Chaos is building for shippers as U.S. port strike continues and costs rise

• As the East and Gulf coast ports strike hits day three on Thursday, there are multiple signs of supply chain stress building.
• Thousands of shipping containers were potentially dumped at the wrong ports as ocean carriers scrambled to find alternate options for cargo, and increased tracking of diverted vessels is a direct challenge to an ILA union threat to stop unloading at other ports.
• Surcharges imposed by shipping giants are starting to mount, and the need to use inland transportation options like trucking and rail for diverted cargo are adding to costs.
• A major grocery chain CEO tells CNBC that while it is well stocked for weeks to come, some go-to items will not be available and prices on items like bananas will rise significantly.

As the East and Gulf coast ports strike hits its third day on Thursday, the nationwide logistics system is beginning to show signs of stress, with thousands of containers dumped at the wrong ports and billions of dollars in trade at anchor on ships. Ocean carrier surcharges for shipping clients are beginning to mount, and the need to use trucking and rail to move diverted cargo to ultimate destinations is adding to supply chain costs.

The building chaos is occurring with no signs that the International Longshoremen's Association and United States Maritime Alliance are back at the negotiating table in an attempt to work through significant differences on wage increase levels and use of port automation, despite consistent efforts by the Biden administration to get the parties back into collective bargaining.

In the mad dash to unload as many containers as possible for clients, ocean carriers moved containers off at alternative ports, but according to Vizion, which tracks container movements, roughly 2,000 shipments may have been dropped at a port that was not their intended destination.

Paul Brashier, vice president of global logistics at ITS Logistics, told CNBC he has clients who were notified their containers were at alternative ports as a result of the container dumping.

"These diversion dropoffs inflate the inland transportation cost," said Brashier. "Trucking companies get paid for a round trip where the truck driver needs to pick up and drop off the containers at the same port. The diversions are adding to transportation costs because of the additional mileage." 

Brashier said some clients had containers that were once destined for the Port of Savannah in Georgia diverted to the Port of Norfolk in Virginia in the last hours before the strike began. A once original 10-mile round trip for their truck driver moving a container in Savannah would have cost $300. Now with the diversion to Virginia, the round trip is almost a thousand miles which increases the costs to $2,000 to cover the fuel and time on the road.

"Pre-strike and post-strike out-of-network container diversions are already driving up shipping costs," Brashier said. "In most cases, little warning was given by the ocean carriers, which left many shippers scrambling to procure last-minute trucking capacity in congested ports they do not have familiarity with."

Exclusive data from Vizion and Everstream Analytics shows that five vessels switched their destinations on Oct. 1 from U.S. East Coast ports to alternative destinations in ocean carrier efforts to remain on schedule and move containers off their vessels.

Mirko Woitzik, director of intelligence solutions at Everstream Analytics, told CNBC that Hapag-Lloyd was the first carrier to divert vessels from the East Coast and turn away from planned U.S. port destinations to keep vessels on schedule.

The Hapag-Lloyd-operated container ship Stadt Dresden left the Port of Norfolk on Sept. 30 and was supposed to call at the Port of Savannah on Oct. 1, but has instead departed back to the Mediterranean Sea, according to Woitzik. The ship, which operates on the Turkey East Coast Express Service, is headed to its next port of call in Egypt.

Vizion data shows a series of vessels that are heading to alternative ports outside the continental U.S. Two vessels, the America and Hermann Schulte, both had the Port of Charleston, South Carolina, listed as their destination but were both shifted to the Port of Freeport in the Bahamas. Kpler data shows Danos is the owner of the America and Schulte Group as the owner of the Hermann Schulte.

More than a dozen container vessels are currently waiting in the port anchorage area of Freeport, Everstream Analytics data shows.

MSC, the largest containership company in the world, has diverted two vessels, according to Vizion. The MSC NOA, listed for an Oct. 1 arrival to Savannah is at the port of Cristobal, Bahamas, and the MSC Antonia, listed for the Port of New York/New Jersey for Oct. 1, switched to the Port of Halifax in Canada.

Some cargo brought into Halifax is expected to be shipped by rail to the New York area and other containers will wait to be loaded onto vessels and delivered back to the U.S. once the strike is over.

Many ships are choosing to wait out the strike, for now, according to an analysis from Everstream Analytics, with vessel queues on the rise off the coast of Savannah, Norfolk and New York. Everstream forecasts that lacking a deal between the ILA and the USMX, the number of vessels waiting outside ports could reach more than 100 by the end of the week.

Diversions are a key issue for the ILA, with the union's president, Harold Daggett, threatening that the longshoremen would travel to ports where diverted vessels attempt to unload their freight. Daggett has mentioned the ILWU allowing ILA members to go to the port in the 1977 strike to stop the unloading of a diverted vessel. Daggett was one of those longshoremen at that time who traveled to the West Coast.

The ILA did not respond to CNBC's request for comment about the diversions. ILA Canada also did not immediately respond to a request for comment on how its ILA local chapter, which works at the Halifax port, will handle any diverted cargo.

Due to the distance that alternative ports are from the original port destination, inland transportation costs incurred by shippers are as high as 10 times expected for the pickup and fuel, according to Brashier. "When you add in additional chassis, storage, and detention and demurrage exposure that amount goes even higher," he said. "But if a shipper has containers that go into demurrage while they are trying to arrange new transportation providers in new markets, that is going to cost thousands of dollars a day in late fees."

Food supply will go down and grocery costs higher

Stew Leonard Jr., CEO of grocer Stew Leonard's, told CNBC his grocery stores anticipated the strike and front-loaded what they could and are good through Thanksgiving. But customers looking for fresh produce and fish might have to modify their buying.

"Customers who may like the sweet Brazilian shrimp may have to buy Gulf shrimp," said Leonard. "Pineapples, bananas, and mangos are exported to the East Coast as well as other vegetables like asparagus. Bananas are the No. 1 fruit export in our produce department. We will get them, but it may be a longer transit from China, or fly and truck them in. This will drive up prices because of the price of logistics. That's when you see parents opting to put an apple in the lunch box rather than bananas."

Leonard said the cost of bananas could double over the short term.

Perishable foods are of great concern among shippers. Medical supplies, too, are a top concern.

Brandon Daniels, CEO of supply chain risk management company Exiger, said the health-care industry is being hit by both the strike and war fought by Israel. "Many key medicines are manufactured in Israel and production is slowed by the war," said Daniels. "In addition, medical supplies from latex gloves needed in surgery to lidocaine, an anesthetic used in hospitals, are stuck in ships waiting to be unloaded by striking dockworkers."

Walmart, Amazon shipments stuck in floating storage

In addition to the land transport challenges shippers face, much cargo is essentially stuck in floating storage. Companies such as Walmart — the No. 1 importer at the affected ports — Amazon.com, Home Depot, The Folgers Co. and Nike are just some of the companies with containers stuck on the water.

Some of the top product categories on these vessels are iron, steel, furniture, bedding, fresh fruit, toys, apparel and electronics.

Amazon products on the water include, toys, furniture bedding, travel goods and electric machinery.

Christian Roeloffs, co-founder and CEO of Container xChange, said the timing of this strike is especially challenging for shippers.

"This could result in skyrocketing logistics costs and delays, making it harder to secure containers," said Roeloffs. "The longer the disruption lasts, the more difficult it will be for these businesses to keep pace with market demands."

The most significant inflationary effect and consumer impact will take time. The daily hit to the U.S. economy, of at least $500 million, will rise to $2 billion per day if the strike lasts for several weeks, according to Moody's Analytics.

Container xChange clients have told Roeloffs that companies are already struggling to absorb these new costs as carriers impose surcharges and adjust services to bypass affected ports. The outlook remains uncertain, with many bracing for further delays and price increases.  

Surcharges ocean carriers are placing on containers could reach millions of dollars in penalties, according to a CNBC review of notices sent to clients.

Among the charges, CMA CGM is hitting shippers for the daily use of electricity to power their refrigerated containers called "reefers."

"Importers and exporters using refrigerated containers are in a very tough spot," Brashier said. "Exports are plugged in at our yards awaiting in-gate since late last month. The containers in port being plugged in accrue additional charges in many cases, but the biggest challenge is time. If the strike drags on, will the commodities in those containers be viable for consumption when they are pulled from the port?" 

Once the ports do open, the problems for shippers won't end, with the buildup of congestion creating massive delays in vessels unloading and containers being transported.

Kyle Henderson, CEO of Vizion, said although the ports are closed, the rest of the world's shipping continues and vessels heading to the East Coast and Gulf Coast show no signs of slowing down.

"The number of inbound vessels continues to go up, 368 inbound vessels on October 1, up from 348 on September 30," said Henderson. "New shipments booked by shippers and confirmed by carriers (2,909 export shipments and 8,760 import shipments), will add to the backlog of containers once they arrive in 45-50 days."

It normally takes one week for every day a port is closed to clear up the congestion. As of now, it will take three weeks to clear out the backlog of trade that is waiting offshore to be processed and cleared through the ports.