Breakwave Advisors Founder and Managing Partner John Kartsonas breaks down how Chinese port congestion is impacting the United States.

Video Transcript

GENE SEROKA: Factory output in Asia is as high as it's ever been, but they're still behind in orders. Ship space is not enough, even with 99 and 1/2% of all vessels deployed worldwide and in our trans-Pacific arena. We've got 32 ships at anchor today, awaiting berthing space. Yet our productivity is higher than ever. It's kind of like squeezing 10 lanes of freeway traffic into five.

AKIKO FUJITA: That is port of LA executive director Gene Seroka speaking to us earlier this week about the impact the port shutdowns in China have had on the US's largest port. The container port at Ningbo-Zhoushan remains partially closed now for more than a week since an employee tested positive for COVID. And the prolonged closure is threatening to disrupt supply chains around the world potentially into the holiday season.

For more on that, let's bring in John Kartsonas. He is Breakwave Advisors Founder and Managing Partner joining us from Greece today. John, it's great to talk to you. I know you've been in touch with those on the ground over in China as well, getting a better sense of how significant these disruptions are likely to be. What's the very latest you're hearing?

JOHN KARTSONAS: Well, I think the situation is getting worse by the day. But again, it all depends on how the virus will progress in China. If you step back a little bit, I mean, this has been building over at least a year now, because, obviously, the first wave of the pandemic led to a significant slowdown in the economy and a slowdown in trade. And once the economies came back at the same time, you had basically a massive move of products and raw materials from point A to point B. And when you stop, that's a big logistical chain. And then you restart it, with demand increasing so much, is what you get-- congestion.

And it's not only, obviously, on the container side. You see the same thing on the dry bulk side. As we speak, about 15% of the dry bulk fleet is basically waiting and congested outside ports. So it's both the container ships, which, obviously, affect the consumer spending, and the dry bulk. And I think that will be with us for a while because, obviously, shipping and the massive amount of cargo that they move takes a lot of time to clear and return to some kind of a normal situation.

AKIKO FUJITA: So when you say it's going to be with us for some time, what kind of backlog are we talking about? And what specific goods do you think are most likely to be affected?

JOHN KARTSONAS: So I think as you look now at the peak shipping season, ahead of, obviously, the holidays, if that lasts for a few more weeks, you will have an impact, obviously, on the big shipping season. And here, I'm talking about mainly consumer goods. When you look at the bulk materials, commodities, again, it depends a lot of how the virus will progress in China. Obviously, over the last two weeks, it has been an easing in terms of the virus situation, at least on the port side. And hopefully, that could potentially lead to some easing on the congestion.

But again, you know, as we know, the waves come and go all the time. And it's not only in one particular spot, like the Ningbo port of Shanghai. You have at least a dozen ports that this is happening. So this is causing basically freight rates to increase substantially because, you know, if you have one ship and three cargoes, these three cargoes are competing for the one ship. And whoever pays the most is taking the ship.

And that's what's happening today with freight rates. I mean, if you look at the Baltic Dry Index, which is a very well known industry shipping, if it's an 11-year high, actually, every day now for the last few weeks, that same thing goes on the container side. So I think pricing is very related to the supply and demand. And the supply, which is the congestion, is very high today.

JARED BLIKRE: Well, you say this is going to take a while to play out. We're already thinking about the holiday season here. And I've seen some-- a few reports that are raising the hairs on the back of my neck here. I'm just wondering, how bad could it get-- and I don't want to get into any fear mongering. But could there be some kind of meltdown if the situation worsens?

JOHN KARTSONAS: Well, I mean, I don't know what the meltdown is in terms of, like, measuring, but in reality, it is, you're talking about tens of thousands of ships that are moving, like, an immense amount of cargo every day. Now, this machine was very well oiled until, basically, the COVID-19 crisis. And now, it's a mess. I think that's the best you can describe it. It's very difficult for people to plan. It's very difficult for people to basically make plans for the next month, let alone six months down the road, because the waves come and go.

So let's say, another virus wave in China or in certain ports happens. Immediately, you have the same issue. And it's not only about the crew on board. It's about the people who work on the docks, right? You have all the pilots. So China is putting a lot of measures in order to prevent that. And that's causing more and more delays. Can it spill into next year? I think it can. But for now, I think as we focus on the holiday season, things will-- I think, like, people should expect delays in deliveries, that people who actually buy goods, consumer goods, do the same thing.

AKIKO FUJITA: And John, those disruptions you've pointed to have led to a lot of conversations, internal conversations with companies, who are saying, well, where should we reposition our supply chains because of what we've learned over the last year or so? What are you hearing in terms of those conversations? And do you see the center shifting away from some of these major ports in China as a result of what we're seeing play out right now?

JOHN KARTSONAS: It's very difficult to see such a repositioning because the world has been, for decades now, being-- you have the producer region, which is basically Asia, mainly China, and the consumer area, which is the Western world. So it's very difficult to see such a repositioning of shipping if you don't reposition the producer and consumer areas of the world. I think, like, probably one thing that's happening is, basically, there is a lot of inventory rebuilding, which is very difficult as well, because inventory storage, both for bulk commodities and for containers, is almost up full. So you cannot even, like, buy in advance and store it when you need it.

So it's both the inventory situation management and the, let's say, up to minute shipping management that the companies have to manage here. I'm hearing, actually, reports that, actually, all the grain inventory facilities in China are basically full. So-- or not all. I wouldn't say all, but a lot. So you have, like, basically, ships waiting to offload cargoes. They cannot do that, that causing more strain into, basically, the port infrastructure, whether that's containers or bulk.

AKIKO FUJITA: John Kartsonas, Breakwave Advisors Founder and Managing Partner, great insight, especially with what's playing out over in China. I appreciate the time today.