Pier Pressure: Supply chain issues for the UK
October 13th, 2021
Maersk, one of the world’s largest container shipping companies, is diverting its vessels away from the United Kingdom due to congestion at its ports.
Felixstowe, in the Southeast of the UK, deals with most of the UK’s containerised freight. The average ‘dwelling time’ for a container at Felixstowe is 5 days, but this has almost doubled to 9.7 days.
The congestion is bad enough that Maersk has diverted its vessels to other ports, where containers can be transhipped into the UK on smaller feeder vessels to other ports such as Hull, Liverpool, and Tyne. This will inevitably lead to delays in supply chains.
Why is this happening, and what are the risks for market parties?
UK ports, global problems
Felixstowe is ‘Britain’s biggest and busiest container port’ – on a good day. The port’s website tells us that it ‘handles more than 4 million TEUs’ every year, and deals with approximately 2000 ships in that period. 17 lines operate from Felixstowe worldwide with 33 services to over 700 ports.
Felixstowe is in a unique position, as it is very close to the open sea and also has good rail links inside the UK. The port claims that 70% of its containers are delivered to the ‘Golden Triangle’ – a belt across the heart of the UK where most retailers and suppliers base their warehouses and distribution networks. In September 2021, Felixstowe received the Ever Ace – the largest container ship in the world.
However, the port is not without commercial and market pressures. The UK’s goods distribution network is largely road-based, and rail movements of TEUs are limited by the rail network’s reach. This means the port is reliant on hauliers for the onward movement of goods from the dockside.
A further pressure is staffing. Staff shortages were exacerbated by the COVID-19 pandemic, which saw hundreds of thousands of workers across the UK forced to quarantine. This was combined with the sudden increase in demand for consumer goods, which has driven the container market to overheating heights. Some freight forwarders now report costs of $20,000 per box and liners and owners are laying down orders for dozens of new vessels to meet this demand. However, they won’t be in service until 2023 or later, and the crunch is now. Dry bulk carriers are trying to capitalise on the surge in demand, with Cargill and Genco exploring using bulkers to move containers.
The elephant in the UK’s terminals is the UK’s departure from the European Union. This has created a customs barrier where there was once free trade, and ports such as Felixstowe have had to adapt to the delay. UK Border Force, which provides customs officers, has had to prioritise training its small stream of new recruits as customs officers rather than immigration officers, which has led to congestion at UK airport borders and complaints from angry travellers. The port can only try to work around this shortfall.
The UK’s departure from the EU also ended the free movement of peoples, which led to thousands of EU nationals leaving the UK to find work inside the EU. This, in particular, has caused a serious problem.
A shortage of hauliers, demand for hauliers
Not everyone can drive a heavy goods vehicle. Drivers must hold a car licence, pass a thorough medical check, and then pass a theory test before training on the heavy goods vehicles and passing a further practical test. This was a lengthy process in the pre-COVID world, and the pandemic has crippled the UK’s ability to produce new drivers. The UK, at capacity, could license 40,000 HGV drivers per year. The current shortfall is 150,000.
Before the UK left the EU, a good proportion of the UK’s HGV drivers were EU nationals. The UK’s departure from the EU was largely responsible for these drivers leaving the UK, directly and indirectly. Directly, many drivers simply left rather than apply for a visa to do work that they could do freely within the Union. Indirectly, those who would still drive in the UK were hit by terrible conditions around Christmas 2020 caused by the UK and EU’s new customs arrangements. Many drivers spent Christmas 2020 parked on a runway in Kent as a temporary holding area, with the Army administering COVID-19 tests.
The UK now faces a severe shortage of HGV drivers whilst the need for onward transit of cargo has never been greater. Hauliers and businesses offered salaries of over £60,000 a year to licensed drivers, and the Department of Transport was forced to write to all licence holders asking them to return to driving heavy goods vehicles.
The Government initially argued that the surge in demand was, in the Prime Minister’s words, ‘the economy roaring back to life’ after COVID restrictions were eased. The Home Office blocked plans to issue short-term visas for HGV drivers. However, the Government has now issued 10,000 3-month visas for HGV drivers to alleviate the shortfall in trained personnel.
The haulier shortage is the cause of the recent petrol panic in the UK, after BP announced that it did not have enough drivers to move fuel from storage tanks to forecourts. In the same way as motorists attempted to stockpile fuel, retailers and distributors are cautiously stockpiling more goods to hedge against supply chain disruptions during the lucrative Christmas period. This means increased storage costs for goods, and increased demand now for goods at a time when the market is already squeezed.
The general shortage of HGV drivers means that ports like Felixstowe are handling more containers than before, with a reduced ability to move those containers inland.
This poses a problem for more than just consumers upset at the lack of fresh strawberries in their supermarket aisles.
Risks for everyone?
Global disruption to supply chains has risks for all parties involved, from consumers to liner operators, owners, and container owners.
- Liner operators and owners are currently making huge profits due to the increased freight rates. Several owners and liner operators have placed orders for new vessels to meet the surge in demand: Hanjin Heavy Industries has been ‘revived’ from administration by an order for four new boxships worth $270 million.Seaspan has an order book of 70 ships – although some of its vessels will be in service to take advantage of the high demand in the market. However, these vessels will be expensive to purchase and may arrive in service after the market falls; leaving owners with mortgages to pay against a backdrop of too much TEU capacity. For certain trades and cargoes, there could be an increase in care for cargo claims if vessels are unable to accommodate extra sea time due to port congestion. Depending on charterparties, diversions to other ports for transhipping could lead to disputes.
- Freight forwarders and shippers are in a tough position. The astronomical box fees cannot always be passed on to the customer, and this has caused enmity between freight forwarders and carriers. When CMA CGM capped its rates until February 2021, the response from freight forwarders was bitter and cynical. Many are at risk of insolvency due to the rates, and see carriers as profiteering – or manoeuvring shippers to sign long-term, high-rate contracts. Congestion at ports drives demand and prices upwards, and smaller shippers may struggle to see out the winter. They are also at risk from increased rates from container owners, who may refuse to release the container until paid.
- Container owners are struggling to obtain their empty boxes. The ability to charge high rates is nothing if those containers cannot be delivered to customers, and the COVID-19 pandemic has hindered the industry’s ability to move boxes to the Far East where they are needed to ‘close the loop’ of sea carriage. There are some 50,000 empty containers at Felixstowe, against the port’s total capacity of approximately 145,000. Storage fees will be due for these containers, and this could add pressure to container owners to increase rates.
- Hauliers are at risk from overwork, burnout, and falling wages. One of the posited benefits of Brexit was a high-wage economy for the UK, and the shortage of foreign hauliers has led to UK drivers being able to command high salaries. However, once the emergency visa programme of 10,000 drivers kicks in and the Army is used to relieve the pressure on the fuel tanker industry, the demand for drivers will fall. Could this see a commensurate fall in wages back to pre-Brexit, pre-COVID levels? If it does, this will be against a backdrop of rising inflation and costs for basic goods. Inflation in the UK is estimated to reach 4% this year, and several industries have seen stagnant wages as the economy slowed down due to the pandemic.
- Consumers face a similar issue. Demand for goods is high, prices are high, and inflation will be higher than expected. Consumers may face reduced stock across all forms of goods, and higher prices for what is available. Similarly to hauliers, stagnant wages mixed with high inflation will lead to financial pressures for many.
Just in, or out, of time
The world economy has largely grown used to just-in-time logistics, with its benefits of cheap storage, low costs, low prices, and easy trade. The UK, and Felixstowe, are caught in a perfect storm of barriers to trade, smaller workforces in key industries, reduced economic output due to COVID-19, and rising inflation and demand for goods. Retailers are attempting to stockpile for the Christmas period during an existing crunch period for the industry, and consumer panics about fuel and food are adding further short-term disruptions to an already upset system. Many carriers, ports, and industry commentators estimate that it may take until 2023 for the global disruptions to settle down. This is assuming that all goes well, and that the world is not once again overtaken by events.
This reliance on just-in-time logistics leads to immediate and noticeable shortages when supply is disrupted. This is even true of the UK’s natural gas stocks – with reports that the UK has some of the smallest storage capacities for natural gas in all of Europe.
Who wins in all of this?
Very few parties. Other UK ports that receive feeder vessels will see an uptick in trade, and increased container volumes. This may help to stimulate economies in areas that the Government seeks to ‘level up’ by bringing trade and a need for drivers, and the communities and networks that support them. That said, it would be remiss for the Government to claim this as an achievement rather than what it really is – a byproduct of commerce simply finding a way.
The other major winners are shipbuilders. After years of difficulties market-wide since 2008, a sudden boost in orders (such as the Hanjin 4-ship book) makes these industries less reliant on state support, and increases the tonnage available to move boxes. This should hopefully drive down prices to more reasonable rates, but these new vessels will take time to enter service.
For Felixstowe, though, newbuild vessels are not the tonic – new HGV drivers are.
Mills & Co advise on all aspects of maritime international trade, including disputes arising from the disruption to supply chains as well as shipbuilding and sale/purchase agreements for newbuilds and existing vessels. Our team have experience in issues caused by port delays to both owners and charterers, and a good understanding of the commercial pressures faced by industry operators at all levels.
If you would like to discuss this article with one of our experts, please get in touch.
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