The Global Supply Chain to Witness Further Disruption Due to the Blockage of Suez Canal

The Global Supply Chain to Witness Further Disruption Due to the Blockage of Suez Canal

The battle to get the 224,000-ton container ship blocking the Suez Canal appears to have been won, but the victory came with accumulated economic losses and heavy impact that will further exacerbate the scarcity of goods and services.

The pandemic created a global supply chain disruption that the world is still grappling with, stoking the cost of goods and services and limiting the availability of needed items. With the monster lasting days at the Canal, the global supply chain is about to see further disruption. The obstruction created a massive traffic jam at the cost of $9 billion each day in global trade.

The problem started when the ship, MV Ever Given, a Panama-flagged vessel operated by Taiwanese company Evergreen and owned by Shoei Kisen Kaisha Ltd of Japan, became wedged sideways across the canal on Tuesday, March 23, due to strong winds.

While the massive efforts to clear the passage way have paid off, the impact could last for months.

The Canal, which is 120-mile long between the Red Sea and the Mediterranean separates Africa from Middle East and Asia and is also the shortest route between Asia and Europe.

Roughly 30% of global container traffic flows through the canal annually. That means, the blockage of the Suez Canal could affect 10%-15% of world container throughput, according to analysts from Moody’s Investors Services.

“Very high consumer and industrial demand, a global shortage of container capacity and low service reliability from global container shipping companies… has made supply chains highly vulnerable to even the smallest of external shocks,” they said in a note on Friday.

In that context, the timing of this event could not have been worse, they added.

There are more than 367 vessels now waiting in the Suez Canal due to the blockage.

A busy traffic in the Suez Canal underscores a shift from the strict restriction that characterized the earlier approach to the pandemic. And just when it’s about to get even, a single vessel tends to reverse the progress made so far.

A temporary closure of the Canal such as this would compound the already strained global supply chain. The delays become expensive as ships get diverted to other routes, which heightens the pressure of container shortage that businesses are already facing.

The ordeal of Ever Given has increased stalling shipments of consumer goods from Asia to Europe and North America, and agricultural products moving in the opposite direction. In addition, it is fanning the soaring cost of freight service that has upped significantly due to the pandemic.

Globally, the average cost to ship a 40-foot container rose from $1040 last June to $4,570 on March 1, according to S&P Global Platts. S&P Global Panjiva said in February, that container shipping costs for seaborne US goods imports totaled $5.2 billion, compared to $2 billion during the same month in 2020.

With this surge in cost of freight services, consumer items are expected to rise accordingly. More than 80% of global trade by volume is moved by sea, which means incidents like the blockage of Suez Canal, even for a day or two will impact the global supply chain, especially as the effects of the pandemic take further toll on industries.

Europe is likely going to be affected more than other regions. Since 2020, China has overtaken the United States as Europe’s top trade partner, increasing freight services from Asia to Europe through the Suez Canal.

“Vessel utilization has been at full capacity on the Asia-Europe trade route because of heavy demand from European importers, with terminals in Europe experiencing labor shortages due to coronavirus-related measures,” said Greg Knowler from consultancy HIS Markit.

Factored also in the crisis is the delay in returning empty containers to Asian exporters, which is expected to further exacerbate the current shortage of containers, according to the consultancy.

For ships taking alternate routes to avoid the Suez standstill, it means longer trip and higher cost. For instance, alternate routes such as the Cape of Good Hope in South Africa, adds up to 10 more days to their journey.

Moody’s Investors Service said Europe’s manufacturing industry and auto sector, including auto suppliers, will be hit hardest as a result of the delays.

“This is because they operate ‘just-in-time’ supply chains, meaning they do not stockpile parts and only have enough on hand for a short period, and source components from Asian manufacturers,” they said.

The longer routes also present other concerns; African waters are infested with pirates, and there is fear that detouring ships will be attacked by pirates.

Although there has been significant progress in dislodging the Ever Given, the ship was moved 30 degrees from left and right by tugboats on Saturday, and on Monday, Canal service firm said the ship has been set free, the damage has been already done.

Moody’s Investors said even if the situation is resolved quickly, port congestion and further delays to an already constrained supply chain are inevitable.

Sumit Agarwal, economics professor at the National University of Singapore said there is going to be a global consequence as a result.

“My view is that this will cause problems for a lot of countries and industries around the world in the short run,” he said.

Share this post

Post Comment