U.S. import demand is stronger than ever as inventory-to-sales ratios remain painfully low. But there’s rising risk to shipping volumes on the supply side of the equation: Most American containerized imports come from China and elsewhere in Asia, where the delta variant is spreading.

There were two big plunges in trans-Pacific volume last year: one supply-side driven, when China locked down in the first quarter; another demand-side driven, when the U.S. locked down in the second quarter.

There appears to be virtually no chance of another major U.S. lockdown that would impair shipping demand. Not so in China, where lockdowns are rigorously enforced even when reported cases are very low.

Looking worse than the June outbreak

Trans-Pacific flows were impacted by the shutdown of China’s Port of Yantian in June following a COVID outbreak in Guangdong province. That led to a temporary reduction in the number of container ships stuck at anchor off Los Angeles/Long Beach, followed by a catch-up effect when delayed cargo arrived.

Donald Straszheim, head of China research at Evercore ISI, warned in a client note on Monday, “New COVID cases are rising and spreading more widely than the previous June outbreaks, yielding risks which are asymmetric to the downside.”

Delta variant cases have now been reported in 15 Chinese provinces. “A stumbling Chinese economy, after leading the world out of COVID, would be an unwelcome setback,” added Straszheim.

Argus Media reported on Monday, “China is dealing with the most challenging COVID-19 outbreak since the coronavirus first emerged earlier last year. The wide geographic spread of the latest outbreak — from the southern province of Hainan to Beijing in north China — is presenting a major challenge to authorities’ strategy of attempting to completely eliminate the virus.

“Cities including Beijing have locked down some residential areas … and millions of people in Hunan province have been ordered to stay home. Alerts have been raised to the highest level in Henan.”

China’s government-backed COVID-tracking app crashed on Monday due to “increased pressure on system services,” reported the South China Morning Post.

Unlike in the June outbreak, there have been only limited effects on transport and exports, but that could change quickly.

According to Argus, truck transport is now being slowed in Jiangsu province, where truckers are required to show negative COVID tests, and COVID restrictions are starting to affect port operations in Changshu and Nantong.

Southeast Asian manufacturing hit

Across Asia, the threat to export cargoes bound for the U.S. intensified over the recent months. Lockdowns in Southeast Asia are curbing production, while factories are facing the same supply-chain woes as everyone else when sourcing materials and components.

Indonesia reported record cases and deaths last month and remains in lockdown. The IHS Markit (NYSE: INFO) Indonesia Manufacturing Purchasing Managers Index (PMI) plunged to 40.1 in July from 53.5 in June. An index level below 50 indicates contraction.

Vietnam is expanding lockdowns as cases and deaths continue to rise. Vietnam’s PMI slid from 53.1 in May to 44.1 in June and improved only slightly to 45.1 in July.

In COVID-stricken Malaysia, where cases and deaths remain high, the PMI sank from 51.3 in May to 39.9 in June and improved slightly to 40.1 in July, albeit still well into contraction territory. As previously reported by American Shipper, supply chains in Vietnam and Malaysia have been hard hit by the latest outbreak.

In China — the most important source of goods for U.S. importers — PMIs are falling but are not yet in contraction. The official Chinese government figure for July was at 50.4, the lowest since February and down from a recent high of 52.1 in November. The IHS Markit China PMI was at 50.3 in July, down from a high of 54.9 in November.

Jason Miller, associate professor of supply chain management at Michigan State University’s Eli Broad College of Business, told American Shipper, “One caution I have with PMI-type measures is they are showing momentum, not absolute level of activity. With the PMIs we can’t yet gauge the magnitude of the disruption.

“Regarding how serious of a threat a decline in Southeast Asia manufacturing will be for the U.S. consumer, it will really be contingent on product categories. [For Vietnam] footwear, furniture, and apparel really stand out as vulnerable commodities.”

US inventory restocking still lags

COVID fallout in Asia coincides with ongoing inventory-to-sales shortfalls in the U.S. The challenge in the second half for American retailers will be to avert stockouts.

The Institute for Supply Chain Management (ISM) released its index of customer inventories on Monday, revealing an alarming drop. The index fell to 25 in July, down from 30.8 in June, to the lowest point since the index was created in 1997.

The Bureau of Economic Analysis (BEA) released its latest sales and inventories data on Friday, through May. BEA data on retail inventories (excluding motor vehicles and parts) and inventory-to-sales ratios highlight the strength of consumer spending.

Retail inventories were actually up 3.4% from May 2019, pre-COVID, to $440.2 billion in May 2021. However, inventories were only 0.96 months of sales, up only slightly from the all-time low in March and 12.2% below the ratio in May 2019.

(Chart: Jason Miller. Chart data: U.S. Census Bureau; inventories adjusted by Miller using implicit price deflators derived from the Bureau of Economic Analysis inventory data)

Thus, after record volumes at U.S. ports in the first half — and amid rising risks on the supply side in Asia in the second half — America remains far behind on its inventory restocking as sales continue to keep pace with imports.

Click for more articles by Greg Miller 

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