June 26, 2022

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The global effects of Shanghai’s lockdown

The global effects of Shanghai’s lockdown

Shanghai authorities began a snap lockdown of the city’s 26 million residents late on Sunday after mass testing found “large-scale” COVID-19 infections throughout the financial hub.

The two-stage lockdown will split Shanghai along the Huangpu River for nine days to allow for “staggered” testing by healthcare workers.

Residents on the eastern side of Shanghai have already been confined to their homes as public transportation, including ride-hailing services, have been halted, while many firms and factories have suspended manufacturing or are working remotely. Across the river, residents are scrambling to secure supplies for the upcoming lockdown in a scene that has become increasingly common under China’s Zero-COVID policy.

Cities including Shenzhen, Dongguan, Changchun, and Shenyang have already faced strict, but short-lived lockdowns in China’s ongoing battle against rising Omicron cases. And more lockdowns could be possible moving forward, as authorities seem intent on maintaining strict restrictions in the country.

“China is unlikely to give up on its Zero Covid policy in the near term, despite challenges from the large Omicron wave,” Bank of America analysts wrote in a note to clients on Monday.

While Shanghai residents grapple with rising COVID-19 cases and lost wages from the city’s lockdown, the global economy is already seeing knock-on effects in everything from commodity prices to electric vehicle production.

Oil prices retreat—for now

Oil prices retreated as much as 8% on Monday after news of Shanghai’s lockdown spurred fears about declining demand for oil from China, the world’s biggest crude importer.

Brent crude oil, the international benchmark, pared losses to trade down over 6% at around $112 per barrel by mid-day on Monday, while West Texas Intermediate crude sank even further, falling to under $106 per barrel.

The fall in the price of oil offers a glimmer of relief for consumers, as U.S. gasoline prices remain near record highs, but experts warn the current downward pricing trend may be short-lived.

“The new shutdown measures due to covid are expected to be short-term road bumps on a long up-trending road,” Ipek Ozkardeskaya, a senior analyst at the online bank Swissquote told Fortune via email. “The impact of the lockdowns on medium-term oil demand will certainly remain limited, whereas the tight supply concerns—which are amplified by the tensions in Saudi Arabia with the Houthi rebels—should keep oil prices under decent positive pressure.”

Mark Haefele, UBS Global Wealth Management’s chief investment officer, said in a note to clients on Monday that he believes oil prices will remain elevated as China does all it can to minimize the economic impact of lockdowns and the global market struggles to replace Russian supply.

“Since the start of the war in Ukraine, sanctions and supply disruptions have kept the situation highly fluid. In our view, Russia is a significant energy producer that cannot be easily replaced by others,” Haefele wrote. “While the markets took the announcement negatively, a recovery remains likely if the short and swift restrictions prove effective. Risks to commodity prices remain skewed to the upside for now.”

Factory shutdowns, “closed-loop” systems

A number of factories in Shanghai have been closed temporarily as a result of the city’s lockdown, but authorities have done their best to prevent production delays by instituting “closed-loop” systems that will let some factories remain open as long as workers are confined to factory campuses and adhere to COVID-19 testing protocols.

Still, Tesla’s Shanghai gigafactory was forced to halt assembly lines at authorities’ request on Monday and will likely remain closed through Thursday, leading to a temporary loss of the factory’s daily production of around 2,000 cars.

But companies like GM and Volkswagen will continue to operate their Shanghai plants, while the iPhone supplier Pegatron and China’s largest chipmaker Semiconductor Manufacturing International have also been able to keep factories running.

Bank of America said the impact on manufacturing may be “manageable” if lockdowns are kept short and don’t spread throughout the country, but damage to China’s services sector and consumer consumption could be more significant.

“Even a sporadic and short-live Covid resurgence could bring notable shocks to consumption, and continue to weigh on consumer confidence for months after the Covid wave subsides,” Bank of America analysts wrote.

Logistics nightmares

Shanghai’s COVID-19 lockdown has already put significant pressure on supply chains and logistics operations around the city.

While Shanghai’s ports and the Pudong airport will remain open despite the lockdown, truckers around Shanghai are finding it difficult if not impossible to secure vehicle passes that allow them to unload their cargo in an ongoing logistics nightmare in the city.

Transfers to and from the city’s ports as well as to Pudong International Airport—China’s leading cargo airport—will be “nearly impossible” over the coming days, Thomas Gronen, head of the greater China region at Fibs Logistics, told The Loadstar on Monday.

“There is a significant disruption to truck movements already…leaving a large part of the cargo ready for loading today unable to be transported to the port,” UK-headquartered logistics provider Woodlands Group said in a statement.

Logistics companies are switching to the nearby Ningbo port or even the much further Qingdao port in an attempt to prevent supply chain chaos around Shanghai, but consumers worldwide will likely feel the impact of Shanghai’s supply chain turmoil.

China can, however, likely limit the damage to supply chains as long as lockdowns don’t persist past the next few weeks, Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group, told Bloomberg.

This story was originally featured on Fortune.com