Omicron pushes Hong Kong's import supply chain to brink of collapse

Hong Kong's government has scrapped aircrew quarantine exemptions, forcing Cathay Pacific Airways to cut cargo flights PHOTO: AFP

HONG KONG (BLOOMBERG) - Hong Kong's Omicron outbreak is dealing a double whammy to businesses.

Not only will new social distancing curbs crimp revenue for retailers and restaurants, a slashing of flights they rely on to bring everything from Australian cherries to wagyu beef into the financial hub is also set to raise costs and boost inflation.

Cathay Pacific Airways, the city's most connected airline, has cancelled hundreds of flights. Cargo capacity could drop below one-fifth of pre-pandemic levels. Logistics costs may surge by 40 per cent within three weeks. Importers expect the price of fruit to rise by 10 per cent.

In pursuit of a zero-Covid-19 strategy, Hong Kong has shut 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 seeing delays in deliveries of staples such as berries and yogurt and of premium seafood and cheeses.

The threat of an Omicron-driven surge has spooked Hong Kong, where the vaccination rate is among the lowest for developed economies. Though officials have found only dozens of cases in the community so far, they are tracking at least three separate transmission chains.

Amid fear of the Omicron variant, the government has scrapped aircrew quarantine exemptions it was previously giving, forcing Cathay to cut cargo flights. Due to a lack of manpower, the airline's cargo capacity will drop to about 20 per cent of its pre-pandemic numbers this month, down from around 71 per cent in November.

Passenger flights were also banned from eight countries, including the United States, Britain and Australia, further reducing cargo capacity.

Those two separate blows are creating "a severe shortage of freight space", said Mr Gary Lau, chairman of the Hong Kong Association of Freight Forwarding and Logistics.

Businesses heavily dependent on imports are bearing the brunt of the disruptions. Suppliers expect shortages of everything from eggplant to lobster. Flowers from Europe for the upcoming Chinese New Year could also be in short supply, as well as fruit and vegetables flown in from places like Britain and the Netherlands.

Hong Kong's retail and restaurant sectors, which had just started to recover after months of prior restrictions, may now miss a peak spending window during the Chinese holiday season. Sales from both sectors reached HK$326 billion (S$56.7 billion) for the first three quarters of last year after the city relaxed social distancing rules. That figure was almost 30 per cent lower than that for the same period in 2018, the last year before a series of protests gripped Hong Kong, causing further economic damage.

Many businesses are weathering logistical nightmares. Mr Richard Poon, managing director of On Kee Dry Seafood, said orders for canned abalone and conch were stuck in Australia. His team now relies on airfreight for more than 30 per cent of its supply, he said, adding that the shop increased orders delivered by plane around November to prepare for the holidays.

"The supply will now be even tighter," he said. "We are concerned we may run out of some goods to sell to customers."

Shipping costs will be "even more fluctuated" after the tightening of flight policies because demand for air cargo remains high, said Mr Elmond Cheung, vice-president of supermarket chain operator City Super Group. The company has already been facing problems with sea shipments, including longer delivery times and higher costs, he said. These factors have caused retail prices to grow by double digits, he said.

Mr Jacques Derreumaux, co-founder of Cheese Club and What'sIn, delivery services that offer French cheeses and fresh fruit and vegetables, said he has resorted to rerouting shipments through limited cargo flights now that passenger flights from France have been banned. Continued disruptions to air travel would "become very problematic for all importers" if prolonged, he said.

Hong Kong's strict virus rules are largely aligned with those of mainland China, which still maintains zero infections as its goal, even while most of the world adjusts to living with the virus. Yet, the city of 7.4 million relies on imported goods for survival in a way that the vast mainland does not, raising concerns that a virus strategy that demands isolation is unsustainable.

Travel restrictions will ultimately translate to a spike in retail prices, said Mr Michael Li, vice-honorary secretary of the Hong Kong Chinese Importers' and Exporters' Association. Mr Li predicted longer delivery times and a possible rise in transport costs of about 30 per cent.

Consumers may see fresh flower prices surge 20 per cent to 30 per cent, for instance, because they are typically flown to Hong Kong from Europe, Mr Li said. Prices may also rise in Japanese restaurants, which use premium seafood ingredients, as well as Chinese restaurants that provide seafood feasts during festivals.

Mr Lau said there are already signs that "the air logistics chain is collapsing".

"As long as the government doesn't ease its pandemic control measures, we believe the situation won't change in the short term," he said.

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