As the 2006 hurricane season gets underway this month, the specter of Katrina hovers in the air-a cloud made darker by authoritative predictions that this year will see a much higher than average level of severe storms.

The National Oceanic and Atmospheric Administration predicts the season will produce 13 to 16 named storms, with four to six growing to Category 3 status (winds in excess of 110 miles per hour). The prediction is matched by the leading independent forecaster, Dr. William Gray, who foresees 17 storms, including five major ones.

That circumstance is creating more than usual anxiety for sellers and shippers all along the supply chain, and a higher level of preparation among the ports that handle America's trade. And, it poses for all concerned the question of what steps to take to lessen the impact of weather disasters. Supply chains are becoming more finely tuned-more tightly linked, with higher utilization and operating on tighter schedules. That very success can make the supply chain more vulnerable to the domino effects that can be caused by a major disruption occurs, like a hurricane striking a coast.

The impact of last year's storms on facilities critical to the smooth functioning of U.S. global supply chains is a warning of the potential of devastating things to come.

Hurricane damage to trade extended far beyond the much-publicized death and desolation in New Orleans. The surge of water that swept through the Gulf Coast carried ripple effects throughout the nation's economy.

The short-term loss of 900,000 million barrels a day in oil recovery and four million barrels of Gulf Coast refining capacity following Katrina helped drive up the fuel costs that effect every movement of goods. Take this example: when replacement fuel supplies started flowing from Europe post-Katrina, trans-Atlantic tanker rates jumped from $20,000 to $35,000 a day.

To cite one industry, the specialized port facilities used to handle frozen poultry are concentrated in the Gulf region. By one estimate, handling such trade in less well-adapted facilities added $8 a ton to their cost, with a major impact on their international competitiveness.

Many industrial products were also affected: diverting steel imports from the Port of New Orleans was estimated to add $80 a ton to their cost, a cost that eventually turns up in the sticker price of new cars and the sale price of consumer items.

As beleaguered residents of the Gulf Coast and New Orleans could surely attest, where hurricanes are concerned, an ounce of preparation is worth a storm surge of cure. And, with the evidence of the last two heavy hurricane seasons in mind, America's ports and shippers have been preparing for this year's possible onslaught.

While you can't alter 'acts of God', the question is 'what can be done to insulate the supply chain from their ravage?'

Not an idle question anymore with intense weather systems (amped up exponentially by the effects of global climate change) becoming increasingly common.

In the words of Robert Peek, spokesperson for the Port of Jacksonville: “As the say in the military, we are sitting on G and waiting on O.” Jacksonville, like all ports, has a hurricane response plan, which is updated each year. Jacksonville ran a tabletop exercise of that plan in spring 2005, and then activated it four times in response to actual hurricane threats. With that much practice, Peek said, “Everybody knows their role. Our tenants, our customers, all know what is supposed to happen.”

Like many ports, Jacksonville's hurricane response is tied to the condition levels announced by the U.S. Coast Guard, which designates a storm hazard as rising through a sequence of Whiskey, X-Ray, Yankee and Zulu.

'Whiskey'means awareness-all dockside construction stops; all loose materials are gathered up.

'X-Ray' mandates port authorities to make decisions about what ships nearing the port should be instructed to remain at sea until the storm passes (the safest place for a ship to be in major storm is out in deep water).

'Yankee' triggers procedures to tie down cranes and secure other equipment.

'Zulu' ceases all operations and the resident Coast Guard captain orders all ships to leave port.

Jacksonville reached Zulu twice last year-once for just a few hours, once for 24 hours. In both cases, storms passed too far away to do much damage. Or cause much delay. “We may have been backlogged for a few hours,” Peek reports, “but we got back up very quickly. That 24-hour shutdown occurred during a slow period.”

In many ways, Jacksonville's experience was typical to that of the U.S. ports that did not make the headlines last year-headlines that focused on the rampage along the Gulf Coast. But for the ports not greatly affected, 2005 was both a warning and a lesson.

Among other steps, the American Association of Port Authorities (AAPA) has drawn on the lessons of the storm to organize an Emergency Preparation and Response Seminar in Portland, Oregon (July 11-13). The seminar, says AAPA spokesperson Aaron Ellis, grows out of the efforts of the organization's special hurricane task force put together last year. The program will include such topics as lessons learned from port emergencies, tutorials on developing emergency response and management plans, and crisis drills.

More specifically, Ellis cites two pressing problems that ports must be more sensitive to in the wake of disasters: First, “there is a need for new thinking on communications. Cell phones may be down; satellite phones are better, but not the best.” Then there's the issue of backup generators. “All ports have them, but some of them are sitting at ground level. You have to find elevated places to put them.”

The emergency communications package put together by the Port of Manatee off Tampa Bay (the closest U.S. deepwater seaport to the Panama Canal and the southeast's leading forestry product import facility) is cited as an excellent example of what others need to do. Communications Manager Steve Hollister says, “We tried to envision a worst case scenario in which the port is inaccessible for some time, and we built from there. We developed a portable kit we can carry off when we evacuate that includes everything we'll need for a couple of weeks.” The system begins with land lines-fairly reliable in Florida-then falls back on 800 megahertz radios and, if need be, to Nextel phones with walkie-talkie capabilities. Communications protocols using radios, Nextel and rallying points, Hollister added, are established with all port tenants.

Manatee's Hollister offers a caveat. His system is as yet untested in Katrina-like conditions. But it did grow out of Manatee's experience last year when four hurricanes passed within 60 miles of the port. On each of those occasions, Tampa Bay was closed to ship traffic; the port itself was closed down twice-for 48 hours with Hurricane Gene and 24 hours for Hurricane Charlie, with Gene blowing some panels off the sides of warehouses.

At the Port of Georgia, chief operating officer Curtis Foltz has placed a similar emphasis on the critical role of communication infrastructure in the wake of a hurricane. “One of the big things we've learned is the necessity of communications. We've purchased satellite telephones that are completely independent of all local communication channels, so that if a hurricane comes through, we are still to the local and state emergency agencies.” To test its capabilities, the port recently completed a mock drill of its key operating and technology areas.

The hurricane seasons of 2004-2005 have changed thinking at the ports and amongst their supply chain shippers in another area-insurance. Hurricane Katrina, says Ryan Ogaard of Guy Carpenter and Company, a global reinsurance intermediary, made people painfully aware of the “mega-multiplier effects” of a big storm. One can, he said, gauge the physical damage likely to be done by storm winds of a particular intensity. With Katrina, he noted, “it wasn't just that the wind blew at some particular speed, it was the effect the storm had on the infrastructure of New Orleans.” The collapse of that infrastructure eliminated the systems intended to protect life and property; this, coupled with flooding and evacuation, brought on an unprecedented level of destruction. Ogaard commented, “People just didn't think this would happen.”

Now, though, they know that it can and the insurance industry is responding with products specifically tailored for such dire events.

For shippers, one possible response is a relatively new form of coverage known as Trade Disruption Insurance (TDI). This provides coverage from any loss of income or added expense stemming from any disruption of the flow of trade-from storm, flood, earthquake, or the unplanned closure of any road, rail or port facility. One vendor of such insurance, the New Jersey firm of Sunrock Risk Services, cites a hurricane related instance that occurred in Honduras when bananas could not be shipped because of a hurricane. Since the bananas themselves were undamaged, ordinary merchandise insurance would not have applied. But because covered conditions prevented a timely delivery, the client's $25 million of TDI coverage kicked in.

More generally, Ogaard recommends that all involved in trade consider risk more broadly. Two approaches exist. The first is to identify the potential weak points in one's supply chain, and then develop advance information on alternatives should one of those links snap. The second entails a refined definition of risk management. Managing risk, he says, is somewhat like managing a stock portfolio. Managers should assess the risks they face throughout their operation, and then consider where they are overexposed. Just as a financial investor might be overexposed to sudden shifts in, say, high-technology stocks, a company might have too many of its trading eggs in a basket likely to be hit by hurricane-force winds. “If a company is thinking of doing business in a hurricane zone, I'd recommend that they ask themselves, 'Is my total cost of risk going to go to an unacceptable level?'”

Even with the best of preparations, hurricanes still strike-often, from unexpected directions and with unexpected consequences. When that happens, it becomes the task of the shippers to create and post alternate routes for the flow of goods. This is true from both inland freight and that moving through a port. If a Class A railroad is providing service from, say, Memphis to Mobile, and Mobile is out of commission, it would be their responsibility to post an alternative service route for their trains and make them available to customers. Post-Katrina, for example, the Port of Georgia's Brunswick facility received bulk rail traffic that had been slated to travel from the mid-Tennessee Valley to the Gulf.

Similarly, with ocean-going freight, if a hurricane closes a major port, it becomes the shipper's responsibility to make other arrangements. Post-Katrina, most of the vessels turned away from affected Gulf Ports headed west to Houston, but some turned up even further afield-vulcanized rubber diverted from New Orleans ended up in Wilmington, and other ports of the eastern seaboard received a trickle of redirected traffic. In such cases, a good deal of quick work is required, somewhat like when a commercial flight is cancelled: there's scrambling, there's improvising and there's more than a few pleas for patient.

Several points stand out. First, as Joe Harris, spokesperson at the Port of Virginia points out, “What's important, first and foremost, is the safety of the people working here.”

Second, as Manatee's Hollister noted: “Every port has its particular challenges and issues.” Tampa Bay, he added, is only 15 feet deep: ship traffic moves through channels, 400 feet wide, and 40 feet plus tide deep, that branch off to Manatee, Tampa and St. Petersburg. A major hurricane storm hitting the area could silt up those channels, and the disruption would be a considerable one. WT

Sidbar:
DHL Launches Disaster Response Team

DHL has established, beginning with this year's hurricane season, a Disaster Response Team whose services will be available for much of the western hemisphere. Based out of the DHL Americas corporate headquarters in South Florida, the team will provide logistical support to ensure that relief goods quickly reach victims of sudden natural disasters, primarily in Latin America and the Caribbean, but also in northern South America and the southern United States.

The response team (which will include experts in cargo handling, warehouse management, inventory control, customs clearance, road operations, communications, safety, and security) will be available to help governments organize the handling, warehousing and loading of relief goods, serving the primary purpose of reducing bottlenecks at airports close to disaster scenes.

The teams will normally be deployed for a period of up to three weeks following a major natural disaster, the company said. By that point in time, the initial surge of international charter aircraft bringing aid supplies has normally decreased to a more manageable level.

“By setting up the DRT (Disaster Response Team) Americas we are making a significant contribution to preparing for the upcoming hurricane season and to support relief efforts in the case of a natural disaster anywhere in the region,” said John Mullen, chief executive officer for DHL Express Americas.

Sidebar2:
Dr. William Gray Leads the Way in Hurricane Prediction

Two thousand five was the worst hurricane season on record. The 28 named storms meant the U.S. Weather Service, which names tropical storms alphabetically, for the first time had to all the way through the alphabet, and then some. Of these, 15 rose to the level of hurricanes, including seven of Category 3 or higher.

Katrina, says Ryan Ogaard, has changed the way people think about storm-related risk. Ogaard is a managing director at Guy Carpenter & Company, a major reinsurance firm. Previously, people considered their risks in terms of 100-year averages of storm behavior. Ogaard commented, “When you've had a couple of seasons in a row--2004, there was more frequency-2005, there was more severity-people want to have shorter-term predictions. 'What's my risk right now?'”

It's a tough question to answer. While life insurance companies can base risk calculations on the records of millions of individuals, reliable records on storm occurrence are fairly limited. Ogaard noted, “There is at most 100 years of hurricane data. Some people are trying to extend that through the study of ancient weather. They look, for instance, at what happened to coral: you can tell when waves got above a certain height because they deposited sand on the other side of a barrier island. But there's still not much to go on.”

The person who's gone about as far as anyone in predicting hurricane activity is a Colorado State University professor Dr. William Gray, who has for a quarter century been publishing what some consider the most authoritative predictions of hurricane activity. Carpenter's Ogaard says, “If Bill Gray says it's going to be a worse year, he's probably right.”

The world's tropical storms have been Gray's focus for a half-century. He flew into his first hurricane in 1958-something he's done twenty times since and that he laconically describes as “interesting.” More generally, he has “studied hurricanes, why they form, their structure, intensity, change of motion and all these sorts of things.”

Hurricanes are characterized by the unpredictability of the paths they take. Equally unpredictable, perhaps, is that the world's largest academic program in hurricane study is at Colorado State University, in the exceedingly hurricane-free city of Ft. Collins, Colorado. That program was founded in 1961 by Dr. Herbert Riehl, a hurricane expert who originally reached this country as a pre-World War Two refugee from Hitler's Germany. Dr. Gray joined the department the following year.

And, Bill Gray says 2006 is going to be a bad year. Not triple the average, as was 2005, but nearly double.

Gray's most recent Atlantic Basin seasonal hurricane forecast predicts that 2006 will bring 17 named tropical storms, versus a 50-year average of 9.6; with nine full hurricanes, versus an average of 5.9. Five of those storms will be intense-again, the average is 2.3-and those storms will produce 13 intense hurricane days, against an average of five.

But, Ogaard notes, it isn't really the number of storms that matters-it's where, and if, they hit land. For example, 1992 was a generally mild year for hurricanes, except for Andrew, which, making landfall in Florida was the costliest storm of all up until that time. And, as the National Weather Service recently announced, if even a Category 2 storm hit New York City, the result would be “disastrous.”

Here, too, Dr. Gray has a forecast. Indeed, he publishes predictions of landfall likelihood for each of the 205 individual counties along the southeastern U.S. coast.

For 2006, he says, the chance of a Category 3-5 Atlantic hurricane making landfall somewhere on the U.S. coast is 81 percent, compared to 100-year average of 52 percent. The greater risk is along the Atlantic coast, with a 64 percent chance of being hit, versus a long-term average of 31 percent. The Gulf coast, ravaged last season by Katrina and Rita, is now in somewhat less danger-about 47 percent, compared to the average of 30 percent.

For a broader comparison, Gray says the U.S. coast is “maybe three to four times more likely of getting a landfall this year than during the 'quiet period' of 1970 to 1994.” The “quiet period” was a quarter century of relatively low hurricane activity, which has been succeeded by a current more active period, which Gray and others believe has a decade or more left to run.

The Atlantic is, Gray explains, the most difficult of the world's eight tropical storm regions on which to make predictions. Elsewhere-for example, in the Pacific Northwest-monsoon troughs produce a fairly predictable number of storms each year: never more than 30; never fewer than 18. The Atlantic, in contrast, may produce a dozen named hurricanes; or none. But, as he and others have established, there is method to nature's madness. In the Atlantic, hurricanes are more common when water surface temperatures rise and more common when the El Nino current off South America is weak. The reason for that is, the winds associated with that current when it is strong tend to sheer of the tops of tropical storms as they form, thus retarding them. These and a handful of other variables come into play to determine the severity of the season.

Gradually, he adds, “I put this together, and I was really somewhat surprised that there are precursor signals out there. You actually can look three, six, nine months before the season starts, and have some knowledge of whether the season is going to be active or not.” Gray fields numerous queries from authorities along the coast: “The people along the southeast coast just want to know. They know you can't tell them for sure, but they say: 'What are the odds? How does it look?'”

But however good the predicting, uncertainty remains. As Carpenter's Ogaard noted, “You could get a year with high frequency and high severity, but the storms just spin around in the Atlantic.” Or so most in the supply chain would hope.