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Suez gridlock chokes global trade; could trigger inflation

Issac John /Dubai
issacjohn@khaleejtimes.com Filed on March 28, 2021
Stranded ship Ever Given, one of the world's largest container ships, is seen after it ran aground, in Suez Canal, Egypt, on Sunday. — Reuters

The blockage could lead to a sharp rise in essential commodity prices including crude oil and food grains among other items and could severely impact global trade

Suez Canal crisis caused by Ever Given, a huge bulk carrier that had run aground, could mean shipping delays and higher prices for consumers around the globe, according to analysts.

The extent of the impact of the canal gridlock on the global trade depends on how quickly the massive vessel, which holds upward of 20,000 shipping containers, can be moved out of the way, maritime experts said.

The 220,000-tonne Ever Given that is 400 metres long and almost 60 metres wide has become wedged between the two sides of the canal for the past six days, apparently grounded by wind during a sandstorm.

Inflation fears

Trade experts warn that the situation could be catastrophic for the global economy, which is already struggling to recover from the devastating blow of the Covid-19 pandemic. The blockage could lead to a sharp rise in essential commodity prices including crude oil and food grains among other items and could severely impact global trade. It is costing nearly $400 million per hour as hundreds of ships ferrying cargo through the canal have been forced to divert and take longer routes.

Vijay Valecha, chief investment officer, Century Financial, said when it comes to shipping goods from Asia to Europe, there are virtually no alternatives such as rail or truck transportation.

“The blockage will delay a range of raw materials for European products such as cotton from India, petroleum from the Middle East, and auto parts from China. As a result, Europe’s manufacturing industry and auto sector, including auto suppliers, will be hit hardest, as they operate ‘just-in-time’ supply chains, which means they do not stockpile parts and only have enough on hand for a short period, and source components from Asian manufacturers.”

Europe imports delayed

Valecha said there would be limited impact on the United States, which receives most shipments from Asia on the West Coast. Still, imports from Europe may be delayed, and the blockage will preclude empty shipping containers from being returned to Asia, further exacerbating the container shortage caused by rising demand for consumer goods during the pandemic.

“While the salvage operations are underway, the crisis, if it persists, is likely to give a push to inflation. Estimates suggest that nearly $10 billion worth of goods pass through the canal every day, and circumventing the canal could cost $300,000 more per ship. The supply chain bottleneck could make the price of goods used in everyday consumption dearer. The shipping delays could impact everything from the clothes and shoes ordered online to electronics, food, and energy supplies,” said Valecha.

Containers shortage seen

Saad Maniar, senior partner at Crowe in the UAE, said a prolonged closure of the canal could be hugely expensive for everyone, especially for the owners of ships waiting to transit the canal.

“Some ship owners may decide to cut their losses and reroute vessels that are bound for the canal. All this will increase the cost of goods and the consumers will have to pay the price,” Maniar said.

Samiullah Tariq, head of research at Pakistan Kuwait Investment Company, said Suez Canal crisis can worsen the shipping crisis which Pakistan and other countries in the region are already facing.

“As the global economy opened up, there was a shortage of containers and vessels. Now as things were expected to normalise, the Suez Canal crisis happened that is bound to impact global economic recovery,” Tariq said. “The Suez Canal crisis can affect Pakistan’s exports majorly as the west (EU and US) are major export destinations of the country,” he added.

The canal, connecting the Mediterranean with the Indian Ocean via the Red Sea, is particularly important for global oil supplies as it allows a direct route for shipping between Europe and Asia without having to go all the way around Africa.

Vital trade route

About 12 per cent of total global trade moves through the Suez Canal. Crude oil, refined oil and liquefied natural gas shipments passing through account for five to 10 per cent of global shipments. Of the 39.2 million barrels per day (bpd) of total seaborne trade in crude in 2020, 1.74 million bpd went through the Suez Canal, according to tanker tracking firm Kpler. Additionally, 1.54 million bpd of refined oil products such as gasoline and diesel fuel flow through the canal, about 9.0 per cent of global seaborne product trade.

According to shipping trackers, hundreds of ships are already stuck in a holding pattern. Clearing up the logjam within a day or so may mean only a few extra days for the delivery of goods from Asia to the United States. But if the Ever Given remains stuck for a week or more, it could add at least 10 days of extra time as ships are rerouted to longer journeys.

“There are millions of dollars of commodities in the other ships, and if it is not cleared quickly then they will look to take other routes, meaning longer time, more fuel and more costs that could eventually be seen passed down to consumers,” according to Ian Woods, a marine cargo lawyer and partner at the London-based firm Clyde & Co.

Analysts said prices at the pump, already on the rise, could spike further, as the canal is a major artery for oil transport.

Last year about 19,000 ships, or an a billion tonnes passed through the canal, providing an important source of revenue for Egypt by bringing in almost $6 billion, according to the Suez Canal Authority.

— issacjohn@khaleejtimes.com

author

Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.





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