Assignment
The fallout from the Suez Canal ship is coming to a store near you
The Ever Given isn't stuck anymore, but it will delay tea, toys, and more. When a ship as long as the Empire State Building is tall got lodged diagonally across the Suez Canal on March 23, it provided immediate and exceptional meme fodder. This mammoth symbol of the hubris of capitalism, run aground by a windy day - like a modern-day Titanic, if all the passengers were giant metal boxes, no one died, and everyone was on Twitter. For the logistics industry, though, the canal blockage was just the latest and most visible manifestation of the relentless cascade of problems created - or at least catalyzed by - the Covid-19 pandemic. "It!s really just another example of how crazy things have been over the past year," says Eytan Buchman, chief marketing officer of the online freight marketplace Freightos. Even before the 220,000-ton Ever Given got stuck, global supply chains were facing a laundry list of stressors, from skyrocketing prices and container shortages to port congestion and unrelenting consumer demand. For the average shopper, most of these pressures have only been noticeable when they!ve gone to buy a couch or fix their washing machine and been met with months of delays. But as the pandemic drags on and the problems continue - now exacerbated by a very big ship that, in six days, held up nearly $60 billion in global trade - there are signs that we may eventually feel the crunch in our checkout carts, too. "Rather than a very sexy explosion in prices overnight or a total lack of capacity, you!ll see a very, very long and drawn-out death by 1,000 small changes over the next couple of months or weeks," says Buchman.
By the time the Ever Given was re-floated on March 29, more than 350 container ships were waiting to pass through the canal. In the coming days and weeks, those ships will all descend on ports at the same time - an effect that will be felt first in Europe and later on the East Coast of the US, where many of the ships are scheduled to stop before returning to Asia. "There will be more congestion and more ships that are stuck waiting, and then there will be a knock-on effect where it!ll be harder to get those same ships back to Asia," thereby exacerbating existing container and commodity shortages, says Buchman. For a sense of just how much stuff was left idling in the ocean as workers tried to free the stuck ship, Jett McCandless,
CEO of the supply chain visibility company Project44, likened the cargo to the contents of nearly 900,000 two-bedroom, two-bathroom apartments. So while ports and terminals are no doubt working overtime to deal with the surge of ships that is set to arrive, he says, "when it comes to transportation supply chains, this really is a physical world. So just like there!s a traffic jam during rush hour because there!s only so many cars you can drive down a big highway, [at ports], there!s only so many trucks, there!s only so many people with cranes." Because of the scale and complexity of these supply chains - and because massive ships and the steel containers they carry aren!t the kind of thing you can scale up overnight - there!s little chance of these problems easing anytime soon. "People should get comfortable waiting," says McCandless. Much of the surge in demand for products like bicycles, furniture, and home appliances has been driven by consumers !lifestyle changes during the pandemic - as they!ve spent more time at home and less money on services like haircuts or dining out, they!ve purchased huge quantities of stuff to meet their needs.
The ripple effects of this spending shift are everywhere: Peloton said in February that it planned to spend more than $100 million this quarter to expedite shipping for its exercise bikes and treadmills, opting to pay as much as 10 times more to ship the products by air rather than deal with ocean freight delays. In March, Costco reported shortages of imported cheese, olive oil, and lawn equipment, among other merchandise, which it attributed to backlogged ports. Nike, Urban Outfitters, Crocs, and Yeti have likewise reported inventory issues in recent months.
Cardboard boxes are also more expensive than ever thanks to the boom in online ordering, prompting producers to shift away from paper production in order to focus on churning out material for boxes. And with a $1.9 trillion stimulus bill passing last month, consumer spending seems likely to continue - provided there are, in fact, goods on the shelf. US retailers reported record-low inventory levels relative to sales in January, according to the most recent data from the Federal Reserve Bank of St. Louis, even as consumer-goods imports reached a record high. What might eventually rein in consumers ! appetites is higher prices, he says. Already, some companies have begun passing along a portion of their higher shipping costs to consumers - and those that haven!t are likely considering it, especially if investors are pushing them for higher profits or if they simply don!t have the capital to absorb the costs themselves. In January, Freightos surveyed 901 small- to medium-sized importers and found that 77 percent experienced supply chain difficulties over the past six months; of that group, 44 percent raised their prices as a result. Unlike big-box stores, these companies have little negotiating power with carriers and suppliers and have therefore been hit even harder by shipping costs and delays - yet another way the pandemic!s effects are being disproportionately borne by the little guys (even if, in this case, the "little guys" still bring in millions in revenue). Given that these problems are so widespread, it will be hard to pinpoint which price increases can be attributed to the Suez blockage when they arrive - though coffee seems to be one category that could see a direct impact. As Bloomberg reports, containers of robusta coffee - used in Nescafé and other instant coffees - were among the delayed cargo, and the canal supports almost all of the coffee beans that Europe imports. It!s hard to know what other goods were on the delayed ships, exactly, since that information isn!t part of the vessels !public data, but experts say it!s just about every category of product.
"Name a brand, and it would be unusual if they don!t have something impacted by this," says McCandless. So far, the companies that have reported having shipments held up range from Ikea to heavy-equipment maker Caterpillar, potentially setting back building construction alongside home-improvement projects. A tea maker with 80 containers of tea onboard several vessels called the situation "chaos," while a Dutch toy company bemoaned the late arrival of 20 containers filled with merchandise. It!s not just obstructing goods on their way to stores or warehouses (or people!s bedside drawers), either. There are also countless raw materials, machine components, and spare parts that are made in Europe and used by US manufacturers, says Saar Yoskovitz, CEO of Augury, a company that uses AI to monitor machine health in manufacturing.
"If spare machine parts are held up, manufacturers may be facing stalled production lines due to machine downtime," he says. "At the same time, many manufacturers that are running low on raw materials, or are out completely, will need to ramp up production once backlogged materials or components arrive to meet demand." He points to one of the great supply chain incidents of our time - the great toilet paper shortage of 2020 - as a prime example of this: Wood pulp was one of the materials that was severely delayed. As one advisory from shipping giant Maersk warned, "Even when the canal gets reopened, the ripple effects on global capacity and equipment are significant," adding that the blockage will trigger "a series of further disruptions and backlogs in global shipping that could take weeks, possibly months, to unravel."
Note that all of the questions are draws from the Examination Case Study: "The fallout from the Suez Canal ship is coming to a store near you." As such, your answers should relate to the case.
I. Question I The shipping delay caused by the grounding* of the Ever Given in 2021 resulted in significant losses for many businesses. As an importer that relies on the regular supply of goods via cargo ships, what steps could you take to protect your organisation from the losses that a shipping delay can cause? Justify your answer. (Total: 10 marks)
II. Question II If an importer and exporter agree to an FAS Incoterm, how do their logistics responsibilities differ from that of a DDP Incoterm agreement? If a consignment of goods transported on the EverGiven were to spoil because of the delay in the Suez canal, would an importer be better off (in a better position) under an FAS or a DDP Incoterm? Explain why. (Total: 10 marks)
III. Question III Logistics delays can result in financial losses. How could a Contract of Carriage by Ocean (Bill of Lading) assist the owners of a valuable cargo damaged because of the delay, if the operators of the EverGiven were proven to be negligent in their handling of the ship in the Suez Canal? What three options do the ship's operators and the cargo owners have to resolve a contract dispute?