How China covid spike will affect the supply chain

Photo: Bloomberg
Photo: Bloomberg

Summary

China has announced stringent lockdowns yet again as covid-19 cases have resurfaced. The Chinese government’s ‘zero covid policy’ means several large cities such as Shenzhen can go under complete lock-down. This has implications for the global supply chain. Mint explains:

China has announced stringent lockdowns yet again as covid-19 cases have resurfaced. The Chinese government’s ‘zero covid policy’ means several large cities such as Shenzhen can go under complete lock-down. This has implications for the global supply chain. Mint explains:

Which regions have seen the outbreak?

China is facing the worst outbreak of covid-19 infections since the beginning of the pandemic. As of 14 March, the country reported 3,602 new cases. Most of them were reported from the northern province of Jilin and from the port city of Shenzhen. The original strain of SARS-CoV-2 emerged in December 2019 but China managed to control its spread over the last two years. Measures included stringent lockdowns, 21-day quarantine for those entering the country, and mass testing and vaccination for citizens. This strategy helped China keep strains such as Beta and Delta suppressed, until Omicron appeared.

What do we know about the spread?

The spread in China is because of the stealth Omicron, a subvariant of the highly infectious Omicron. However, studies have not shown it to escape vaccine immunity. According to GSIAD Initiative, the global organization that tracks influenza and coronaviruses, the stealth Omicron variant is prevalent in 4% of the total covid-19 cases reported since January 2022. Shenzhen shares its borders with Hong Kong that has reported 27,000 new cases since Monday. Hong Kong reportedly had a lax approach towards controlling the infection, which spread to Chinese cities. Experts in India are closely watching the situation.

Photo: AP
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Photo: AP

What about the global supply chain?

Foxconn, a supplier of Apple Inc., has temporarily closed down its factory in Shenzhen, the city known for exporting electronics parts to the world. Multiple lockdowns since 2020 have slowed down goods movement. Rating firm Moody’s estimates that the global recovery of the supply chain would be pushed back to at least the second half of 2022.

Will freight costs shoot up?

They might if port cities stay closed for long. Freight costs started shooting up during the first year of the pandemic. But Moody’s, in January, cited the Baltic Dry Index, which measures the transportation cost of dry bulk commodities by sea, to say rates dropped 14% month-on-month. Prices peaked in September 2021. Though on a weekly basis the freight rate from Shanghai to Los Angeles has not changed much since the peak, rates are still up substantially year-on-year, shows the Drewry World Container Index.

Is India prepared for the disruption?

India imports electronic goods, chemicals, and active pharmaceutical ingredients (APIs) from China. About 70% of APIs used to make medicines in India are imported from China. Most Indian firms keep an inventory of at least three months and may be able to weather the storm. Indian firms have diversified their supply chains since the first lockdown. However, long lockdowns resulting from a wide spread of the virus in China or Hong Kong could lead to more travel curbs and, thereby, shortages of key inputs.

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