Trouble at Sea How the Shipping Industry Is Impacted by Hurricane Season

Trouble at Sea:  How the Shipping Industry Is Impacted by Hurricane Season

During the first half of September 2017, three hurricanes were present in the Atlantic — Irma, Jose, and Katia. Irma was a Category 4 or 5 hurricane for most of her journey across the Atlantic and caused significant damage in the Caribbean and to Florida. In addition, the Houston area is just beginning to recover from Hurricane Harvey and its unprecedented quantity of water.

The damage hurricanes can do on land is both tremendous and well-known. Between the lives lost, buildings destroyed, and communities disrupted, it can often take years to recover.

Less recognizable are the effects hurricane season can have on the shipping industry. Because hurricanes largely hit coastal regions, they also can affect major and minor shipping ports along the way. Because ports can be affected, the shipping industry also faces repercussions. Even at sea, storms and hurricanes can disrupt traffic.

The Shipping Industry Quote

The Shipping Industry

container-ship in stormThe shipping industry carries roughly two-thirds of the total value of global trade. Carrying goods by water is inexpensive, especially for deliverables which are especially time-sensitive. Only ships can carry cargo in the bulk that the shipping industry manages.

The World Trade Organization estimates that the total value of merchandise exports of its member countries was $16.2 trillion in 2015. The ability to send these goods where manufacturers need them is dependent on the shipping industry.

Since the Great Recession of 2008, the shipping industry has suffered. The industry currently has more capacity than it can fill. The container industry began a process of demolition and consolidation in 2016 and has continued that trend in 2017.

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Shipping Routes

Shipping routes tend to follow great circle routes across the ocean. They follow the shortest route across the surface of a sphere.

Trade routes, which often experience hurricanes, include routes from the Panama Canal to the Mediterranean, Europe, and the East Coast of the U.S., as well as ports in the Gulf of Mexico. Many of the routes from Asia to North America are less susceptible to hurricanes because they travel through the northern Pacific.

While storms at sea can happen year-round, the Atlantic hurricane season runs from June through November. Hurricanes thus can interfere with trade in goods for the holiday and winter season, along with normal trade during a time of year when storms otherwise are likely to be less frequent.

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Time and Fuel

Most commercial vessels are not built for speed, although modern container vessels travel much faster than the freighters of the early 20th century. Modern container ships are designed to travel around 24 knots (around 27.5 miles per hour).

At that speed, a container ship capable of carrying 8,000 20-foot containers (each of which can carry 10-15 pallets) burns around 225 tons of fuel oil daily. At 21 knots (just over 24 mph), the same ship consumes 150 tons of fuel per day.

Traveling at 21 knots would add roughly a day to the time of the trip. While that day might not seem critical, the days added to all trips total up and reduce the quantity of cargo the ship can transport each year.

Since the financial crisis of 2008, the industry began to shift to a “slow steaming” practice — roughly 18-20 knots. Because of the lowered fuel cost and the environmental benefits, slow steaming is likely to become the standard practice. While this practice is not directly storm related, it does play into calculations of rerouting and time which occurs because of storms.

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Storms and Ships

Ships’ captains do not like to be out in hurricanes and major storms. Even with modern design and materials, storms place great stresses on ship hulls. Storms can also cause cargo to shift, and even fall overboard.

Maersk Line, among others, has a centralized bureau which analyzes weather information and provides it to their ships’ captains. This information allows them to steer out of the way of storms, although the captains make the final decision for their ships.

Storms cannot only damage the ships but can also wash containers overboard. In recent years, over 700 containers are lost at sea on average per year, not counting catastrophic events such as the sinking of MOL Comfort in 2013, which caused the loss of over 4,200 containers.

Storms also pose delays for cargo delivery, which can affect the lines’ profitability. The ships need to make as many trips as possible in a year, and sailing around storms can increase the costs of shipping.

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Ships in Port

Ports are rarely safe harbors for large ships during a hurricane. Ships are safer at sea, keeping as much distance from the storm as possible.

Ships and docks should not be knocked together by storm action. Both will end up badly damaged, and if the ship breaks loose, it would endanger everything in the harbor.

Industrial crane loading Containers in a Cargo freight ship

During Hurricane Sandy in 2012, the U.S. Coast Guard closed most ports on the eastern seaboard. Ships were ordered to leave port, and proceed as far east as possible until the storm danger passed. These unplanned departures and returns both can pose delays to delivery and add costs to the trip itself.

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Damage to Ports

Storms not only endanger ships, they also can damage port facilities, and the damage takes time to repair. While ports are damaged, their ability to load and unload cargo is impaired or completely blocked.

Hurricane Harvey has already caused disruption. Texas ports on the Gulf of Mexico handle around 24% of the wheat exported from the U.S. Other ports in Louisiana handle 60% of U.S. soybean exports and 59% of corn exports.

Harvey not only damaged ports, which delayed shipments, but also destroyed goods which otherwise would be shipped. Cotton in storage was destroyed by the storm, and other remaining cotton may have become too wet to process in cotton gins.

Hurricane Katrina in 2005 caused over 2,000 deaths in New Orleans, as well as extensive damage to the city and port facilities. However, the recovery of the port happened relatively quickly. This speed meant the impact of port damage was not too severe.

The Port of New Orleans resumed operation shortly after the storm. It received its first ship two weeks after the storm, and within three months was operating at half capacity. By the following March, the port was handling 30 ships per day, compared to the pre-Katrina 27 ships.

The port suffered $100 million in damage to its facilities. Port-related businesses suffered over a quarter of a billion dollars in damage. But, like New Orleans, other nearby ports returned to operation in a similarly speedy timeframe.

The disruption from Katrina did not just affect sea-going vessels. New Orleans is served by 70 truck lines and six rail lines. Other Gulf ports, including Mobile and Gulfport, saw similar damages from the storm.

The supply chain effects from Katrina rippled throughout the country. Diesel fuel price increases raised freight rates. Road damage limited the ability of truck lines to access the port to deliver or receive goods.

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On-shore Shipping Effects of Hurricanes

Hurricane Harvey, in August 2017, provides a strong illustration of the immediate shipping effects of hurricanes. Harvey inflicted both wind and water damage on Houston, Texas. In fact, the hurricane brought record levels of rain to the Houston area.

Thirteen refineries were shut down at least partially by the storm, reducing the American capacity to produce gasoline by 10%. The storm had greater effects on the petrochemicals, and over a third of ethylene production was disrupted by Harvey. Ethylene is a basic material in the manufacture of plastics. Overall, Harvey affected around 10% of U.S. trucking capacity.

The U.S. Postal Service, UPS, FedEx and other shipping firms shut down during the storm, further disrupting shipping around the country. While all have resumed deliveries, these short-term disruptions can be expected during and after each major storm.

Hurricane Irma made landfall in the Florida Keys and again on Florida’s west coast. Major disruption of shipping in and out of Florida can be expected, especially since Port Everglades is the 11th biggest container port in the United States. Additionally, even customers placing orders with Amazon are notified of shipping delays.  

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Economic Resilience

Despite the impact of Harvey on the gasoline and petrochemical businesses, as well as the devastation to people’s homes and lives, the overall economic impact of Harvey may not be strongly negative. The markets, at least, do not see it as a national economic disaster.

Construction site workersParadoxically, storms increase economic activity once the floods recede. While not diminishing the human tragedy of hurricanes, over 2,000 died as a result of Katrina. The process of rebuilding can boost national, regional and local economies.

It is also possible that storms can push wages higher, especially in construction-related industries. Because unemployment is generally low, employers may have to pay more because of the lower supply of labor. The competition for wages may bring workers in from other states, since Houston lacks sufficient construction workers.

The automobile business and its related industries can expect to see an increase in late 2017 and early 2018, as cars destroyed by floods and hurricanes are replaced. The increase in demand may also increase prices, especially for used vehicles.

Modern businesses, however, have resilient supply chains. Many of the fears of disruption after Katrina were avoided. While logistics industry figures expect a ripple effect after Harvey — and surely after Irma — the extent is not yet clear. Firms which have invested in contingency planning and risk mitigation should be able to handle the disruptions from these hurricanes.

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Proctor & Gamble

One example of planning comes from Proctor & Gamble after Katrina. P&G, which handles 40% of coffee in the U.S., produces more than half of that around New Orleans.

In the weeks after the storm, P&G worked with its employees to secure temporary housing and resumed production locally by mid-September. Within two months of the storm, production was back to full capacity.

P&G has an annual emergency simulation, and this tradition of planning ensured it could be a solid employer, a good corporate citizen and a productive company, despite the disruption caused by the storm.

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Home Depot and Lowes

Wood stacked inside home depotHome Depot has also applied lessons from Katrina. Part of their annual hurricane planning includes stocking supplies useful during hurricane response and recovery and holds loaded trucks ready to go once hurricane alerts are issued.

It is estimated that Home Depot incurred $50 million in costs dealing with hurricanes Katrina and Rita in 2005, but the firm likely made 10-15 times that in revenue because of their hurricane inventory initiatives.  

Home Depot has four dedicated distribution centers for hurricane relief, all near areas affected by recent storms, including Hurricane Sandy. Home Depot works with its suppliers to coordinate shipping and delivery.

Lowes also has a hurricane response system, bypassing some of the supply chains. Many suppliers are shipping directly to the stores, rather than to distribution centers.

Flexible planning for the response, especially from companies which sell items necessary to recovery, should become the model in the supply chain, logistics and shipping industries.

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Hurricanes can cause tremendous destruction, especially on land. They can also have significant effects on the shipping industry and the supply chain it provides for many other industries.

Storms at sea endanger ships and cargo. More frequently, however, they cause delays and increased expenses as shipping is rerouted away from the storms. It’s worth noting, though, that when a hurricane passes, shipping resumes in its wake. For Hurricane Irma, many ships held to positions south and west of the Lesser Antilles and then proceeded northeast as the storm passed the Virgin Islands and Puerto Rico.

Other effects on the shipping industry include the damage to port facilities and infrastructure. The experience of Katrina, however, shows that ports can resume handling of shipping in a brief period after the hurricane. Other firms demonstrate that with planning, practice and flexibility, shipping and business can resume quickly.

While the trauma of a major hurricane may fade slowly, the damage is rarely permanent. The effects on localities and regions, as well as industry, are more temporary. With planning and foresight, most businesses can find ways to be flexible and will not only ride the storm, but find ways to thrive.

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