Maritime Economics Assignment: Analysis on Maersk & MSC Warn of Supply Chain Disruption

Question

Task: Maersk and MSC warn of supply chain disruption from blocked Suez Canal The world's top two box lines join others in diverting ships round Cape of Good Hope and warn of supply chain disruption ahead as Maersk begins to reject bookings Updated March 27, 1500 GMT: Despite suggestions that the grounded 20,000 teu Ever Given could soon be moved by salvors, container lines are warning the backlog of ships and requirement to redirect services mean the disruptions could be felt throughout the second quarter

THE world’s two largest container lines, Maersk and Mediterranean Shipping Co, are warning that disruption from the closure of the Suez Canal could last for some time, leading to congested ports and further delays in the supply chain. The carriers have joined others that are now diverting ships round the Cape of Good Hope, despite hope rising that the vessel blocking the Suez Canal could soon be shifted. MSC senior vice-president Caroline Becquart, who is head of Asia and 2M services, warned that the situation in Suez would result in one of the biggest disruptions to global trade in recent years.

“Unfortunately, even when the canal re-opens, for the huge backlog of ships waiting at anchorage this will lead to a surge in arrivals at certain ports and we may experience fresh congestion problems,” Ms Becquart said in an emailed statement. “We envisage the second quarter of 2021 being more disrupted than the first three months, and perhaps even more challenging than it was at the end of last year.”

She added that companies should expect the Suez blockage to lead to a constriction in shipping capacity and equipment, and consequently, some deterioration in supply chain reliability issues over the coming months.

2M alliance partner Maersk said that while expected times of arrival were in jeopardy, it was too early to determine any delays.

“For every day the canal remains blocked, the ripple effects on global capacity and equipment continues to increase,” Maersk said in a customer advisory. “The impact will continue well beyond the physical removal of the vessel and we are working hard to manage the impact as much as possible — both operationally and commercially.” But it added it would have to manage its bookings due to the disruptions. “We have already started to proactively manage our capacity and will not be accepting cargo where we cannot ensure space,” Maersk said.

Another major European carrier, CMA CGM, said on Friday evening that it was studying all possible options “including diverting some ships via the Cape of Good Hope as well as deploying aircraft solutions from the CMA CGM air cargo division, or rail solutions via the Silk Road”.

Several other lines, including HMM and Evergreen, had already started to re-route some ships via southern Africa as the prospect of re-opening the canal soon started to fade following the grounding of the 20,000 teu Ever Given on Wednesday. Maersk and MSC, which operate joint services in the east-west trades through the 2M alliance, issued customer notices detailing the ships and services that will be diverted rather than be caught up in logjams either end of the Suez Canal.

MSC said it expected the Ever Given casualty “to have a very significant impact on the movement of containerised goods, disrupting supply chains beyond the existing challenges posed by the coronavirus pandemic”. The line added that it had no concrete information, or forecast, of when the waterway would re-open.

A statement from Evergreen, the ship’s operator, issued on Friday said there were plans to clear sand and mud from around the vessel’s bow, with the intention of moving it at high tide. The next high tide will fall on Saturday evening at around 22.30 local time, but Evergreen warned that the excavation would take at least two to three days to reach the required depth for the stranded ship to refloat.

Leth Agencies reported that 10 tugs were working close to the vessel, “which shows increased efforts to have the vessel fully re-floated”. The BBC reports that the president of the company responsible for Ever Given, Shoei Kisen Kaisha, told a press conference that the vessel could be freed by as early as Saturday night.

In a separate statement, Maersk said that while efforts to remove the Evergreen vessel from the Suez Canal continue, “over 200 ships are caught up in the traffic snarl in both directions”. Those affected by the chaos include the 7,000 teu Gunde Maersk (IMO: 9359014), which is trapped in the convoy. Also stuck in the queue are the 8,400 teu Maersk Saigon (IMO: 9303534) and 13,000 teu Maersk Esmeraldas (IMO: 9502972) Many more are waiting in anchorages, including the 6,500 teu Maersk Seletar (IMO: 9315197) and 15,000 teu Maersk Hanoi (IMO: 9784295), plus at least a dozen more.

MSC listed 11 ships that will now go round the Cape of Good Hope, including six that are operated with Maersk through the 2M vessel sharing agreement. One of the biggest is the 18,340 teu Madison Maersk (IMO: 9619945), deployed in the Asia-Europe Silk service.

Others include Maersk Skarstind, which is in the loop marketed by MSC as the Elephant service, the 8,200 teu MSC Bilbao in the Emerald rotation, and the 18,270 teu Maersk Merete (IMO: 9632064) in the Albatross loop.

Some services from India have also been turned back, MSC said. Meanwhile, new analysis from Sea-Intelligence suggests that the Suez Canal blockage could represent a reduction of available containership capacity of 6% if carriers are forced to take the longer route around the Cape of Good Hope.

“Assuming vessels sailing at 17 kts, one week would be added from Singapore to Rotterdam, 10 days to the west Mediterranean, and a little over two weeks to the eastern Mediterranean,” said chief executive Alan Murphy.

“On the Asia to US east coast route, roughly 2.5-4.5 days will be added to the head-haul sailing times.”

Re-routing cargo around Africa — or through Panama in some cases for the Asia-US east coast — would absorb carrying capacity equal to 6% of the globally available capacity.

That represented 1.5m teu, or 74 ultra-large containerships.

“It is evident that such an amount of capacity absorption will have a global impact and lead to severe capacity shortages,” Mr Murphy said.

“It will impact all trade lanes, as carriers will seek to cascade vessels to locations where the find they have the greatest need. In the short term, it is not possible to build more vessels to solve the problem — the only viable option would be to speed up the vessels.”

While this would partially alleviate the problem, it would still not be enough, however. “Increasing speed from 17 kts to 20 kts would reduce the impact on the global fleet from 6% to 5.2%,” Mr Murphy said. “Going full throttle at 22 kts would still only reduce the impact to 4.8%.” _

You are required to write a maritime economics assignment based on the above scenario addressing the following questions:

Question 1: Discuss how vertical integration between container shipping lines and port terminals affects competition in the container shipping market by using the double marginalization model. Make relevant assumption(s) if necessary and provide relevant examples to illustrate your discussion.

Question 2: Suppose the shipping freight and shipbuilding markets are in equilibrium when the International Maritime Organization (IMO) requires the shipping sector to further reduce its emissions of greenhouse gases.

1. Explain how this requirement likely influences shipping freight rates in the short run and in the long run. Make relevant assumption(s) to support your answer if necessary.
2. Explain the impact of the above requirement on the shipbuilding market in the long run by using a two-part diagram showing the connection between the shipping freight and shipbuilding markets.

Question 3: The attached article written by Janet Porter and James Baker, ‘Maersk and MSC warn of supply chain disruption from blocked Suez Canal’, Lloyd’s List, viewed 27 March 2021, < https://lloydslist.maritimeintelligence.informa.com/LL1136275/Maersk-and-MSCwarn-of-supply-chain-disruption-from-blocked-Suez-Canal>, reports on the impact of Suez Canal blockage on global shipping. Based on the information provided in the article and relevant sources, complete the following tasks. Make relevant assumption(s) to support your answer if necessary.

1. Explain how Suez Canal blockage may affect the 2M Alliance’s services in the east-west trades in the short term.
2. Based on your answer to task a, discuss the possible responses of the 2M Alliance.
3. Evaluate the statement “It will impact all trade lanes, as carriers will seek to cascade vessels to locations where the find they have the greatest need”. Justify your answer using a different trade lane.

Answer

Answer 1
The double marginalization concept discussed herein Maritime Economics assignment illustrates that different firms from the same industry have their own market powers apply their own mark-up in prices while working in distinct vertical levels of the supply chain. The mark-up prices set by the firms, a deadweight loss occurs twice, and it affects the whole market. Integration of two firms vertically is the one way to avoid the losses caused by double marginalization. The vertical integration of the firms can avoid at least the occurrence of one loss (Ghili and Schmitt, 2018). Vertical integration is possible with mergers or acquisitions between the firms in their supply chain. The market power of the firm is the main reason behind the loss occurrence here, as the market power allows the firm to set prices beyond the marginal cost. The vertical integration between port terminals and container shipping lines can affect (Ghili and Schmitt, 2018) the fair competition in the container shipping market. In this context, logistics integration is applied to integrate the port terminals and container shipping lines. Logistics integration is a type of integration in which the service providers involved in the supply chain operations and work collaboratively to enhance the overall operational performance of the supply chain. In the present context, a similar application is followed in the integration of port terminals and container shipping lines.

For example, the collaboration between shipping lines and seaports as the integral parts of the supply chain is the key concept of maritime logistics operations. Such integration can be performed with the consideration of various measures such as value-added services, information exchange, operations, and joint ventures. Such vertical integration in logistics helps to enhance supply chain efficiency (Tongzon and Nguyen, 2021). In the context of double marginalization, it can be said that the integration between the port terminals and container shipping lines is considered in order to increase efficiency in the overall logistics operations, and it will provide mutual benefits for both firms. The vertical integration between port terminals and container shipping lines can be justified as the rationale of using two types of integration, one is operational integration, and the other is relational integration (Tongzon and Nguyen, 2021). If the primary objective of this integration is based on the aim to enhance technical efficiency or operational performance, then it will result in benefits for both parties in the forms of higher competitiveness, customer satisfaction, and service quality. Based on the double marginalization concept, the vertical integration of the port terminals and container shipping lines can lead to strong market power, which can reduce the competition in the market.

Another assumption can be made that vertical integration may affect allocative efficiency and operational performance. The collaboration of the logistics operations or the vertical integration will allow the firms to develop new services, share resources, and improve the service quality, which in return reduce the operational cost and increase their market power. Based on the double marginalization concept, it can be said that the vertical integration of port terminals and container shipping lines will eventually affect the competition in the container shipping market as the vertical integration will reduce the cost, which means it will enhance the technical efficiency (Kwoka and Slade, 2020). The vertical integration will eventually increase the market power of the firms and allow them to increase prices, which will affect the competition in the market.

Answer 2
(a)There are a few factors related to the emission of greenhouse gases by the shipping traffic. The fluctuations in the freight carrying rates of shipping industries are caused by global market factors that are related to the maritime freight transportation industry. The effects can be categorized into long-term and short-term, which is instrumental in determining the factors responsible for the fluctuation of rates.

Long term effects
The emission of greenhouse gases by the freight carriers has forced the adoption of re-routing of ships that are becoming more common nowadays. Due to the increased levels of global warming, the ice is beginning to melt around the surrounding regions of the North Pole, and for this reason, the sea levels are consistently rising, and coastal erosion is taking place at a fast rate. These natural changes have largely impacted the shipping channels. Since the existing routes are not safe or easy to travel as they were before, new routes and other re-routing options need to be planned(Figueres, 2020).

Lower productivity has been a prime concern for the fluctuating rates of freight carriage. Rise in sea levels, and storm surges along with flooding can be attributed to the reason of lower productivity that leads to increased freight prices.

Short term effects
There is also an increased chance of port infrastructure damage that is caused by the natural calamities that raise the seawater to dangerous levels. The port infrastructure will be severely damaged by the flooding waters of the sea that will act as a catalyst in raising the prices of freight transport due to increased repair and maintenance costs. Due to the emission of greenhouse gases by ships, temperature levels are constantly rising, and refrigeration costs are gradually increasing(Figueres, 2020). Extended periods of severe and harsh weather conditions can lead to long travels and decreased cost-effectiveness of the shipping routes, creating a surge in the freight carriage rates. Furthermore, conditions like drought and increased heat will reduce the demand for goods due to the decreased production. This particular event will decrease the demand of shipping companies and increase the transportation costs to a new level.

(b)International shipping operations account for an average of 2.3% of all global greenhouse emissions and are one of the major causes of marine pollution. Although the use of fossil fuels as a transport fuel, the emission continues to affect marine life to an extent. The rising natural calamities and storms across the seas, the melting icebergs, and glaciers are all considered a by-product of ocean pollution(Manaadiar, 2019). The rise of fuel pollution is one of the causes of ocean acidification which is considered as a serious impact on marine biodiversity. The yearly rise in the atmospheric carbon released from shipping emissions worsens climate change around the world significantly. The auxiliary engines of the cargo ships generate poisonous gases like SOx, NOx, and CO2 at considerable levels and also create noises that can affect the natural fauna and flora of the marine biosphere(Manaadiar, 2019). The shipbuilding industry can release toxic waste into the ocean waters, which can directly pollute the ocean waters and harm marine life.

The shipping freight industry, along with the shipbuilding industry, also creates a considerable amount of carbon emissions that can harm marine diversity and the atmosphere. The global greenhouse emissions of the shipping industry are more than one billion tons, and that is an exceptionally alarming figure, according to environmentalists(Wada et al., 2021). The effects of greenhouse gas emissions by the shipping and freight industry are ravaging all aspects of human life. The shipping and freight industry is also facing consequences related to technical and economic aspects. Proper adherence to emission limits and other environment-friendly procedures can reduce the effects of greenhouse gas emissions(Wada et al., 2021). The shipping industry handles almost 70% of the trading value of global operations, and it is crucial to saving this industry from the impact of the economic threats. It is one of the most integral aspects of global trade as there are other global business prospects associated with it.

Figure 1: Two-part diagram model shows the connection between shipbuilding markets and shipping freight
Source: (Wada et al., 2021)

Answer 3
(a)Suez Canalis an effective route that allows the vessels to go to their destination within a short time compared to other routes. The 2M Alliance is between the two largest container lines in the world, namely Mediterranean Shipping Co (MSC) and Maersk. The blockage of the Suez Canal affected the supply chain all over the world, especially the east-west trades. The impact of the Suez Canal blockage is significant, or the services of 2M Alliance as the canal ensures 10% of all global trade flows and most of the trade flow for 2M, and this canal allows container ships and tankers to take the fastest route to arrive their destination and to avoid the southern tip of Africa that takes more time (Turak, 2021). However, the blockage is removed, but it has already affected the supply chain and the services of 2M as it caused a delay in the departure of the actual timing of the vessels. Its blockage also caused a huge problem of congestion in the ports. Due to the blockage in the Suez Canal, 2M has to depend on Cape of Good Hope because even the blockage problem in Suez Canal is removed, but it caused fresh congestion problem, which affected the supply chain operations for three months (Turak, 2021). Due to the blockage problem, the 2M alliance services issued customer notices that the services will be diverted rather than being in the congestion.

The blockage in the Suez Canal caught up the vessels from both sides. The re-routing of the vessels added more time to the arrival at the actual destination as the vessels have to take another route. The 2M alliance services re-routed many of the ships via Cape of Good Hope that takes more time compared to the Suez Canal (Rogers, 2021). However, the blockage in the canal has a short time effect on the 2M alliance services, but it caused huge problems in terms of supply chain delay and disruption. Mostly, the east-west trades are affected as many of the vessels were waiting on the ports, whereas many of them got stuck on both sides of the Suez Canal.

(b)The impact that Suez Canalblockage caused to 2M alliance services are responded by 2M by re-routing the ships via Cape of Good Hope. In the re-route strategy, MSC listed 11 ships, and Maersk listed six ships that will take their journey via Cape of Good Hope. The re-route journey of the listed ships is undertaken based on a 2M vessel sharing agreement. The canal blockage causes a reduction in the containership capacity availability by 6% at the time when the vessels will take the longer route via Cape of Good Hope as per the 2M decision. However, it is also estimated the capacity absorption will lead to capacity shortage and will significantly impact globally. However, the addition of new vessels cannot solve the problem, so there is one option left for 2M services is to speed up to increase the speed of each vessel. The average vessel speed of 17kts can allow the vessels to arrive at the destination at an expected time. However, if the speed is increased by 20kts, then it will reduce the impact of containership capacity from 6% to 5.2%. If the vessels cover their journey at a speed of 22kts which is the highest safe speed, then it will only reduce the impact by 4.8%.

The joint services of Maersk and MSC decided to re-routing rather than taking the path of the Suez Canal after blockage clearance because there were already many vessels waiting on both sides of the canal. The clearance of the blockage will create mass congestion as many vessels are waiting there, so it will be ultimately slower the arrival time of vessels at the destination. Hence, Maersk and MSC, under the 2M services, decide to divert the route of the vessels rather than stuck at the logjams. There was no solid information that can assure the clearance of the blockage early. Hence the immediate responses of 2M services to re-route the vessels via Cape of Good Hope even if it takes a longer time. There is no concrete information about when the blockage can be cleared, so rather than waiting for Suez Canal's clearance, it is better to take a new route.

(c)The statement clearly indicates that it refers to the trade lane of the Panama Canal through which the 2M services are planned to re-route the vessels. Routing via Panama Canal still not enough to solve the problem as adding more vessels cannot solve the problem, and speeding up the vessels can solve the problem a little bit, but it is not enough for the problem. The example of Northern Sea Routes (NSR) can be taken into consideration to illustrate the current problem (Rahman, Saharuddin, and Rasdi, 2014). NSR is an alternative option to route the vessels from Europe to the Far East. The original route used to ship the containers from Europe to the Far East is via Suez Canal and Malacca Straits. If the alternative routes are chosen by the shipping companies, it will affect the Malacca Straits. The decrease in the ships crossing the Suez Canal will also decrease the total ship numbers crossing Malacca Straits. The alternative route will significantly affect the Malacca Straits as it will impact the country's income, port profit, and business trade. The alternative route of NSR will eventually affect the overall maritime activities (Rahman, Saharuddin, and Rasdi, 2014). The reduction in the total number of vessels will create an unstable condition for the government. It will also affect the attitude of customers towards imported goods and services. Due to the reduction in the ship vessels at Malacca Straits, the weak government infrastructure may lead Malaysia from losing out to other countries. The decrease in the ship vessels at Malacca Straits will increase the opportunity for other routes like Melbourne port and NSR, so the balance of the trade lanes is expected to interrupt in the future. If a similar situation like Suez Canal occurs in any of the alternative routes, then it will put pressure on the other routes, and the overall capacity will be reduced. ?

References
Figueres, J.M. 2020. Here’s how we can reduce the emissions from the shipping industry. [online] World Economic Forum. Available at: https://www.weforum.org/agenda/2020/10/shipping-industry-carbon-emissions-climate-change-environment-ocean/. Ghili, S. and Schmitt, M. 2018. Risk Aversion and Double Marginalization. SSRN Electronic Journal.

Kwoka, J. and Slade, M. 2020. Second Thoughts on Double Marginalization. SecondThoughts on Double Marginalization, [online] 34(2). Available at: https://www.americanbar.org/content/dam/aba/publishing/antitrust_magazine/atmag-spring2020/sprng20-kwoka.pdf [Accessed 5 Jun. 2021].

Manaadiar, H. 2019. 5 adverse effects of climate change on maritime transport. [online] Shipping and Freight Resource. Available at: https://www.shippingandfreightresource.com/5-adverse-effects-of-climate-change-on-maritime-transport/.

Rahman, N.S.F.A., Saharuddin, A.H. and Rasdi, R. 2014. Effect of the Northern Sea Route Opening to the Shipping Activities at Malacca Straits. International Journal of e-Navigation and Maritime Economy, 1, pp.85–98.

Rogers, C. 2021. Suez blockage removed; supply chain effects could last for months. [online] www.spglobal.com. Available at: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/suez-blockage-removed-supply-chain-effects-could-last-for-months-63407653 [Accessed 5 Jun. 2021].

Tongzon, J.L. and Nguyen, H.-O. 2021. Effects of port-shipping logistics integration on technical and allocative efficiency. The Asian Journal of Shipping and Logistics, 37(2).

Turak, N. 2021. Suez Canal blockage could cause problems for the globe: Here’s what you need to know. [online] CNBC. Available at: https://www.cnbc.com/2021/03/25/suez-canal-cargo-ship-blockage-could-cause-problems-for-the-globe.html.

Wada, Y., Yamamura, T., Hamada, K. and Wanaka, S. 2021. Evaluation of GHG Emission Measures Based on Shipping and Shipbuilding Market Forecasting. Sustainability, 13(5), p.2760.