Ever Given lessons

The Ever Given: One gut punch after another

Johnny McCord, CEO of Loadsure says that the Ever Given case once again underlines the criticality of understanding your risks to protect your balance sheet

The Ever Given, one of the world’s largest container ships, became jammed across the Suez Canal in high winds on 23 March 2021.

To the international press, the dramatic story of the Ever Given has reached its happy conclusion. The canal has been reopened, the backlog of canal transits has been made up, and the ripple effects of supply chain disruption simply are not newsworthy enough to warrant column inches. For the individual cargo interests on board the Ever Given, however, the story is far from over.

And, deluged by this continuous stream of shockingly bad news within the industry, unaffected cargo owners are scrambling to gain a better understanding of their true risk before they find themselves on the receiving end of disaster.

The evolving situation in the Suez Canal certainly produced a lot to take in. And, while the scale of the losses won’t be fully understood for months, the Ever Given offers some critical lessons to the supply chain industry right now. It is common knowledge that the shipowner, Shoei Kisen Kaisha, declared general average. This means that cargo owners will share in four-fifths of the losses—losses which, at the time of writing, currently include a claim of US$916m for lost revenue, salvage costs, and damage to reputation and infrastructure, courtesy of the Suez Canal Authority. It is, however, not generally understood that cargo owners that shipped under-and uninsured containers have just been hit with a double whammy.

CASH COUNTER GUARANTEES

Not only do they have to put up the cash counter guarantees demanded by the shipowner— bonds that could have been covered by all risk coverage—but their cargo is still stuck on that ship; and very well could be for the next 12 months.

This lack of insurance is a pervasive problem. Today, 80%–90% of containers are moved without adequate coverage, exposing businesses to massive liability. How will the situation be resolved? It’s too early to tell. Right now, we’re watching an expensive game of chicken play out with each party hoping the other moves first. Unfortunately, it is hard to see the Suez Canal Authority backing down from its original demand or releasing the ship and its cargo, which strengthens its bargaining position.

Even if the innocent cargo interests could be released, the logistics of discharging a 20,000 TEU ship are simply prohibitive. Neither the Suez Port nor Port Said has the infrastructure necessary to discharge the Ever Given. Meanwhile, ship and cargo interests will argue that the canal’s revenue was largely not lost but rather delayed and that the actual canal repair and salvage costs are not remotely equivalent to the canal’s demands. Further, the damages claimed by the authority far exceed the value of the venture. Why would they ever agree to such demands?

FLOATING IDLY

At the time of writing, the Ever Given rests quietly in the Great Bitter Lake, midway through the Suez Canal, which is in sharp contract to the financial storm that’s just begun. Until an agreement with the Suez Canal Authority has been completed, the vessel and all of its cargo will be detained.

Even simply determining how to apportion the losses will prove a massive headache. Consider this: The Ever Given had 20,000 containers on board. In theory, that means 20,000 unique cargo owners, even more, if the vessel was carrying consolidated containers.

The shipowner, Shoei Kisen Kaisha, must obtain an average bond, an average guarantee, a bill of lading and the basis of valuation from every cargo owner. If it takes an hour, on average, to pull those documents together, that will lead to 20,000 labour hours just for the guarantees.

In the end, if negligence is proven, cargo owners that have incurred a loss will have a claim against the shipowner. That said, the vessel is responsible for damage to the canal regardless of provable negligence. However, it is important to consider that the shipowner will not have insurance to cover third-party business interruption issues. If the grounding was outside the crew’s control, cargo owners will have no claim whatsoever. I understand why it’s so easy to see insurance as a cost. Some, 95%–98% of transits run without a loss, after all. Cargo owners often experience only money going out and not a lot of value coming in. It is when situations like this occur, however, that the value of insurance becomes abundantly clear. As marine insurance expert, Peter Townsend said during one of our recent Icebreaker sessions: (a monthly networking session for the supply chain industry) “Don’t think of insurance as a cost. Think of it as a balance sheet stabilizer. It’s a cost that you’re paying, but when things do go wrong, they don’t go wrong for you.”

Peter is right, shipping your loads with full cargo coverage is the only way to ensure your business continuity.

“It is common knowledge that the shipowner, Shoei Kisen Kaisha, declared General Average. This means that cargo owners will share in four-fifths of the losses—losses which, at the time of writing, currently include a claim of $916m for lost revenue, salvage costs, and damage to reputation and infrastructure, courtesy of the Suez Canal Authority.’’

Johnny McCord, Loadsure