Supply Chain Matters alerts clients and readers to a potential replay of the 2021 disruption in global shipping and cascading supply chain disruption as a result of recent events.

 

Background

Multi-industry supply chain teams are currently occupied with supporting activities in insuring that end of year customer and business commitments are accomplished, after yet another challenging year.

However, Supply Chain Matters seeks to alert readers to an evolving set of events that have the makings of another maritime disruption that has the likelihood of becoming the magnitude of cascading global-wide shipping and supply disruptions that occurred in 2021, but in different dimensions.

Teams have vivid memories of the grounding accident of the mega container ship Ever Given as this ship was attempting to transit the Suez Canal toward Europe. The incident caused a multi-day closing of traffic to the world’s most crucial trade artery. The cascading effects of the disruption reverberated among multiple industry supply chains and ocean container shipping schedules. Transit times became unpredictable, and shipping and demurrage costs exploded.

 

Red Sea Terrorist Incidents

The Red Sea serves as a major shipping lane for transiting the Suez Canal.  Throughout this week, global shipping has reportedly grinded to a halt as a result of incidents of terrorist attacks on ships, idling both ocean container vessels and oil tankers. These attacks are believed to be linked to the ongoing Israel and Hamas conflict.

Earlier this week, the U.S. along with several other countries began marshalling a joint naval task force to counter theses attacks with added security and presence.

As a consequence, the top three container shipping lines, Maersk Line, CMA CGM , Hapag Lloyd, announced their intent to begin routing ships toward the Cape of Good Hope in southern Africa avoiding the Suez Canal. In its reporting, Bloomberg cited recent data from Flexport indicating that 46 vessels were being diverted with an  additional 78 vessels awaiting routing instructions.

The condition is expected to continue as dedicated naval resources initiate convoys for the escorting of groups of vessels transiting the Red Sea.

In a related development, marine insurance underwriters have reportedly elected to expand the Red Sea region as a designated war risk, which adds to shipping costs.

As expected, shipping rates are now rising on Asia to Europe routing, reportedly up 62 percent since the end of November. On the commodity side, oil and natural gas prices are reported to be on the rise as well.

The Related Concern

The related concern is the ongoing drought conditions in the areas surrounding the Panama Canal which for weeks have restricted the volume of vessels that can transit this canal because of the low water levels in the staging basin area.

The result has been that crossings have been limited to 32 vessels per day. By February, crossings are expected to be reduced to 18 vessels per day, a more than 40 percent. Reportedly, forty percent of all U.S. container traffic travels through the Panama Canal every year.

This restriction for Panama Canal transit had already motivated logistics and transportation management teams to begin to re-route Asia to U.S. East Coast maritime traffic toward the Suez Canal.

Added Thoughts

The ongoing developments involving both critical global trade arteries is certain to occupy the attention and ongoing concern of industry supply chain teams over the coming weeks or perhaps months.

The somewhat good news is that global freight volumes have contracted considerably from what they were in 2021. The traditional Lunar New Year occurring in parts of China and Asia in January and February further provide reduced shipping volumes and likely sailings.

The huge question mark will be how various global shipping lines manage these two disruptions and whether they elect to again raise shipping and demurrage rates to very high levels. With global shipping volumes expected to contract throughout 2024, this disruption provides ample motivation for keeping rates high and service levels low.

The results, as the saying goes, are often reflected in history.

Bob Ferrari

 

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