We highlight initial thoughts on how the recent COVID-19 resurgence in China could impact the country’s Industrials & Transportation sectors. Setting the stage, China’s sudden infection surge seen over the past weekend across several Chinese cities has triggered mobility curbs in Shanghai and Jilin province, and city-wide lockdown restrictions in Shenzhen and Dongguan. While the situation remains highly fluid with close monitoring of key developments required, we summarize key impacts as follows:

1) Manufacturing activity: impact so far appears manageable despite partial factory closures and suspension of on-site business services in affected areas. That said, if the lockdown measures (adopted by Shenzhen and Dongguan) remain in place for longer than one week, we expect to see bigger disruptions.

2) Supply chain and logistics: Truck-based pick-up/delivery activity has been more impacted due to road/district closures and mobility curbs, while ports and airports in Shenzhen and Shanghai are operational as of now.

3) Passenger travel has been curtailed: Shanghai and Shenzhen saw 70%/80% of the scheduled flights being cancelled over the past two days due to sudden tightening of travel restrictions, while road- and rail-based travel has also seen large-scale cutbacks in services.

What is likely to happen?

  • Mixed expectations for manufacturing activity. Though industrial companies under coverage generally expect limited impact from the suddenly imposed mobility curbs, China’s near-term COVID reaction is poised to pose further headwinds, adding to downward economic pressure amid disruptions in supply chain brought about by the ongoing Russia-Ukraine conflict.
  • Positive on Infra: This year’s economic growth target of 5.5% announced at the NPC meeting now looks even more challenging against the latest macro backdrop. We therefore expect higher intensity in infra capex amid more accommodative monetary policy to mitigate the above-mentioned challenges. Worth noting early indicators including excavator and wheel loader sales saw improving sales trend in Jan-Feb’22, reflecting effects from front-loading of fiscal support. In addition, post China’s NPC meeting, NDRC mentioned its plan to front-load/accelerate key infra projects across railroads (including metros), ports, highways, and cold-chain logistics development. In addition, China Railway Corporation (‘CRC’, ex-MOR) also announced large-size tendering of freight-purpose locomotives totaling 229 units late last week, with railway capex typically used as a counter-cyclical tool.
  • For shipping, drivers are becoming increasingly mixed: We retain our positive views on container shipping, given risk of port shutdown and major disruptions for on-the-ground logistics, which would send further shockwave effect to an already crippled global supply chain, though longer-term inflationary impact on end-demand is yet to be seen. For bulk shipping, demand outlook appears more positive, given our expectations for stronger infra response and liquidity support, in addition to rising need for securing food and energy supply amid tightening industry supply.

Container and Bulk Shipping — Latest infection resurgence breeds fresh uncertainty for global supply chain

  • Temporary factory closures could impact manufacturing output and China containerized exports. China’s latest COVID-19 flare-up has prompted various companies located in Shenzhen and Shanghai to temporarily halt production, suspend on-site business services and step-up epidemic control measures. While it is premature to fully assess the exact impact of such factory closures, we expect prolonged closures to notably impact factory output and containerized export volumes.
  • China ports back under the spotlight amid tightening of restrictions. While ports remain operational, the tightening of restrictions and precautionary measures (i.e., testing, inspection, quarantine, and disinfection) will certainly impact port productivity. Based on Maersk’s latest customer advisory, the overall landside transportation situation remains dynamic, with trucking service largely available provided truck drivers obtain negative Nucleic Acid Test (NAT) report as mandated by local governments. Considering the restrictions, Maersk anticipates overall trucking operational efficiency to be significantly reduced due to frequent NATs, especially in Pearl River Delta (PRD), Yangtze inland ports, Qingdao, and Tianjin. Moreover, warehouses located in Shenzhen will remain closed from March 14~20 while warehouses in Shanghai and Qingdao are operational for now though truck drivers will be requested to show health code for cargo delivery and require negative NAT reports not older than 48 hours, if they are arriving from medium- to high-risk areas. While it is premature to assess whether this latest episode will resemble that of closure of Shenzhen Yantian International Container Terminal (YICT) in Jun’21 and Ningbo-Meishan terminal during Aug ’21, China’s adherence to COVID-19 zero tolerance policy continues to expose risk of temporary port shutdown, which will create a major shockwave effect to an already crippled global supply chain.