SHIPPING CANAL DISRUPTIONS CAUSING CHAOS TO GLOBAL SUPPLY CHAINS

There has been quite a bit of coverage these last few weeks, firstly about the reduced capacity in the Panama Canal and in the last week about more and more carriers diverting vessels to bypass the Suez Canal.

Fundamentally we all understand that extended lead times and delays translate into higher costs. Ultimately, this increase prices you pay for certain goods, as well as the time it takes to get things delivered from overseas but why are these canals so important to global trade?

Collectively about 17 percent of global trade move through these two major transit points. When the container vessel Ever Given got stuck in the Suez Canal for six days in 2021, it affected the shipping lane for weeks, causing havoc with global supply chains and disrupting global trade flow to the tune of billions of dollars as these disruptions have severe knock-on effects as these ships deliver goods from one country to another.

LONGER TRANSIT TIMES IMPACT GLOBAL SUPPLY CHAINS

Many shipping lines are adopting what is known as slow steaming. Slow steaming is a process of deliberately reducing the speed of cargo ships to cut down fuel consumption and carbon emissions. In slow steaming, a container ship travels at a speed of around 12-19 knots instead of the usual 20-24 knots.

Today, the transit time between eastern Asia and western Europe can increase by about 25 per cent to 35 per cent when ships use the Cape of Good Hope route. For example, a vessel travelling at 14 knots per hour between Shanghai, China and the Port of Felixstowe in the United Kingdom will see its sailing time increase from an average of 31 days to 40 or 41 days when sailing around the Cape.

This transit time is extended even further for exporters shipping goods from European ports to Dubai. The Cape route could take them 160 per cent more time than the Suez route (12 days versus 32 days)!

Container vessels move on strings where they stop at multiple ports along a specific route and containers from around the world can be on a single vessel as a result of the different ports a vessel will visit on its string. When a vessel is delayed because of re-routing that means all shippers from a multitude of countries who have cargo on that vessel or who are waiting for that vessel to pick up their containers, are faced with delays.

When it comes to comparing costs for the two routes a container could take however, the figures are not straightforward. Vessels passing through the Suez Canal need to pay a toll. This can be as much as US$700,000 for a vessel carrying 20,000 containers but the Cape route could still cost 10 percent more, even considering the canal transit toll. The exact cost difference also depends on current fuel prices, as well as size and the type of vessel. To offset these costs, real or otherwise, container shipping lines have started to implement contingency surcharges of anywhere between $1,500 to $3,000 per TEU (twenty-foot equivalent unit). This could translate into an additional $30 million dollars in revenue if a fully loaded 20,000 TEU vessel was plying this alternative route. Many Logistics Managers would like more transparency on cost increases since the ocean carriers are no longer paying the US$700,000 toll for example to pass through the Suez Canal but transparency about impact on costs would make price increases sit easier with shippers.

These surcharges aside, it will be the reduced shipping capacity due to longer transit times, not the increased operating costs of shipowners, that will really weigh on global supply chains. This is because freight and the rates one pays for shipping is a derived demand dependent on goods supply and demand. It was a supply and demand imbalance that caused shipping costs to skyrocket during the COVID-19 pandemic. Shipping supply was reduced because of disruptions but demand increased because people were spending more on goods during the lockdowns.

The magnitude of freight rate increases is unlikely to be as large in this instance because there is not as significant a surge in demand for shipping services. The cost increase and extended transit times and disruptions are making some firms take pause when considering a switch from airfreight to ocean freight.

WHAT DO THESE SHIPPING DISRUPTIONS MEAN TO YOU THE CONSUMER?

If you live in Europe and have ordered furniture from a website from a manufacturer in China, you could expect a delay of at least 10 days. However the increased freight costs indicated above would also be passed on to you the consumer.

The inflationary impact all this disruption is causing depends on the duration of the vessel re-routing and the length of time shippers pay the higher freight costs. The drought affecting the Panama Canal seems to be in abeyance and all of us are hopeful that the situation in the Red Sea can be resolved soon. Once the timeline hits the one-month mark, inflationary pressures will be felt and seen in the supply chain and eventually at the consumer level.

Perhaps just when some of us thought things were getting more consistent we now have a new opportunity to demonstrate our capabilities!