More supply chain weakness exposed in Baltimore bridge collapse

Stocks rallied to new highs yesterday as investors set their sights on today’s quarter end. Fed governors continue to ply the markets with the “we’re in no rush” mantra.

Forward thinking. Regular readers, put on your thinking caps. I have on many occasions said that controlling the US economy was like piloting a large cargo container ship. As you may know, those vessels don’t exactly turn on a dime, and oh, they don’t have brakes. The helmsman must make adjustments sometimes miles in advance and then make minor alterations as they approach their waypoints. If you ever watched reality shows which cover the process of a ship navigating inner waterways, you know that it is a tense process even for the saltiest of skippers. I have used this as an analogy for the Fed’s navigating the US economy time and again. As you can see, it has been a tricky process.

Today, I want to reverse the view and ponder for a moment the impact a single cargo container ship can have on the economy. By now, you have probably figured out that I am referring to the cargo ship, Dali, that struck Baltimore’s Francis Scott Key bridge causing it to collapse earlier this week. If you are not familiar with it, the bridge spanned the entrance to the Port of Baltimore. Check out this map to see exactly how exposed the port is to that bridge and keep reading.

Now, you don’t need to be an expert marine navigator to realize just how important the entry point is; you can see it just by looking at the map. You must also understand that there is a channel, that is even narrower than the mouth of the harbor which is deep enough to allow larger vessels to pass. You can probably guess that the channel is right where you see the vessel traffic concentrated (light blue markers). Now, imagine that a ship struck the bridge right in that location causing its entire span to collapse locking the ship right in the middle of the channel. What I probably described just now in too many words is that Baltimore Harbor is out of business for now. Lives were lost and someone is going to be waiting a long, long time for their shipment to show up. Let’s take a moment to ponder the broader economic impact of this.

The Port of Baltimore is the largest shipping center for agriculture machinery, facilitating some 64% of all imports in the aggregate. Think of it, 81% of all Combine Harvesters and 67% of Row Crop tractors came into the US through that port last year. Now, there is some good news in that there are other ports on the US’s east coast which can accommodate the shipments, but think for a moment, what the cost of rerouting will be. Stop thinking, I will tell you. Experts estimate that it will cost some $1 billion. That is not accounting for equipment that may not show up in time for harvest. I am no farmer, but I can tell you that a lack of necessary equipment can be a problem 😉. It is also estimated that around 2.5 million tons of coal shipments will be affected in the aftermath. Rerouting that coal to different harbors will clearly come with a high price tag and introduce delays. The list of products that come and go through that harbor… er, under the former Francis Scott Key bridge is too long to list here but suffice it to say roughly 3% of all east coast and gulf shipping goes through the harbor and will need to be rerouted. Oh, and there are a number of ships stuck in the harbor as well.

The bridge itself carries about 35,000 vehicles a day and the American Trucking Association estimates that some $28 billion of goods travel over it each year. It took 5 years to construct the bridge in the 1970s and experts expect that rebuilding it can take as long and come with a multi-billion-dollar price tag, which will likely be covered by marine insurance. Lloyd’s of London CEO John Neal has asserted that this could be the costliest marine disaster in history, and analysts estimate that insurers will be on the hook for $3 billion.

There is also a human cost. Roughly 2,400 dockworkers man the harbor. Dockworkers are hired for daily work based on need, and those Longshoreman are at risk of losing pay until the harbor can be restored. We only need to look back a few years to the pandemic to be reminded how easily a supply chain can get disrupted and bring with it steep economic repercussions. At this point is early days in the recovery and calculating precise economic costs is difficult, but a few things are clear. The costs will be sizable and will certainly affect companies’ bottom lines. It also exposes weaknesses in the supply chain, something we have been learning a lot about around the world in recent years.

YESTERDAY’S MARKETS

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• Annualized Quarterly GDP (Q4) is expected to come in at +3.2% in line with prior estimates.
• Initial Jobless Claims (March 23) is expected to come in at 212k, slightly higher than last week’s 210k claims.
• MNI Chicago PMI (March) may have increased to 46.0 from 44.0.
• Pending Home Sales (Feb) is expected to have gained +1.5% after declining by -4.9% in January.
• Markets will be closed tomorrow in observance of Good Friday. Next week, we will get JOLTS Job Openings, Factory Orders, Durable Goods Orders, and ISM Manufacturing / Services. Check back in on Monday for calendars and details.