Maritime Economics Assignment: 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,” MsBecquart 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 teuGunde 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%.”
Write a detailed and well-researched maritime economics assignment addressing the following questions based on the given case scenario: 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.
a) 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.
b) 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.
a) Explain how Suez Canal blockage may affect the 2M Alliance’s services in the east-west trades in the short term.
b) Based on your answer to task a, discuss the possible responses of the 2M Alliance.
c) 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 integration strategy between the value chain of a particular industry but among two similar firms is called vertical integration. This maritime economics assignmentfocuses on the primary aim of vertical integration between the container shipping lines and the terminals of the port. The integration of vertical strategies provides the organisation with the advantages of a better economic scale and enormous resources simultaneously with less competition in the market (Sturgeon, 2021). The cooperation of the organisation most significantly in the stages of the supply chain which includes terminal services, hinterland transportation services, the process of administering the products and services and wholesale establishment. The significant illustration of Maersk is cited as the firm to follow the strategy of vertical integration. There are different types of vertical integration depending upon the processes in the organisation:
- Vertical integration including backward or upstream flow.
- Vertical integration including forwarding or downstream flow.
- Vertical integration including upstream or downstream flow.
The next part of the study deals with the Approach of the double marginalization model. The double marginalization model is defined as an approach to vertical externalities as an outcome of processes in the association of two organisations having market power (Kwoka and Slade, 2020). The double marginalization model deals with different vertical levels in the process of the supply chain which is used to apply various mark-up prices. The fundamental aim of using vertical integration between container shipping lines and port terminals affects competition and simultaneously vertical integration mitigates the hurdles caused due to double marginalization. The process of vertical integration allows the two firms to operate independently executing the power of monopoly by price difference above the marginal cost. The advantages of vertical integration by using the double marginalization model are the process of vertical integration provides the benefits of distribution of entities which includes aligning interests. It also included themitigation of excessive transportation cost and elimination of the risk from the double marginalization model (Choné, Linnemer and Vergé, 2021). This facilitates setting costs according to productivity and profitability to establish greater overall profit.
Significantly the area of land-sea integration provides the opportunity to study the importance of integration. The traditional organisation in association with the process of shipping is observed to increase the effectiveness in processes for establishing and expanding their land business which includes the process of operations of terminals and road carriage.
The most appropriate illustration of COSCO provided in the study to explain the competition in the market of the organisation implementing the process of vertical integration by using the double marginalization model (??????, 2019). The shipping company of COSCO is a traditional Chinese shipping giant with a major share in the intervention market of Hongkong. The marketing operations of the Chinese shipping company of COSCO is observed to perform terminal operations and as a logistics company OOCL in the era of 2018. On the contrary, Maersk is widely known as the most popular and largest shipping company globally. The firm of Maersk is on the strategy to develop fundamental processes for establishing its operation over land. In addition to this, Maersk also aims to integrate the business processes in Damco independently as Maersk with a planned reorganisation (Agudelo, 2017).
Answer 2:
a. To study the requirements which are likely to have an influence on the rates of shipping freight in the short and long run, it is essential to identify the environmental effect associated with shipping. The ecological impact of shipping constitutes various pollutants such as air pollution, water pollution, oil pollution, etc. The process of shipping is observed to have 18% of the total pollution in the environment (Gong, et al., 2018). The emission of greenhouse gas is a major concern of the environment which is an outcome of the process of shipping. The accurate analysis from various reports depicts the International Maritime Organisation estimating the emission of carbon dioxide from shipping is equal to 2.2% of the total global emissions. These global emissions are observed to be equal to human-made emissions in the era of 2012. Thus according to the question, the decision taken by the International Maritime Organisation aims to reduce greenhouse gas emissions as the organisation aims the situation of global pollution to rise to 50 to 250% by the year 2050 (Kachi, et al.,2019).
The impact of reducing the environmental hazards on the shipping freight which includes long term and short term process of shipping is observed to have less flooding in the water bodies. As flooding is a major environmental effect due to climate change it induces a rise in sea level. As observed in the case study of similar operations in various regions, the rise in the level of the sea would result in flooding affecting the agricultural lowland thus impacting a decrease in the maritime security of shipping freight. The challenges and issues associated with the decline of maritime security involve the ineffectiveness of operational security of ships and simultaneously affects the physical security of the seafarers. The activities of pirates or terrorist attacks can thus increase. The natural dangers which may be cited as an outcome of environmental impacts can thus impose danger to the industries of maritime causing great challenges to the security threats in the shipping sector. The change in the climatic conditions due to driven sea-level rise increases sea surface temperature and thus frequently increases the weather uncertainties. This tremendously impacts the growth of shipping industries. The emission and control regulations for maintaining ecological balance add an operational budget to the industries of shipping in the long-run process. The importance of global trade can be observed with the decline in the trade of oil globally. The impact on both east-west trades will be fostered as there are various shipments done every day with the aid of the Suez canal. As 12% of the total trade passes through the canal, the economy of both east-west regions will suffer a loss in productivity and profitability (Notteboom and Neyens, 2017).
b. The impact of environmental factors leads to tremendous challenges among which the growth of the shipping industry serves as the most important concern. The industry of shipping is widely known for providing transport services for the deployment of vessels and to access the ports to facilitate business in shipping. This approach provides a perspective to the traditional system with neo-economics and shipping is assumed to continue the profit maximization from the subject of scarce materials which includes the resources of capital, assets, etc (Christiansen, et al., 2020). The environmental factors lead to security issues in shipping freight which impact a decline of marketing growth in the shipbuilding markets. By using the two part diagram of the relationship between the shipping freight and shipping market it will be easier to understand the impact of the processes faced due to challenges faced by any one of the units.
Figure 1: process of port operation
(Source: Jasmi and Fernando, 2018)
The process of port operation, consolidation and distribution centre, the haulage of trucks and various logistics processes are affected due to the environmental impacts. The impact of the resources is also high and thus affects the labourers, seafarers and the employees of the back- office. To analyse the relationship between the shipping freight and shipbuilding market, it is essential to determine the importance of the shipping market to manage the various activities of shipping projects including the proper design, planning and procurement of freight and the production of engineering for providing an advantage to human resources and quality management (Jasmi and Fernando, 2018). Thus if the shipping freight is affected due to environmental hazards the growth of the shipping market is affected which will lead to the decline of market value. Another significant impact on the long run of the shipping process includes the effective management of the process of shipping for establishing stable environmental aspects; there is a need for excessive allocation for budgetary plans. Based on your answer to task a, discuss the possible responses of the 2M Alliance.
Answer 3:
a. The Suez Canal is the shortest link that connects Europe and Asia. The traffic due to the blockage of ships containing cargo worth 11billion dollars affects the economy. The Suez Canal allows large shipping tankers to pass through the channel avoiding the longest route which flows from Africa. It records 11% of total world trade. According to Lloyd's list of the journal the traffic mostly affects the trade of eastern and western parts estimated at around 9.7 billion dollars. The traffic in the canal results in the delay of shipments. Due to blockage other routes will also get affected as there will be a need for an alternative route for delivering the shipments as early as possible.Companies need to expect that the Suez blockage will generate a crisis in terms of the shipping capacity as well as equipment.In addition, as a result, supply chain reliability issues will decline somewhat in the coming months.Under these circumstances, the canal will remain blocked for a long time, which might lead to world trade, noteworthy disruption as well as skyrocketing shipping rates, further increase in fuel products and global inflation.Complications or mild damage can prolong the disruption.In addition to this, the few-day blockage will be widely used for the container shipping industry,possiblybecause of the additional fuel costs involved, shipping companies speed up their shipping services for lost time.With reference to the blockage on the trading route in case of both the alliance, Europe as well as Asia has responded to set offconstructive measures to evade long traffic jams in the canal as it affects the economy.The blockage generally harms the economy of Europe and Asia but it also impacts other countries which have a trade link with this alliance.
b. The approach of 2M, is defined as in the year of 2015, the Maersk line and MSC in association launched the 10-year alliance of 2M. This agreement focuses on the Alliance vessel sharing agreement between the Asia - Europe and the trans-Pacific and trans - Atlantic trades (NAIR, 2016) The agreement focuses on the effort to develop better opportunities for utilising the associated capacity for assessing the failed bid for launching the network of P3. The possible response of the alliance has tremendously contributed towards the lower frequency of services in the shipping industry along with some port-to-port connection; this facilitates the declining schedule in reliability and long time for waiting. Due to responses of 2M has been observed to increase in total transport time and the uncertainty in delivery for various freights of shippers leading to an effective increase in inventory and costs of buffers.
The response of the alliance on the blockade of the Suez Canal is based on the trading response conducted in the canal of Suez. The blockage of the Suez canal caused the delay leading to a strong impact on the eCommerce of the orders placed by the consumers of Europe. As the global trade of alliance is estimated to be 12% to pass through the canal, the business processes were affected which caused a tremendous loss to the alliance powers. Due to the knocking effects of the Suez canal, there was tremendous congestion in ports and vessels as their next targeted journey could not be scheduled. The alliance faced the pressure of the supply chain reeling from the shortage of containers. Thus, the impacts and responses of the 2M alliance are explained with the help of scenarios created due to blockage of the Suez canal. With the effect of blockage on the trading route both the alliance, Europe and Asia have responded to initiate positive measures to avoid long traffic jams in the canal as it affects the economy. To restore jams alternative shortcuts through the Mediterranean Sea are proposed for trading between Asia and Europe. According to Lloyd, daily, more than 60 cargo ships pass through the canal containing more than 1 billion tons of goods every day (Rusinov, Gavrilova and Sergeev, 2021)
c. The importance of the Suez canal to the Allies facilitated the allowance of one-time travel from the Mediterranean or the North Atlantic towards the Indian Ocean without covering the continent of Africa. The blockage of the Suez Canal will lead to disruption in the global economy gradually affecting the flow of oil and chemicals along with apparels, iron ore and the manufactured goods. It is estimated that 13% of the total trade globally passes through the Suez canal according to the 2M alliance. The blocking of the Suez canal will lead to an impact on the trade lanes as the major supply through shipping is estimated to be 12-13% of the global trading (Wiegmans and Janic, 2019). The evaluation of the statement “It will impact all trade lanes, as carriers will seek to cascade vessels to locations where they find they have the greatest need” refers to the challenges faced if the Suez canal is blocked. As the canal carries over 10% of global trade out of which 7% includes the trading of the world's supply of oil. The tradeline of oil is taken as the most significant illustration in this study. If the Suez canal is blocked the trader of oil will tend to look for better opportunities for facilitating their market and to move their business and cascade the vessels over the location favouring the needs and demands of the consumer. This will lead to a decline in the economy for the 2M alliance over the canal as it will not facilitate further travel and shipment of vessels.
Along with the choke points of the Suez canal blockage, the association with the Strait of Hormuz and the Strait of Malacca, the Suez canal facilitates the critical importance of global trading of oil. The canal facilitates the pipeline of oil from the Suez Gulf to the Mediterranean sea accounting for about nine per cent of the total seaborne trading of petroleum (Tadini, 2019). Due to the blockage, the trade line of oil was observed to increase the price of oil in various regions which hampered the economy. For maintaining the effective flow of the economy the alliance needs to foster efficient control over the Suez Canal to mitigate the trade lines to seek different locations for facilitating their business. With the help of the trade line of oil globally the evaluation of the above sentence is provided in the study. It is essential to implement better facilities along with the concern of the environment to maintain the stable flow of business processes and shipping markets for enhancing the process of trading.
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