Suez drama highlights supply faults
It has already been a difficult year for New Zealand supply chains. The Suez Canal saga will only make things worse. But this is proving to be a good lesson about the country’s supply chain vulnerability. Now is the time to pay attention to what would make us more resilient.
More than 99 per cent of New Zealand’s import/export volumes are shipped by sea and these tonnages account for 80 per cent of national trade value. A significant portion of this trade will be impacted as the Suez Canal conveys 12 per cent of global shipping along the Europe-Asia trunk route.
A disruption bullwhip
Containerised trade will be hit hard. More than 300 ships are halted, waiting for the Ever Given to be re-floated. In the meantime, shipping schedules have been thrown into disarray.
This chaos will bullwhip through the hub-and-spoke design of the container network. While New Zealand trade isn’t crucially harmed by a severed sea link to Europe (most of our European trade is via air), we will experience repercussions on sea links with China and the rest of Asia.
The Ever Given is one of a class of monstrous ships categorised as Ultra Large Container Ships that carry up to 20 000 TEUs. The business case for these titans became viable in the past decade with the rise of radical consumerism and extreme globalisation.
Volumes of goods are consolidated on large ships that traverse global trunk routes between major ports. At these ports, containers are re-shuffled and redirected to their final destinations (like the Port of Tauranga) via smaller ships.
It is a hyperconnected system that usually operates with great efficiency, unless something goes wrong on a trunk route.
Blocking off a trunk route has a more widespread impact than the port congestion we’ve seen worldwide due to Covid. Hundreds of ports and tens of thousands of containers are simultaneously affected by a three-fold delay.
First, there is the delay of being stalled. These are days lost as ships wait around the canal.
Secondly, there is the delay of re-routing. On Friday, ships started to re-route around Africa, tagging on one to two weeks’ travel time.
Thirdly, there is the delay of bunching. Once the canal reopens and the backlog of ships mobilise, the bunch-up will transfer to ports along the route. As the full force of these delays reach Asian ports, New Zealand containers will be caught up in the tumult.
The empty container shortage worldwide is also worsened by the Suez Canal choke. Recently Maersk announced a new service to reposition empty containers from North to South Island to aid exporters. This is a positive development, but industry remains concerned about the supply of containers in months to come.
Cost to the consumer
By and large, the migraines suffered by supply chains are hidden from the consumer. Apart from frustrating delays in our Amazon deliveries, we are shielded, or so we think.
Eventually consumers are affected by paying more for goods.
Shipping prices, which already soared during Covid, are expected to rise further as there is less supply and more desperation in the market.
Market power in maritime shipping lies with the shipping companies who push their own cost increases onto their customers. In turn, their customers push the cost onto the consumer.
Another troubling development is a shortage of oil.
More than 30 oil tankers are waiting to pass through the Suez Canal.
Earlier last week, the reduction in oil demand because of European lockdowns seemed to outweigh the impact of the Ever Given bungle.
But as time wore on, the oil price rebounded.
The price of fuel affects the entire supply chain with these costs eventually bundled into the checkout price.
Time to build resilience
This situation illustrates how vulnerable global supply chains are. New Zealand is more vulnerable than most due to our geographic position and modest market size. Therefore, any attention paid to increasing our resilience would be wellinvested.
Flexibility makes a supply chain resilient. Having more than one alternative at hand seems redundant and costly when times are good, but can be a lifesaver when a dust storm veers a sea-faring giant into the bank of a constricted canal.
New Zealand can develop flexibility, first, through a greater variety in trade partners. This would buffer against geopolitics or country-specific issues. Secondly, increasing the strength and diversity of our maritime and air connectivity would give us more options to reroute and more negotiating power.
Finally, being less dependent on international suppliers for daily consumables would leave us less exposed.
New Zealand has a reputation for being a resilient and resourceful people, it’s time for our supply chains to live up to that reputation.