In my last post I discussed the issues surrounding labor negotiations at the US West Coast ports.  This potential work stoppage at critical California ports could not come at a worse time.  Suppose, for example, that a work stoppage occurred August 1^st.   

Record Energy Prices 

What are the alternative means of importing goods from Asia to the US?  Re-routing goods to East Coast of Gulf State ports is one option.  Shipping goods via air freight is another option.  However, record high energy prices make these options more expensive than ever.  $150/barrel oil has led to skyrocketing increases in jet fuel and gasoline.  Higher energy prices have not only affected air and ground transportation.   Oil prices have increased the costs of marine freight as well.  The diagram below illustrates the dramatic cost increases for shipping a 40 foot container from Shanghai to the US at various oil prices.

As a result, no matter what contingency plans are followed, importers will pay an unusually high premium to divert shipments around the work stoppage.

Olympics 

The clock in Tiananmen Square is counting down the minutes remaining to the opening of the 2008 Olympics in Beijing on August 8th.  The Olympics present a critical milestone in China’s development.  Government officials want to ensure that while country is showcased to the world during the Olympic Games that outsiders will gain a favorable opinion of China’s progress in recent years.  Among the government’s largest concerns is pollution.  There have been several unconfirmed reports of government actions to curb pollution.  Examples include closing factories, halting construction and limiting automobile use.   For more information see the post on Bryan Larkin’s blog  or the recent articles from AMR Research  or Business Week (An Olympic Loss for Industry).   

The Olympic disruption to transportation and manufacturing is significant in that it could interrupt the flow of exports to the US for several weeks.

Back To School 

Challenged by a recessionary economy throughout the duration of 2008, US retailers are hoping to stage a comeback in the second largest sales period of the year – back to school season.  Overcoming recessionary pressures in consumer spending will not be easy.  US retail sales for June increased by only 0.1%.  Much of the gains are attributed to rising gasoline prices which are included in the sales figures.  Consumers are demonstrating a reluctance to spend even though the US Federal Government has injected over $90B in liquidity into consumer’s bank accounts through its tax stimulus programs this spring. 

The Perfect Storm? 

So back to the original question at the beginning of the post - what would happen if a port strike occurred on August 1^st?  High volume imports of apparel, footwear, electronics, toys, furniture and other consumer products would come to a halt as steamships anchored idly off the California coast.  This comes at a period in which the US is already anticipating decreased flow of exports from China.  Government actions to temporarily reduce Chinese manufacturing and transportation capacity to offset pollution will be occurring throughout July.   Alternative transportation methods such as shipping cargo via air freight and re-routing to East Coast ports with subsequent ground transportation are possibilities, but may be prohibitively expensive due to rising oil prices.  

The combined effect could be a perfect storm of logistical challenges that result in an unprecedented volume of out-of-stocks during the mid-August to late August peak shopping season.  Let’s hope the longshoreman and port operators can reach a consensus on the critical issues soon.  Otherwise a depressed retail sector may be stealing headlines from the automotive and banking industries come September…