‘COVID Zero’ Hong Kong pushes supply chain to breaking point | Economy

The Omicron outbreak in Hong Kong is a double whammy for businesses.

Not only will the new social distancing restrictions reduce income for retailers and restaurants, a reduction in the thefts they rely on to transport everything from Australian cherries to Wagyu beef in the financial center is expected to raise costs and spur inflation. .

Cathay Pacific Airways Ltd., the city’s most connected airline, has canceled hundreds of flights. Cargo capacity could drop below a fifth of pre-pandemic levels. Logistics costs can increase by 40% in three weeks. Importers expect the price of fruit to increase by 10%.

Plane at Hong Kong International Airport as Hong Kong terminates flights amid Omicron
A plane operated by Cathay Pacific takes off from Hong Kong International Airport on January 6.

In pursuit of a “Covid Zero” strategy, Hong Kong has closed bars, gyms and cinemas. At the same time, an already fractured supply chain for a city that imports most of its goods has reached a breaking point, with businesses experiencing delays in deliveries of staples like berries and yogurt, as well. than top quality seafood and cheeses.

The threat of an omicron wave has scared Hong Kong, where the vaccination rate is among the lowest in developed economies. Although authorities have so far found only dozens of cases in the community, they are following at least three separate chains of transmission.

Amid fears of the omicron variant, the government has removed the quarantine exemptions for aircrew it previously granted, forcing Cathay to cut back on cargo flights. The airline will only operate about 20% of its pre-pandemic capacity this month due to a lack of manpower. Passenger flights have also been banned from eight countries, including the US, UK and Australia, further reducing cargo capacity.

Airlines cut flights to Hong Kong amid tightening government quarantine rules [File: Paul Yeung/Bloomberg]

These two separate moves create “a serious shortage of freight space,” said Gary Lau, chairman of the Hong Kong Association of Freight Forwarding & Logistics.

Firms heavily dependent on imports bear the brunt of the disruption. Suppliers expect shortages of everything from eggplant to lobster. Flowers from Europe for the upcoming Lunar New Year might also be scarce, as well as fruits and vegetables from places like the UK and the Netherlands.

Hong Kong’s retail and restaurant sectors, which had just started to recover from months of earlier restrictions, could now miss a peak spending window during the Chinese holiday season. Sales from both sectors hit HK $ 326 billion ($ 42 billion) for the first three quarters of last year after the city eased social distancing rules. That figure was almost 30% lower than in the same period in 2018, last year before a series of protests hit Hong Kong, causing further economic damage.

Many businesses go through logistical nightmares. Richard Poon, managing director of On Kee Dry Seafood, said orders for canned abalone and conch were stuck in Australia. His team now depends on air freight for more than 30% of their supply, he said, adding that the store had increased orders delivered by air around November to prepare for the holiday.

“The offer will now be even tighter,” he said. “We are concerned that we will run out of certain products to sell to customers. “

Jacques Derreumaux, co-founder of Cheese Club and WHAT’sIN, delivery services that offer French cheeses and fresh fruits and vegetables, said he has resorted to re-routing shipments via limited freight flights now that passenger flights from France have been banned. The continued disruption to air travel “would become very problematic for all importers” if it continued, he said.

“The logistics chain is collapsing”

Hong Kong’s strict virus rules are largely aligned with those of mainland China, which still maintains zero infections as a goal, even as most countries around the world are adjusting to life with the virus. Yet the city of 7.4 million people depends on imported goods for its survival, unlike the vast continent, raising fears that a virus strategy that requires isolation is unsustainable.

Travel restrictions will ultimately result in soaring retail prices, said Michael Li, honorary deputy secretary of the Hong Kong Chinese Importers and Exporters Association. Li predicted longer delivery times and a possible increase in transportation costs of around 30%.

Consumers may see the prices of fresh flowers soar by 20 to 30 percent, for example, because they are typically flown to Hong Kong from Europe, Li said. Prices may also rise in Japanese restaurants, that use premium seafood ingredients, as well as in Chinese restaurants that offer seafood feasts during festivals.

Lau, of the Hong Kong Association of Freight Forwarding & Logistics, said there were already signs that “the airline supply chain is collapsing.”

“Until the government relaxes its pandemic control measures, we believe the situation will not change in the short term,” he said.

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