Risk accumulation in ports and shipping routes demands new approach from risk managers

Risk concentration in ports and shipping chokepoints is disrupting supply chains and will require companies to start monitoring trade flows and exposures, according to a report from Russell Group. Recent years have seen a number of events that have caused disruption to trade. These include Covid-19, Brexit, extreme weather events and, most recently, the blocking of the Suez Canal by the Ever Given. At the time of the event in March, Russell Group estimated that the blockage had the potential to cause $40bn in trade disruption, given that some $1.1bn of trade flowed through the Suez Canal every day. Globalisation and the low cost of transporting goods by sea has resulted in increased reliance on sea-borne trade. However, reliance on shipping has created issues, exposure accumulation at ports and so-called choke points, such as the Suez Canal, according to Russell Group. Global trade in 2020 dropped by 15%, or $2.9trn, after more than a decade of year-on-year growth, consequently reducing exposure at most ports, according to Russell Group. However, there is evidence of a surge in trade exposure this year that will reverse the effect of the pandemic, it adds. During the last few decades, the value of trade entering key ports has risen exponentially and become concentrated. Large containerships, for example, require deep ports with infrastructure to handle cargos and vessels. This concentrates trade on key ports, in particular those servicing trade between Asia and the US and Europe. “It is justified to argue that there is a large aggregation of risk at these ports, meaning that if there is an incident or blockage then the ripple effects of that would harm organisations, consumers and the wider economy,” Russell Group says in the report. A number of major ports have experienced delays during the past year, when demand for container shipping and commodities like iron ore surged as the US and Chinese economies bounced back from the pandemic. Covid-19 measures at ports and the recent outbreak in India have also caused delays. Waiting times led to vessels queuing at major ports, such as Los Angeles and Long Beach, which experienced a 27% increase in cargo capacity demand at the end of last year. The two ports alone handle $486bn in imports each year. According to Russell Group, the world’s 50 biggest ports – which include Hong Kong, Los Angeles, Long Beach, Rotterdam, Shanghai – account for 55%, or $7.5trn, of global trade. The port of Hong Kong had the largest exposure at $594bn in 2020, followed by Rotterdam at $578bn and Singapore at $490bn. Major shipping routes – which often concentrate on so-called chokepoints like Suez – also present large exposures. The Dover Strait, which carries trade to major ports in northern Europe, and the Strait of Malacca, which carries trade between Asia, Europe and the US, have the largest exposures. Exposures at an individual company level are also big. UK companies, for example, have significant exposure to the port of Southampton. These exposures were highlighted when Brexit and Covid-19 collided at the end of 2020, causing massive delays at UK ports. The Suez Canal blockage, meanwhile, contributed to a shortage of semi-conductors or integrated circuit boards (ICB). The resulting supply chain disruption affected production of consumer electronics – including iPhones and the latest PlayStation – and car manufacturing. Manufacturers with significant exposures to the shortage included Volkswagen ($1.7bn), Daimler ($849bn), and BMW ($581bn), according to Russell Group. Demand for ICBs has risen sharply with Covid-19-related changes in demand for electronics, and as economies and manufacturing recovered in the latter part of 2020. However, increased supply came up against reduced capacity from a series of unrelated events, including a fire at a manufacturing plant in Japan, shutdowns of chip plants in the US due to the ‘big freeze’ and, more recently, a drought in Taiwan that has affected production. According to a 2020 McKinsey study, shocks that affect global production are growing more frequent and more severe, noted Suki Basi, managing director and founder of Russell Group. Disruptions lasting a month or longer now occur every 3.7 years on average, and the financial toll associated with the most extreme events has been climbing, he said. “For instance, semiconductors’ and components’ global value chains’ exposure to shocks arising from trade disputes were estimated to be the largest. According to the same study, adjusted for the probability and frequency of disruptions, companies can expect to lose more than 40% of a year’s profits every decade, on average. But a single severe event that disrupts production for 100 days – something that happens every five to seven years on average – could erase almost a year’s earnings in some industries,” said Mr Basi. Continuous monitoring of trade flows and port accumulations is key for corporates and their insurers, according to Mr Basi. “It is paramount for any robust risk mitigation strategy to have at the heart of it an understanding of global trade and its impact on business,” he argued. “If the Covid-19 pandemic has taught us anything, then it is that some organisations are more resilient to external threats than others, and the ones that are prepared to adapt to a new environment rapidly are the ones that can flourish and find opportunities where previously there were none. This philosophy needs to be learned and adapted to the prospect of a blockage at a port or through a trade route,” said Mr Basi. However, analysis of risk accumulation at ports currently falls short, according to Russell Group. “Currently, there is not a solution or system that analyses global trade flow and then seeks to understand the exposure breakdown of that trade at a country, company, port, commodity and operator level,” it says. According to Russell Group, the ability to track, identify and analyse risk aggregations at ports ensures that businesses are robust enough to weather any potential shocks and, in turn, protect balance sheets. “By having access to, and knowledge of, trade flow at a company and commodity level, an organisation and its insurers would be able to have the ability to identify and mitigate any potential disruption to their business network,” the report states. Understanding port accumulations and global trade flow is “vital” for all organisations that operate in today’s interconnected economy and their insurers, the report argues. Russell Group provides data and analytics to help corporates and insurers assess trade exposure and accumulation at port, shipping route, vessel and individual-company level. This information would help companies identify potential vulnerabilities in their network, as well as alternative routes and supply chains. “There are many scenarios, both local and remote, which have the potential to impact your business today. Understanding what they could be and the impact that they could have is essential business intelligence that every organisation should be seeking out,” said Mr Basi. “As eloquently demonstrated by events such as Suez, so much of the world is now inextricably connected. Never before has business been so vulnerable to threats, both malicious and benign. Due to the sheer complexity of the business ecosystems, organisations need to understand that resilience goes beyond data and science, and starts entering the realm of imagination. We need an imaginative approach to creating new insurance products and, going beyond that, tools and services that result in outcomes-based solutions,” he added.

Risk accumulation in ports and shipping routes demands new approach from risk managers

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