Transfin.
HomeNewsGuidesReadsPodcastsVideosTech
  1. News
  2. Explained

The Economics Involved in the Suez Canal Blockade

Editor, TRANSFIN
Mar 27, 2021 4:28 AM 5 min read
Editorial

At around 7.40 am local time on March 23rd 2021, a massive container ship got stuck in Egypt's Suez Canal, blocking the vitally important international waterway. The 300-feet wide and 1,300-feet long vessel called Ever Given, meandered along the canal and then ran aground literally wedging itself across the width of the channel. 

Result: An unprecedented traffic jam on both sides of the canal. 

This has essentially struck another blow to the global supply chains by blocking one of the most important global trade routes. In a year that witnessed delays, shortages and price squeezes on a planetary scale, this is shaping up to be yet another unfortunate setback. 

Let us see how intense and pronounced the economic impacts of this crisis could pan out to be. 

The Ever Given Misgivings 

As per The Wall Street Journal, the Ever Given is one of the largest container ships in the world. It's owned by the Japanese firm Shoei Kisen and operated by a Taiwanese company Evergreen Marine. 

 

Why Is It Difficult to Steer Away? 

The size! Reports say the displacement was on account of strong winds and dust storms that occurred Tuesday morning. As the vessel floated away, the bow was lodged into the banks and wedged itself on the sand. 

As per the rescue crew, the dislodging process may take up to weeks. Authorities are now contemplating disembarking the cargo from this 224,000 tonne haul that is equipped to carry 20,000 containers! 

FYI: The 25-member-large crew of the Ever Given is entirely Indian.

 

What's At Stake? 

Let's hit you with some numbers to paint a picture. 

  • Total value of cargo stranded at the canal is $12bn and counting.
  • Number of ships currently in a holding pattern along the Suez Canal: >200 and counting (including 41 bulk carriers and 24 crude tankers)
  • Estimated valuation of delay in goods transport: c. $400m an hour (as per the shipping data and news company, Lloyd's List).
  • Shares of Moller-Maersk, the leading global shipping company, tanked by 9% in just two sessions following the incident.
  • The Baltic Exchange Dry Index, a benchmark indicator for global shipping rates, shot up close to 40% after the incident, marking its highest jump since February 2019.

The 193-km long Suez Canal is estimated to control approximately 10% of global trade. At least 19,000 ships passed through the Canal in 2020, an average of 51.5 ships a day.

Source: NYT

With 2020 turning out to be an exceptionally challenging year from supply chain management perspective, the Suez blockade is going to throw another wrench in the works. The alternative route between Asia and Europe is a week slower with close to 2,700 miles added to the voyage. 

In terms of container ships alone, Suez controls 30% of all their movement globally. In addition to delayed deliveries, there's going to be an acute shortage of container boxes and vessels needed to package the haul awaiting at the destination docks. 

Another big setback is to the movement of crude. However, the pricing impact from this remains somewhat camouflaged as the downward pressure from COVID-19 and fears of related lockdown have more than offset the pricing uptick due to the blockade.

At least 16 tankers carrying crude or other oil products are facing transit delays up to two weeks that could add half a million dollars in costs. If freeing the containers takes meaningfully longer, the impact on oil price could get quite substantial. From an Indian standpoint, this is further exacerbated by the fact that India is the biggest importer of crude oil via the Suez Canal with more than two-thirds coming from the Gulf alone.  

How Will This Impact Average Consumers? 

It won't, if the crisis lasts a couple more days. It will, beyond that. 

Each day of shipping delay incurs a cost somewhere between 0.6% and 2.3% of the value of goods on board. So with over 300 ships lined up at the canal, costs of everyday commodities will spiral quickly. A Livemint report says that logistics in Europe are so affected that robusta coffee roasters won't have enough buffer stock to support two to three weeks' delay. 

Factories and ships are struggling to get back to swing after the months-long halt in production and supply lines last year. A shipping crisis and delay at this time is, hence, far from ideal. Delay leads to shortage in goods. Shortage leads to higher inflation. Furthermore, an uptick in crude prices is likely to cascade through to retail prices which has an additional impact on short term inflation. All this at a time when central banks have had a hard time grappling with rising inflation. Perhaps, the tug boats engaged in dislodging the Ever Given will have a say on the next set of interest rate cuts.

The Indian exports to the EU and the Americas could be delayed by 4-5 days at the minimum. Not to forget, it may create a dearth of working capital for exporters needed to finance their business in the medium term. This is especially relevant for businesses which work on the payment-against-delivery model. With the EU being India's leading trading partner, the role played by the Suez Canal in boosting this trade cost-effectively can't be understated. 

How Unprecedented Is the Incident?

Accidents along the Suez Canal are rather infrequent (75 reported in the last decade). The most notable incident in its history was the eight-year shutdown of the canal in 1967 when Egyptian and Israeli forces engaged in a stand-off following the Six Day War. 

The Ever Given isn't incidence-free either. In 2019, the ship cruised and bruised past a ferry boat in the Port of Hamburg in Germany, reportedly, not even stopping after causing such damage. 

The latest blockade really tells the story of rising shipping congestion and a mismatch between trade expansion and trade infrastructure provisions. The recent boom in e-commerce which was fuelled by more homebound consumers ordering goods online can be credited with shipping crisis like these that occur partly due to over-saturation of cargo. 

Among all else, incidents like these are the stirrings upon which amendments in shipping and maritime laws as well as their enforcement is built on. When you call a global trade artery like Suez Canal "Marlboro country", you are not only mocking the indelicacies in port governance, but also trivialising global trade and maritime security. 

FIN.
 

The cut-throat world of Business and Finance means that there is fresh News everyday. But don't worry, we got you. Subscribe to TRANSFIN. E-O-D and get commentaries like the one above straight to your inbox.