As we usher in 2019, China and a few Asian countries with large ethnic Chinese populations are gearing up for another festive season to celebrate the traditional Chinese New Year (CNY), also known as the Spring Festival or the Lunar New Year. The year of the ‘Pig’ will commence from February 5, 2019 according to the Chinese Zodiac, which is based on a twelve-year cycle with 12 animals being designated to a year each.
The CNY holiday season is a time when millions of workers travel back home to celebrate the festivities with their families and when businesses and factories shutdown for three to four weeks to allow workers to return to their hometowns. Although the duration of the holiday is officially about a week, precedents indicate that factories normally shut down 10-days prior to the holidays to allow travel time for their employees. This indicates that factories in China are highly likely to be closed starting from the last week of January 2019. Furthermore, some employers allow additional time for the employees to travel back to the city after the holidays. Thus, the period before and after CNY not only heavily impacts the Chinese manufacturing industry but simultaneously creates a domino effect of disruptions to international businesses that rely on production in China.
Before the CNY, factories normally face a production peak period to get their products out in order to make up for the time lost during the holidays as well as because of an expected slow ramp up in business afterwards. Precedents indicate that it is quite common for most workers to not return to work or take an extended period to get back to work. Moreover, CNY is also the time for ocean and air freight prices to increase as it takes advantage of the high demand for capacity.
Ocean freight prices have been on the rise since even before Christmas 2018 as goods produced in China rushed to be imported to the US ahead of January 1, 2019 to avoid the 25 percent increase in tariff. Earlier reports had indicated that tariffs would be raised from 10 to 25 percent on Chinese imports to the US at the beginning of 2019. However, the tariff increment has been pushed back to March 1, 2019 as negotiations between the two countries continue. Nevertheless, ocean freight rates traditionally increase in January prior to the Lunar New Year from China to the rest of the world due to the high demand for capacity. According to industry sources, cargo rush and tight spaces are expected to contribute to a rate increase in January during the pre-Lunar New Year period; the increment will affect shipping lanes from Asia Pacific to Europe, Latin America, North America, Middle East and North Africa as well as within the Asia Pacific region.
Moreover, ports in China may face slight congestion before CNY as a result of shippers rushing to get their cargo out before ports face capacity constraints. This also reflects carriers’ plans, as a few vessels have already scheduled blank sailings or have revised their ETAs to some Chinese ports, including Shanghai, Qingdao and Kaohsiung in Taiwan by avoiding the first and second weeks of February.
Due to the rising popularity of B2C eCommerce around the world, there is a trend for consumers to purchase products of Western brands online prior to the Lunar New Year. Thus, the upsurge in demand to get goods on time has caused an upward price pressure for air freight carriers. According to industry sources, capacity for air freight from Asia Pacific to Europe and North America are bound to be affected as demands are forecasted to exceed capacity in January; demands for capacity is also expected to be high for air routes from Europe and North America flying to Asia with the possibility of forming cargo backlogs until the Lunar New Year.
As CNY is an annual festival, Resilience360 customers with suppliers based in China are advised to liaise with suppliers and manufacturers in the region to mitigate disruptions before and after the Chinese New Year period.