Authored by AXA XL Senior Underwriter Marine, Switzerland, Victor Enzler
The logistics industry faces numerous challenges including pandemic-related shutdowns, container shortages, economic headwinds and, as always, the threats posed by natural disasters or accidents. Although the causes of the recent bottlenecks in the transport sector vary, the impacts on the global economy are immense and are unlikely to dissipate anytime soon. For Victor Enzler, transport insurance expert in Switzerland, one thing is clear: companies cannot avoid re-evaluating their supply chains and adjusting their purchasing, distribution and logistics practices accordingly.
Massive disruptions in the logistics sector are one of the many challenges the world has faced since the onset of the pandemic in early 2020. In June 2021, for example, there were 160 thousand empty TEU (twenty-foot equivalent) containers in Yantian north of Hong Kong. That is roughly equivalent to a day’s throughput at the ports of Shanghai and Hamburg combined. These disruptions have led to port congestion, delivery delays and substantially higher freight costs which the war in Ukraine has further exacerbated.
Shanghai: Port congestion of historic proportions
As the pandemic began to ease in many parts of the world in the spring of 2022, China was hit particularly hard. As part of its “zero Covid strategy,” Shanghai was put in total lockdown from 5 April to 31 May 2022, significantly slowing the flow of goods worldwide. After all, Shanghai is not only the largest seaport but also home to the Yangshan Deep-Water Port, the largest container port in the world. Even though the port facilities weren’t closed, due to the stringent covid measures onsite, the operations had to manage with significantly fewer workers, some of whom weren’t allowed to leave the port area.
Thus, the port’s functionality and capacity were greatly restricted, and there was huge port congestion, with up to 500 ships waiting to load/unload their cargo. Vast quantities of goods ready for export and import remained blocked onsite. While the situation has calmed down somewhat since then, it could take months before the congestion is fully resolved, and who knows what new challenges lie ahead.
Concentrations of values as a dangerous accumulation risk
The direct consequence of the last lockdown (for the time being) is a concentration of values on an unprecedented scale in “Greater Shanghai.” Whereas in “normal” times, the re/insurance industry used to assume a few billion USD in commodity values on a daily average, now one has to reckon with a low double-digit billion amount. And this doesn’t include the value of the ships, port facilities, buildings or consequential damage to surrounding areas. It is hard to imagine the financial impacts resulting from a severe typhoon or earthquake in Shanghai or its environs.
In other words, today’s threats are myriad and diverse and include pandemic-related disruptions, war and civil strife, and increasingly severe and unusual storms, and apply to relatively small areas with concentrations of tremendous asset values. As a preview of what we could encounter, the 2002 super typhoon “Maemi” was one of the most severe cyclones in South Korea’s history. The damage to the Busan port facility alone was estimated at around USD 50 million and reduced the port’s cargo capacity by 20 percent. Moreover, due to prolonged strikes and three public holidays shortly beforehand, the value of the assets at the time was unusually high, further amplifying the impacts.
Freight congestion and capacity bottlenecks outside Asia
However, these disruptions and bottlenecks are not limited to the Asian trade metropolises. Remember how the world was transfixed by the sight of the container ship “Ever Given” when it blocked the Suez Canal for six long days in March 2021? Before it was refloated following an elaborate and time-consuming rescue operation, around 400 ships were blocked from entering the Canal. Many others opted for the longer route around the Cape of Good Hope. The ongoing insurance settlement is expected to cost about USD 2 billion, among the largest to date.
Regardless of the various causes of the recent freight congestion, the current developments must be closely observed, analyzed and—importantly—financed. As noted, the global logistics sector is still far from normal operations. At the same time, demand for raw materials, newly manufactured goods and containers are growing strongly, generating even higher volumes and risks. However, what is a blessing for the economy is pushing the cargo ports in Europe and North America to their capacity limits. That is why there are regular backlogs and longer waiting times on our doorstep.
Time to act: Recommendations and practical tips
Since the situation is unlikely to calm down before spring 2023, companies should proactively consider how these changes in the global economy and supply chains will impact business activities and revise their purchasing, distribution and logistics plans/processes accordingly.
In many cases, new solutions will need to be developed to avoid raw materials, spare parts or finished products arriving only after long delays and then possibly incomplete or damaged. Following are some general measures and recommendations for lessening the risks:
- Review sales contracts and Incoterms® 2020 : who organizes and pays for the transport? Who bears the risk of loss or damage? Which party shall be compensated? If logistical hurdles are difficult to overcome, transfer the risk to the foreign contractual partner to cushion the adverse effects of losses or damages and troubleshoot.
- Recognise bottlenecks : which seaports or airports are the “congestion hotspots”? What are the reasons, and what precautions should be taken?
- Evaluate new means of transport, transport routes and diversion options : what is Plan B? Evaluate alternative routes and means of transportation and test diversions at an early stage.
- Talk to trading partners and transporters : are the seaports, airports and transshipment warehouses involved fully staffed and operational? Are there operational inland transport routes, sufficient vehicles and drivers experienced on the route? Self-select shore-based subcontractors, including providing the insurance certificate of the carrier’s liability insurance stating the sum insured. Insist on transparency or, if necessary, change forwarder/carrier.
- Review the design and protection of goods : will new transport routes and longer travel times necessitate changes in how the goods are packaged? If this is not within your direct control, check and instruct how the goods will be packed, transported and stored. Avoid cutting corners so that damages can be prevented or the possibility of recourse preserved.
- Check your own transport insurance : are the scope of cover and sums insured adequate?
- Seek knowledge exchange : seek dialogue with authorities, industry associations and your insurer. As a transport insurer, for example, we have a worldwide network of specialized risk experts at our disposal.
Companies are challenged
Port congestion in many places worldwide and its consequences will likely remain with us for some time.
Currently, Shanghai still has the largest concentration of goods in the world. Anyone who transports goods there or via other bottlenecks should consider the associated risks and alternative solutions more than ever before. Further changes and new challenges are also foreseeable. All parties involved in the cross-border movement of goods should take prudent steps to manage increasingly inevitable delivery delays and strive to develop resilient supply chains that are plannable and increase the likelihood of goods arriving undamaged at the targeted time. Informed and proactive risk management also positively impacts insurance premiums.