Hurricane Irma: Potential Implications for Manufacturing, Retail and Logistics

Hurricane Irma: Potential Implications for Manufacturing, Retail and Logistics

Executive Summary

  • Hurricane Irma – the strongest hurricane ever to be recorded in the Atlantic – is projected to make landfall in South Florida on September 9-10, potentially causing widespread damage as far as North Carolina throughout next week
  • Airlines, port operators and railroads are currently preparing to wind down operations. American Airlines, for instance, reportedly cancelled all flights in and out of Miami International Airport (MIA) for the upcoming weekend.
  • Key industries in Florida and on the wider East Coast including automotive, aerospace and healthcare are likely to be affected by shut down airports and ports as well as damage to manufacturing sites or suppliers
  • Coupled with lingering after-effects of Hurricane Harvey, driver, truck and fuel shortages are expected to add to higher shipping rates on the East Coast over the coming weeks

Background

Following Harvey, another powerful category 5 hurricane named Irma has been observed moving through Puerto Rico on late September 6 and is projected to hit southern Florida on September 9 or 10. Everstream Analytics has been tracking the storm since it began developing in the Cape Verde Islands on August 31. Irma is said to be the strongest storm ever recorded in the Atlantic. Exactly where in Florida the storm would hit was still not known on September 6, according to the National Hurricane Center. However, Hurricane watches would likely be issued for portions of the Florida Keys and the Florida peninsula on September 7. Both South and Central Florida were projected to sustain widespread damage for the first time since Hurricane Wilma in 2005, with storm force winds likely to arrive late Friday on September 8. Moving onwards with lesser force, the hurricane could still inflict major damages as far as South and North Carolina as well as Georgia. Due to Irma’s intensity, tropical storm force winds currently extend to 185 miles from its center, compared to 90 miles of Hurricane Matthew which hit the Atlantic Coast in October 2016. Early estimates project the potential damages to amount to USD 200 billion if the storm hits southern Florida directly.

Source: Accuweather

Impacts on Logistics

With Hurricane Irma projected to make landfall in South Florida this weekend, American Airlines and other airlines have reportedly cancelled all flights in and out of Miami International Airport (MIA) on September 9 and 10. Airlines at Orlando International Airport were expected to wind down operations by September 9, 5:00 PM Eastern Time. The airport in Key West has already been closed since September 6 due to the approaching storm.

AirportsExpected end of operationsDetails
Miami International Airport (MIA)Sep 8, Afternoon (ET)American Airlines announced last flights to take off to Dallas on Sep 8, 3:49 PM (ET). Flights from Europe and South America were cancelled.
Key WestSep 6Airport is currently closed.
Orlando International AirportSep 9, 5:00 PM (ET)American Airlines expected to wind down operations on Sep 9, 2:00 PM (ET)
Fortlauderdale, West Palm BeachSep 8, Afternoon (ET) 
PortsExpected end of operationsDetails
Port MiamiSep 8-9Port condition Whiskey was issued on Sep 6, meaning that hurricane effects are expected within 72 hours.
Port EvergladesSep 8-9Port condition Whiskey was issued on Sep 6, meaning that hurricane effects are expected within 72 hours.
Port of JacksonvilleSep 9-10 
Port of Charleston, SavannahEarly next weekDuring Hurricane Matthew in 2016, coastal ports in Georgia and South Carolina also suspended operations
Ports of San Juan, Puerto RicoSep 5 
Rail servicesExpected end of operationsDetails
Amtrak services in FloridaSep 7Amtrak suspended all rail services in Florida
CSX, Norfolk SouthernSep 7 or 8Federal Railroad Administration declared a rail emergency in Florida on Sep 6

On September 6, the US Coast Guard issued port condition “Whiskey” for all South Florida ports, meaning that hurricane effects were expected within the next 72 hours. Restrictions on vessel movements were expected to come into effect by September 8. Major ports along the coast including the Port of Charleston and Savannah were said to monitor the path of the hurricane and prepare emergency measures before the weekend. With the Federal Railroad Administration declaring a rail emergency in Florida on September 6, the two eastern Class I railroads, CSX Transportation and Norfolk Southern, will likely cease services in South Florida on main lines between Auburndale and Orlando and Sanford on September 7 or 8. Other main lines connecting Jacksonville, Florida and Savannah, Georgia are expected to be curtailed a day after. Later this week, they could also cease operations on its line from Savannah to Pembroke, North Carolina. As of Wednesday morning, September 6, Florida’s roads have no more construction-related lane closures to keep open all possible evacuation routes open, while authorities suspended all statewide tolls including Florida’s Turnpike, Interstate 95 express lanes, state roads, and all expressways, effective since September 5, to free the flow of potential evacuees. However, reports suggested that there was a substantial threat of the storm damaging weak key infrastructure such as the Cow Key Channel Bridge and the bridge linking the Venetian Causeway around Miami’s Biscayne Bay. Both bridges see more than 20,000 vehicles passing per day.

Potential Impacts on Manufacturing and Retail

Closures of airports, ports, road and rail movements as well as damage to manufacturing sites due to Hurricane Irma could have severe impacts on industries and businesses that move goods to, through or from the East Coast to major markets in the US or abroad. According to Dun & Bradstreet, Hurricane Matthew impacted 79,000 active businesses in Florida, Georgia, North and South Carolina. Over 99 per cent of these were small businesses with less than 100 employees, significantly increasing the risk of bankruptcy over the next 12 months due to material damages and reduced revenues.

Oil and Gas

Besides Tampa and Jacksonville, Port Everglades is among the largest petroleum storage hubs in Florida, supplying one-fifth of Florida’s energy requirements via tank ships and barges since the state does not have any refineries. Both gasoline and jet fuel are distributed from petroleum companies including Chevron, ExxonMobil and Marathon Petroleum operating in and around the port to a dozen Florida counties and four international airports. The port generally keeps enough fuel to last one week at the site. Coupled with the ongoing supply shortage due to Hurricane Harvey, the amount of cargo shipped into Port Everglades ahead of Irma’s arrival and the extent of damage to the facilities after its passing will determine whether these shortages will turn into more prolonged supply disruptions, and higher prices at retail stations. Many gas stations in Florida reportedly ran out of gas on September 6 and average gas prices across the state were at USD 2.71 per gallon, up from USD 2.35 a week ago.

Automotive

Both the Port of Jacksonville and Miami are among the busiest seaports in the United States, in particular for shipments of passenger vehicles and car parts. Last year, the Port of Jacksonville moved more than 636,000 vehicles, making it the second largest handler of vehicles in the United States. Further north, the Port of Savannah is another key gateway on the East Coast for imports and exports of auto parts and cars, with container ships navigating up and down the Savannah River to access and exit the port. An illustrative example of the disruption potential a hurricane can have on the industry is Hurricane Matthew which hit in 2016. A medium-sized auto supplier was forced to halt production in Charleston, while Toyota, Nissan and Michelin moved most of their goods stored at Jacksonville to the hinterland. One of the largest exporters in South Carolina – BMW – implemented contingency plans to either anticipate Europe-bound shipments down the river to the port or secure cargo against damage at the port.

Aerospace

Northwest Florida and South Carolina are home to more than 2,000 aerospace and aviation companies, many of which use key airports and ports in the state to ship component parts to their customers. Over the past years, aircrafts, engines and aircraft component parts were among the leading export goods in Florida. Last year, a major aircraft manufacturer was forced to suspend production at its plants along the East Coast and a large aerospace supplier was unable to manufacture component parts due to Hurricane Matthew. When the company finally ramped up production, it was forced to ship component parts by airplane to meet its deadlines, adding further costs compared to shipping via North Carolina’s ports.

Life Sciences and Healthcare

Since 2015, Miami International Airport also became the first US airport to be certified as a pharmaceutical freight hub, doubling the pharmaceutical freight volume in the following year. Accessible infrastructure including the Port of Miami further attract companies in the Life Sciences and Healthcare sector to settle in Florida, making medical instruments one of the main import commodities in 2017. Pharmaceutical companies are particularly vulnerable to storms and flooding as sustained power outages and locked shipments can destroy entire stocks, causing production outages that can last weeks. During Hurricane Matthew, a large biopharmaceutical company was unable to manufacture and ship drugs as one of its suppliers sustained major damages at its manufacturing facilities in North and South Carolina due to power outages and flooded roadways.

Retail

As the area impacted is one of the most populous regions in the US, many department stores and apparel chains could be severely impacted by the approaching hurricane, causing lost sales amid the back-to- school season. Many East Coast merchants reportedly anticipated this coming impact and ordered extra supplies ahead of time. However, supply shortages of water, generators and home supplies were already being reported earlier this week. Hurricane Irma will likely impact the retail sector well after the storm runs its course, as major logistics hubs for retail goods including the Port of Savannah might be closed or operating at limited capacity, potentially delaying shipments of retail goods for the coming weeks. Previous hurricanes have impeded a quick recovery for retailers, notably due to flooded roads and damaged warehouses. During previous hurricanes, retailers have reverted to ship-to-home options or moving fulfillment of orders to warehouses and stores outside the affected areas in an effort to mitigate effects.

Force Majeure and its Potential Impacts on Procurement

In the event of hurricanes, knowing the operational state of suppliers can help planning for when conditions eventually normalize. Procurement professionals are advised to check if supplier contracts contain force majeure clauses, which allow a supplier to justify a failure to uphold its end of a contracts with another company as a result of a hurricane for instance. On the other hand, the lack of such a clause could potentially lead to the use of litigation as a remedy to production halts or delays.

Outlook

As of September 6, it was still not exactly clear where in Florida Irma would hit, but Hurricane watches would likely be issued for portions of the Florida Keys and the Florida peninsula throughout September 7. Both South and Central Florida were projected to sustain widespread damage while further north the storm might take a similar path as Hurricane Matthew, moving towards South Carolina, North Carolina and Georgia. Shipping liners will look for alternative routes for their vessels once the US Coast Guard starts issuing restrictions on port operations, starting in Miami all the way up the coast to Savannah. Analysts suggest that some Florida-bound cargoes could look out for the New York Harbor to clear. However, strong Florida prices mean most carriers might simply float the cargo until ports clear for discharge. Looking at the effects that Hurricane Harvey caused last week, analysts also project trucking costs to rise dramatically due to a shortage in labor, available trucks and fuel. Trucking rates between Dallas and Houston were 66 per cent more costly last week than the previous week.

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