian goods exports bounced back amid strong global consumer demand
However, the road to recovery has been bumpy, and Asia-Pacific’s production has periodically been impacted by fresh outbreaks. More recently, restrictions were reinstated across the region to stabilise a wave of COVID-19 cases, leading to production disruptions and negative spillovers to regional demand. China’s import demand also weakened amid production cutbacks and electricity shortages. The Southeast Asian economies of Malaysia, Thailand and Vietnam were particularly hard hit, with Vietnam’s manufacturing plunging 12% quarter-on-quarter in seasonally adjusted terms in the third quarter.
Southeast Asia’s disruption created supply-chain bottlenecks
While not as crucial as China, a significant share of Southeast Asia’s exports are intermediate goods used in the production of other countries’ exports (Exhibit 2), particularly in automobile and electronics. Indeed, Toyota temporarily closed its Japanese auto plant in September, citing pandemic disruptions in Southeast Asia. Factory closures in Vietnam also impacted Samsung and Apple, leading to delivery delays, and apparel manufacturing was also severely disrupted.
Exhibit 2: ASEAN-5’s participation in global supply chains likely higher now, following US-China trade tensions
US trade data suggests that Chinese companies stepped in to fill some of Malaysia’s and Vietnam’s supply gap, with US’s import share of electronics parts and components from China increasing during the period from April 2021 to September 2021 (Exhibit 3). But given the rise in US tariffs on Chinese goods since 2018, this has come at a cost.
Exhibit 3: China has helped fill some of the supply gap in electronics
The easing of restrictions has resulted in production rebounding across most of the region since September. The latest IHS PMIs suggest manufacturers in Malaysia and Vietnam are facing some supply delivery delays (Exhibit 4), but relative to the rest of the world, the reported supply delivery delays are minor.
Exhibit 4: IHS global supplier delivery times
In part, this reflects the less complex and more labour-intensive nature of production in developing Southeast Asia countries. With restrictions eased and workers able to return, manufacturing can now restart. In the case of Singapore, production is concentrated in upstream products, such as semiconductors; these products are inherently less reliant on other manufactured inputs. As Southeast Asia is less exposed to disruption in other parts of global supply chains, and with firms now able to operate, we expect a relatively rapid recovery. This will eventually flow through to the more complex, high value-added segments of global supply chains and consumers in the US and Europe.
Port congestion yet another problem
Even as more production comes online, there remain logistical challenges, particularly across shipping but also in air freight. Capacity on major shipping routes between Asia, Europe and the US have recovered to pre-COVID levels, and TEU throughput was up around 6.2% in the first nine months of 2021 compared to the same period in 2019. But demand has outstripped supply (Exhibit 5).
Exhibit 5: Temporary stagnation in global trade, reflecting shortages of key parts and busy ports
In the short run, shipping supply is constrained given the multi-year lag between new orders and new ship deliveries. The pandemic has further reduced capacity through increased vessel quarantine regulations, labour shortages due to COVID-related restrictions globally, and periodic port shutdowns due to positive cases. Outbreaks at China’s ports (Yantian port in June and Ningbo in August) have been particularly challenging given their size and importance in supply chains.
Indeed, globally less than half of ships arrived on time during 2021, and delays for late ships are consistently adding more than a week to delivery times versus around four days in 2018-2019 (Exhibit 6).
Exhibit 6: Delays in shipping arrivals have stretched to 7.5 days from around 4 pre-COVID
The increase in delivery times has led to a rise in blank (cancelled) sailings, and around 10% of scheduled capacity was cut in H1 2021. Currently, blank sailings stand at around 8%. In all, this has led to a surge in freight rates (Exhibit 7), which has been felt more acutely across the low value-added cargo segments (Exhibit 8).
Exhibit 7: Freight rates have risen sharply across all shipping lines
Exhibit 8: The share of transport costs has risen sharply for low value-added goods
Asian ports generally more productive
Port congestion and logistical problems are most acute in Los Angeles and Long Beach (LALB), which account for around 40% of US ocean-borne imports. The number of ships waiting at sea has fallen from a record 76 in September to 57 in early November. But according to IHS, it takes three times as long to upload a container at LALB than in China. This is mainly due to Asian ports operating 24/7 (Exhibit 9). But the US is also facing limited capacity at warehouses and a trucking labour shortage, all of which add to logistical bottlenecks.
Exhibit 9: Turnaround time in Asia is generally lower and has eased
As a result, ship turnaround times in Shanghai, the world’s busiest port, is currently around 4.9 days, only up slightly from the 4.5 average during 2017-2019. Similarly, for other Asian ports such as Singapore, Busan South Korea, and Port Kelang Malaysia, the current turnaround is between 1.7 to 3.5 days (less than half a day higher). In contrast, turnaround time at LALB is up from 3.6 to 6.4 days.
Asia’s port efficiency, an increase in empty containers being returned from the US to Asia, and increased trans-Pacific capacity into the intra-Asia market to serve (among others) surging Vietnamese volumes, gives us some optimism that the current ramp-up in Asia’s production will not lead to a significant increase in congestion across the region. Singapore, a key regional trading and logistics hub, has also implemented measures to ease regional port congestion, including opening the Tuas Port to store containers and providing vessels with the chance to refuel and change crews. But capacity at ports will remain tight as Asian manufacturers continue to work through a backlog of orders.
Challenges to remain until at least mid-2022
Asia’s port efficiency, though, will not resolve the logistical challenges facing the US and EU. The end of the peak Christmas season and slowdown in Asian manufacturing during the Chinese New Year will give US and EU port operators some space to catch up, particularly if US ports begin operating 24/7, and may lead to some further easing in global freight rates from 2021’s highs. But warehousing and labour shortages in trucking mean the clearing of ships is still likely to take longer than normal, and we expect global freight rates to remain elevated amid solid demand as inventories are rebuilt.
While the worst may be behind us, we don’t expect a full easing in supply chain disruptions before H2 2022. Thereafter, as consumers pivot back towards spending on services, global demand for shipping should ease. In fact, in 2023 we could be back in a state of excess capacity with freight prices falling sharply as based on current orders, and shipping capacity is set to rise around 22% over 2022-24. We estimate that if supply-chain disruptions prove more persistent, Asia’s GDP growth could be 1.6ppt lower next year.
Exhibit 10: More persistent supply-chain disruptions could see 2022 APAC GDP growth at 4% vs our baseline of 5.6%