Australia could be hit by disruptions from a severe global supply chain crisis, which looks likely to kick-off next Tuesday (01 October 2024).
We might see a global shortage of shipping capacity (that includes both ships and containers), extensive delays, many blank sailings, vessels re-directed, vessels held off port – waiting, port omissions, port re-routings, and port congestion. The net result of all of this can be summed up in the phrase “a likely supply squeeze leading to a shortage”.
As all good economists and businesspeople know what happens to rates when demand grossly exceeds supply. And that’s before anyone starts discussing surcharges and ancillary charges issued because of the disruption.
If it happens, it will happen on a worldwide scale.
Why? Well, many tens of thousands wharfies in the United States will likely walk off the job on Tuesday next week on an indefinite strike. It’s not quite clear how many will strike – some sources say 45,000, others 65,000. The International Longshoremen’s Association (the union) says that it represents 85,000 members.
Anyway, there’s a master contract that needs to be renewed and the workers and management are in dispute over wages, benefits, and, particularly, over automation. Ports on the US East and Gulf Coasts from the Canadian border down to the Mexican border could be shut down.
Let no-one make any mistake here, nor let them downplay the gravity of the situation. This strike is potentially very serious for all countries that rely on the global ocean supply chain. This is not just an American problem. It is a global problem.
Severe disruption may be on the way for all of us.
A lot of conditionals right now
Now, you have probably noticed the conditionals here: “may”, “potentially”, “could” and so on.
There’s basically several reasons for this hesitancy.
Firstly, the workers’ union – the International Longshoremens’ Association (ILA), and the employer’s union – the US Maritime Alliance (USMX), could do a last-minute deal. Although a deal doesn’t appear likely, it is possible. If a deal isn’t done, the ILA has sworn to “hit the streets”.
Secondly, the USMX has filed within the last 24 hours (as at the time of writing on Friday 29 September 2024) for an injunction from the appropriate regulatory authority. We won’t get into the details of it, we will just note that it is happening.
Thirdly, if the strike does go ahead, it is possible that the US Biden Administration could promptly step in using the Taft-Hartley Act, a 1947 US Federal Law that regulates labour activities. An intervention would lead to an 80-day cooling off period and a deal could be done in that time. Owing to the politics of the situation – the U.S. Presidential election is due in November – the general consensus is that a government intervention is unlikely. Again, we won’t get into the details here. Although we do note that, in the last few hours, the White House has urged both sides to settle their differences.
Fourthly, it’s entirely possible that the strike could occur, but it might be short-lived. This would still be very costly and disruptive for the USA but the effects on the rest of the world would be limited.
Caveats out of the way, what could happen? Well, not all caveats. There’s a further qualification that the future is unknown and unknowable, and any prediction is, at best, an educated guess.
A strike of that geographic magnitude that lasts for a few weeks would be extremely disruptive for, well, everyone, everywhere.
US strikes: why will anyone else be affected?
We live in a globally connected world. We are physically connected by the ocean and by the cargo ships that sail upon it. While events may be far distant, they will have a cascading whiplash effect around the world, and sometimes in ways that may surprise.
Australia will be directly affected because about 5.5% of our containerised general cargo trade (excluding empty containers) involves imports and exports to and from the US & Canada, roughly about 300,000 TEU.
A reader might say, “so what – it’s not a huge proportion of our trade,” and they would be right, it’s not. Although we’d respond that while 5.5% is only a relatively small volume, it’s not nothing. There are also other cargoes to / from Australia that could (and probably will be) indirectly affected and there’s also all of the likely disruption to global shipping services.
The bigger problem
The bigger problem is the effect on the global supply chain and the indirect, secondary effects.
The US is both a massive importer – it’s the world’s biggest consumer nation, and it is a massive exporter itself.
The full US box trade in 2023 was about 24.8 million TEU, according to logistics software company Descartes. The 13 ILA East Coast Ports (Boston, New York / New Jersey, Philadelphia, Baltimore, Hampton Roads (that’s the Port of Norfolk, in Virginia), Wilmington, Charleston, Savannah, Jacksonville, Miami, Mobile, New Orleans, and Houston). Together they account for about 51% to 52% of all TEU entering the United States, that’s about 12.8m TEU. Roughly, the ILA ports handle a little more than about 1m-ish TEU a month every year. Incidentally, to avoid repeatedly writing out “East and Gulf Coast Ports”, or repeatedly using an ugly acronym, we’ll just say “East Coast” from now on.
Again, a reader might say, “America,” and “so how does this affect anyone else”?
Well, about half of that roughly 13m TEU East Coast trade originates in Asia, about 30% of it is from Europe and 20% of it is from elsewhere, according to various trade media who are, in turn, quoting local experts. Of, about roughly half of all the containerised cargo that goes into the US, about 45% of all Asian-origin cargo goes into the East Coast, as does 85% to 90% of all European cargo and about 75% of all Latin American cargo does too.
That European cargo is particularly important on the global scale. US maritime expert Sal Mercogliano points out that about 30% of the containerised trade on the Asia-to-Europe route actually gets trans-shipped in Europe and is then sent to, yes, you guessed it, into the USA.
Roughly 12.8m TEU is just a huge volume of cargo to suddenly stop moving. And remember, it’s the ships that carry the cargo that stop moving too.
Will the ships and cargo stop?
Yes. We know from various maritime databases that there are about 40 container ships that are en-route to the US East Coast that will arrive after any strike likely begins. There could also be ships that get “stuck” at berth in US ports if the longshoremen walk off the job next week. We will have a look next week to see how many get stuck.
Meanwhile, Jeremy Nixon – CEO of global container shipping line ONE – has told the trade media that he expects all terminals along the East Coast to come to a stop and that ships will apparently have to “sit and wait” for the industrial disruption to stop. Other shipping lines have apparently also told maritime media that they expect vessels en-route to the US East Coast to stop too.
It looks most unlikely that ships will be diverted elsewhere – there are few (if any) other ports on the US East Coast that are not affected; it would be impossible (and too expensive) to divert all of those vessels through the Panama Canal; it’s not possible for the West Coast US ports to pick up another 12.8m worth of TEU; the inland transportation infrastructure from the US West Coast ports (that’s trucks, road, rail, barge, warehouses) simply could not handle that volume (and it would be prohibitively expensive anyway); and diversion to Mexican or Canadian ports doesn’t look do-able either because they are already nearing full utilisation according to ONE’s Nixon.
And that’s before we even take into account that there is industrial disputation underway in the Canadian rail freight network which, while subject to government intervention right now, could apparently flare back into life.
There are no alternative routes or destinations if the ILA go on strike.
Containers, ships, and cargo, are going to get stuck if the strike goes ahead.
What are the consequences of ships and cargo stopping
We know this. We’ve been here before. Remember COVID?
We’ve outlined what is likely to happen at the top of this update. We’ll repeat it here: a global shortage of shipping capacity (that includes both ships and containers), extensive delays, many blank sailings, reduced service frequency, vessels re-directed, vessels held off port – waiting, upwards freight rate pressure, port omissions, port re-routings, port congestion, surcharges, ancillary charges, upwards freight rate pressure, and a shortage of containers.
Mechanism of action
Australian readers may well still be thinking, yes, but that’s in America, how can something so far away affect us here?
O sweet summer child, we will explain.
Ships, right, carry cargo from A to Z. Where A is (often) Asia and B, C, D, E, etc is “somewhere else” on the way to “Z”, which is the destination. In this case, the US East Coast.
Ships sail in loops. They start at A, go to B, then to C, and perhaps back again to A. Consider Australia. Ships calling in Australia might call something like “Singapore-Brisbane-Sydney-Melbourne-Adelaide-Fremantle-Singapore again”. Another loop might be, say, Los Angeles-various Pacific Island ports-Tauranga (New Zealand)-Brisbane, or something like that. There are numerous different loops, and they change all the time.
Ships, cargo and trade connect countries and so transmit supply chain congestion between countries.
The key word here is “loop”. Ships go in a circle around and around. Right up until the point when they don’t. For, say, industrial action. Then they stop, usually at anchorages outside of the port.
A ship that is stopped somewhere cannot carry on with the loop. So, it can’t go back to the place where the cargo is manufactured, such as North Asia, and pick up more cargo. But the manufacturers don’t stop manufacturing. So, more and more cargo builds up, especially because shipping capacity plummets.
Meanwhile, inside the U.S., cargo that is already en-route or is at premises of consignees, gets unstuffed from the box, which is great. But consignees then have to get rid of the box – but they cannot do that because no-one is picking up the box for re-export back to Asia. So, we tend to find that empty boxes start building up in trucking yards, consignee yards, empty container yards, all over the country. They clog up the system in the country experiencing the empty container crisis and, as the supply of containers is limited, everyone else in all other countries starts experiencing a container shortage which, again, puts upwards pressure on rates.
Shipping operations get disrupted globally too.
Remember: shipping is a very expensive business. Having ships wait around is very costly and so shipping companies try to avoid it if possible.
Let’s go back to our ports A, B, C, D, E, F & G. Imagine there is a big strike at Port D. If ships had to move in a predetermined way – like parcels on a conveyor belt – what would happen is ships would call at A, B, C and then when they get to D they would get stuck because there are no, or few, cargo operations. A queue would quickly build up, there would be severe waiting times outside ports and so on.
But ships don’t move on fixed tracks so what actually happens is that shipping companies start to skip Port D and we call this a “port omission”. This benefits shippers and consignees because cargo keeps moving. Even shippers and consignees at Port D might benefit if ports C and E are close enough because cargo could be land-shipped (by rail, or, more likely, truck) to the hinterland of Port D.
But congestion spreads, so you quickly find that if Port D is on strike then there will be congestion, queues and backlogs at all the other ports. When this happens, shipping companies start blanking sailings (i.e. not sailing a slot that had been previously advertised) and also reducing sailing frequency from, say, one week to two weeks. That’s a 50% cut in capacity.
Alternatively, or in addition, ships might have the order of port calls changed to say A, B, C, E, F, G and the D. That happens were, say, there’s a bit of buffer in the schedule, or there is a long ocean leg (across the Pacific, say), in which ships can speed up and recover time.
All of this is extraordinarily expensive and it generates upwards cost pressure in two ways. Firstly, shipping companies are hit with more costs and so they typically issue surcharges and the like. Secondly, all of these measures take capacity out of supply of shipping capacity.
Shippers want and need to move their cargo but, if supply is cut, then their demand to move cargo starts exceeding the supply of ships and shipping services to move that cargo. Shippers then start getting desperate to have their cargo carried and so they begin to bid-up the price of freight. This is when freight rates go into an upwards spiral. They also induce smaller regional players to move more freight, and even, if the rates get high enough, to for non-container ships (such as bulk carriers) to start carrying containers on deck.
We saw all of this during COVID.
Effects on Australia
We promised to explain how it affects Australia, and here it is.
Although there are a lot of ships, containers, and shipping services in the world, it is nonetheless limited – there is only so much to go around. So, the knock-on effects – freight rate rises, port congestion, cuts in supply, will affect everyone around the world because the US is such a major importer / exporter and attracts so much shipping.
We said earlier that about 5.5% of Australian box trade will be directly affected and that is true. If we look at our Asian and European trade too, we can see how a US crisis might affect us more than we might initially think. Over the long-term, Australia’s total Asian container trade (full import and export boxes; East Asia, Southeast Asia, and Japan / Korea), stands at about 66.7% of all of our container trade (excluding empties). Meanwhile, our European box trade stands at about 11%.
Australia’s US / Canada trade will be directly severely disrupted, and Australia’s Asia and Europe could be – potentially – severely indirectly disrupted at least in part. Unfortunately, we have no way of knowing how much.
But disruption is disruption.
We are potentially facing some kind of disruption, at least in part, in terms of time / cost / delay / increased complexity to about 83% of our full (i.e. not empty) containerised trade.
How bad will all of this get?
Nobody really knows. It’s too hard to say as there are too many variables. The strike might not go ahead (although it looks likely that it will). One happy coincidence is that next week is “Golden Week” in China, which is when large numbers of Chinese businesses shut down and huge numbers of Chinese people go on holiday. So, for the first week of any strike at least, the impact may be mitigated. Maybe cargo backlogs will build up in Asia. Maybe they won’t. Maybe ships will make all of their schedules timeslots at different ports around the world – although that seems really unlikely.
In one scenario, the strike might not last long. In another, it might. There’s really no way to know.
If the strike goes on for some time, well, the effects tend to compound.
The general consensus is that each day of strike will lead to six days (or more) of disruption. We’re not sure what (if any) evidence there is for that sentiment, but it’s been said a few times. On the assumption it’s true, a one week strike will disrupt for about 42 days, two weeks for 84 (that’s close to three months) and three weeks, well, that’s 126 days i.e. over four months.
There’s a lot of “ifs” in this analysis, so we’ll finish with some more.
Buckle in people, if the strike goes ahead, and if it goes on for a long time, then we’re in for a real bumpy ride.
