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Suez Canal blockage: Supply chain vulnerability

29 March 2021 Wilhelm Greyling

The Ever Given has finally been freed at approximately 04:30 local time after being stuck for almost a week according to officials. The Rotterdam-bound vessel is capable of transporting up to 20,000 Twenty-foot Equivalent Units (TEU) of shipping containers and was carrying cargo from Asia when it became stuck. It is not the first time the canal has been blocked - smaller vessels such as the Fabiola was lodged in the Suez Canal for two days in 2016 and the Maersk Shams was stuck in 2015 but refloated on the same day with minimal disruption.

The vessel - one of the largest container ships in the world - became stuck on Tuesday 23 March 2021 in a very narrow part of the Suez Canal measuring around 985 feet in width. Concerns around the need to widen the canal are once again being voiced. Since its opening in 1869, the Suez Canal has been widened through many infrastructure projects - the most recent being an $8 billion project in 2015. Despite this, many maritime authorities agree that the canal infrastructure has failed to keep up with the increasing demands of growing ship sizes.

According to Port Authorities, a total of 367 vessels are waiting to pass through the canal, which will take at least three days to clear. Many of the ships waiting to get through are carrying livestock, oil, and consumer products such as clothing, furniture, manufacturing components, and car parts. The immediate implications of this blockage will likely be felt for months in some sectors. Oil prices saw a sharp increase on Friday amidst concerns that the blockage could take weeks to resolve. Brent crude was higher by 4.2 percent, at $64.57 on Friday, after dropping 3.8 percent on Thursday. However, since the news of the vessel being freed, the price dropped by $1 to $63.67.

According to John Mothersole, Director at IHS Markit's Pricing and Purchasing service, aluminum prices began moving higher last week with regional premiums rising globally. European billet prices are also reported to have increased between 5% and 7% in Italy and Germany over the past week because of potential shortages in both countries. Our industrial commodity analysts expect some near-term market price increases as a result of the delays. Impacts of the blockage on some regional markets will happen with a lag, as the scheduled arrival dates to be missed by ships delayed at the Canal have not yet occurred in more distant markets.

Even though the ship has now been freed, it appears delivery problems and port congestion are likely to continue through at least the first half of April, which will only accentuate the cost pressures that have built up over the past 10 months from the surge in commodity prices. Our view is that the rally in commodity prices will lose momentum and that the rise in goods price inflation likely this summer will therefore prove temporary.

The incident is unlikely to have any significant long-term effects on shipping rates although there is expected to be some knock-on effect to other routes. Several shipping companies have started diverting their vessels around the Cape of Good Hope, which adds about 3,500 miles to the journey and up to 12 days. Despite concerns among global shipping companies over piracy risks, vessels rerouted around South Africa's Horn of Good Hope would be at lower risk from Somalia-based piracy than those using the Suez Canal, which necessitates a transit through the Gulf of Aden. Vessels traveling between the Cape of Good Hope and Europe or North America would also pass the Gulf of Guinea at a significant distance from areas in which Nigeria-based pirates operate.

In addition, there will be added pressure on intercontinental air cargo as companies look to these services to temporarily take over transportation of critical goods. It's critical to note that air cargo capacity was already stretched by the Pandemic. A 12-15-hour flight can easily offset any expected delays due to a prolonged Suez blockage. However, any increase in demand is likely to be short-lived due to the extremely high cost of air cargo. While a Boeing 747-400F can carry a maximum payload of 113,000kgs, the Ever Given carries 200,000 tonnes of cargo. Therefore, transportation by planes proves far too expensive and uneconomic for most long-term global shipping needs.

While this intercontinental traffic jam highlights the need for better contingency planning, the effects on the supply chain are likely to be short-lived and relatively insignificant against the backdrop of post-pandemic world trade. Shipping remains the dominant method of long-haul freight transport and looks to remain so for the foreseeable future.

Posted 29 March 2021 by Wilhelm Greyling, Executive Director, Supply Chain Solutions, Economics & Country Risk, IHS Markit

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