The costly aftermath of the Suez Canal blockage

 

The other day, talking about our supply chain and its current problems, I said, "the one word that describes our supply lines is 'fragile'."  That's been illustrated by the complications flowing from the recent blockage of the Suez Canal - a blockage that lasted for less than a week, but is having huge international logistics ramifications.

Peter Sundara, VP global ocean product at Hong Kong’s LF Logistics, said the week-long Suez blockage aggravated already stretched container supply chains.

“Even though the canal is now open, it’s going to have a tremendous ripple effect,” he told The Loadstar.

. . .

“When the vessels leaving Suez get into Europe and the US, we’re going to see a lot of vessel bunching, which will worsen port congestion. All the critical landside assets, like chassis, trucks, rail and barges, are going to be under extreme pressure too, and that’s just imports.”

Indeed, given the congestion in destination markets, Mr Sundara noted, vessels bringing back vitally-needed equipment to Asia would be delayed even further.

“We’re going to face a chronic shortage of containers in China, South-east Asia and the Indian subcontinent, especially India, since the carriers prioritise China first in terms of container distribution, then Asean and India, etc.”

. . .

“This is going to impact all the small and medium-sized customers that depend heavily on online bookings,” Mr Sundara said. “Short-term and spot rates are likely to be impacted across the board.”

He said all carriers were revising their sailing schedules which, in some cases, were missing from their websites.

. . .

“If you can’t find the sailing schedules you can’t make a booking,” he explained. “Bookings were already taking up to a week, and now I believe it could take up to two weeks just for the carriers to confirm the space and release a container ... It’s going to be worse, because all the vessels returning from Europe and the US will be coming and going at the same time,” said Mr Sundara.

There's more at the link.

As if to emphasize the point, Maersk - one of the biggest shipping lines in the world - has warned its customers of coming disruptions.

The next challenge is to get the services back on schedule, as we have near 50 vessels delayed for a full week or more due to the Suez blockage, either waiting at the Canal or being redirected South of Africa.

When the delayed vessels start hitting the next load ports in both Asia and Europe, we cannot avoid a significant impact on our equipment availability and capacity availability in the coming period. We urge our customers not to think that the situation is resolved and advise you to prioritise the most urgent/critical goods to be shipped first due to the foreseeable limitations in the weeks to come.

Again, more at the link.

Put the pieces together, looking at them from the point of view of US importers and consumers, and here are the elements that have all come together to create a tsunami of difficulties.

• Major US West Coast ports are already congested, with dozens of the world's largest container vessels anchored outside, waiting for berths to open up.  While they're anchored there, they can't be unloading, or loading empty containers to take back to China, or doing anything productive - including make more voyages.  Essentially, they're subtracted from the available world shipping fleet while they're waiting.
• The chaos in and around the Suez Canal merely adds to the problem.  Scores of ships had to wait at anchor at either end of the canal while it was cleared.  Some are still waiting to go through.  Others were stuck in the Bitter Lakes, halfway through the canal, unable to go forward or back until the situation was resolved.  They, too, were effectively taken out of the world's shipping fleet while they were waiting.  More were diverted around the Cape of Good Hope, which will add at least two weeks to their voyages (often more), and delay their arrival at their destinations.
• When the delayed ships arrive at their destinations, they're likely to do so in a very short time period, not spread out as they would have been without the interruption to their journeys.  That's going to overstrain ports and cargo handling facilities, which must suddenly deal with an influx several times higher than they were designed to handle.  Expect confusion in distribution channels beyond those ports, too (e.g. train and road shipment of containers), as they, too, will be overloaded in the short term.  Those factors, in turn, will affect how much return trade they can handle from their own factories and producers, taking it back to the same ports for export.
• All of the delayed ships had been scheduled to pick up more cargoes in the near future.  All of those cargoes must now also be delayed or deferred, impacting factories that can't move their production to their customers, and/or can't get more raw materials and parts to produce more goods.  Those who'd ordered the goods have had to pay for them, but now can't sell them to their customers thanks to their non-arrival.  That's likely to produce a "cash crunch" for many companies, including some of the largest distributors and retailers.  (An example:  yesterday I talked with a friend who's the appliance purchasing manager for a major US retailer.  He says a massive gap is developing in their supply pipeline between appliances being received from overseas, and those being delivered to local stores.  He reckons that for the next month or two, they're going to be under-stocked in most of their stores thanks to shipping delays alone - and that means consumers won't find the selection and pricing they're used to seeing.  He expects there to be so much demand for their limited stock that their prices will almost certainly go up.)
• Because of the "ripple effect" of too many goods chasing too few ships available, any and every imported item is likely to cost more, thanks to shipping surcharges.  The increased costs will come from both manufacturers and distributors (who have to pay more to move the goods) and from shipping lines, who are making hay while the sun shines and charging their customers a lot more to move their containers.  Inflation will increase as a result of these pressures.  T-shirts, jeans, appliances, power tools, automotive spares, you name it - they're all going to feel the pressure, because approximately one-fifth of US consumer spending is on imported goods.  The industrial and manufacturing economy will be similarly affected.

And all of that is because one ship got stuck across one canal.  That's over 10% of the world's maritime trade blocked for the duration, plus another 10% or so seriously inconvenienced by the ripple effects of the incident.

I daresay strategists around the world are eyeing the resulting chaos, and thinking deeply.  If rogue nations (e.g. Iran, North Korea) want to cause chaos, or terrorist movements (e.g. Al Qaeda, ISIS) are looking for a vulnerable point to attack, they've just been given a very good example of how to disrupt the world's economy at very low cost.  Imagine if a big ship were deliberately sunk across the Suez Canal, or in each lock basin of the Panama Canal.  Between them, they handle up to a quarter of all world shipping.  There'd be chaos for months.

Fragile supply chains, indeed!

Peter