How Suez Canal Blockage Could Affect Product Supply Chains

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AP – The freighter blocking the Suez Canal is blocking traffic that carries nearly $ 10 billion in goods every day, so quickly breaking the deadlock is essential to limit the economic fallout.

Efforts continued on Thursday to dislodge the container ship Ever Given and restore traffic on the man-made waterway that connects the Mediterranean with the Red Sea and provides a maritime shortcut between Europe and Asia.

How vital is the canal for navigation?

About 10% of all world trade passes through the 120-mile-long (193-kilometer-long) canal, which allows tankers and container ships to avoid a long journey around the southern tip of Africa.

Iconic maritime newspaper Lloyd’s List estimates that $ 9.6 billion worth of goods pass through the canal every day. Lloyd’s says about $ 5.1 billion of that traffic goes west and $ 4.5 billion east.

اهد الفيديو | اصل أعمال تعويم السفينة الجانحة NEVER GIVEN. # قناة_السويس_شريان_الحياة #SuezCanal #evergiven

Posted byقناة السويس Suez Canal AuthorityThursday, March 25, 2021

About a quarter of this traffic is carried on container ships, such as the one currently buried in a side wall of the canal. Lloyd’s says more than 50 ships pass through the canal on average per day, carrying 1.2 billion tonnes of cargo.

What effect will this have on supply chains?

When it comes to shipping goods from Asia to Europe, there are hardly any alternatives such as rail or truck transport, said Sharat Ganapati, economics professor at the Georgetown University. The lockdown will delay a range of parts and raw materials for European products such as cotton from India for clothing, oil from the Middle East for plastics and auto parts from China, he said.

“The fact that the most crucial node in the commercial network is blocked will have important effects on the well-being of the world,” said Woan Foong Wong, professor of economics at the University of Oregon.

This satellite image from Cnes2021, Distribution Airbus DS, shows the MV Ever Given cargo ship stuck in the Suez Canal near Suez, Egypt on March 25, 2021. (Cnes2021, Distribution Airbus DS via AP)

There will be less direct impact on the United States, which receives most of the shipments from Asia to the West Coast. Still, imports from Europe may be delayed and the lockdown will prevent empty shipping containers from returning to Asia, adding to a container shortage caused by growing demand for consumer goods during the pandemic.

“If you get a bump in one place, it’s going to seep into the system,” Ganapati said. “It’s going to take a while for things to work out. “

Is the supply chain in trouble?

The Suez situation could exacerbate problems for a supply chain already under pressure from the pandemic and increased purchasing.

This photo released by the Suez Canal Authority on March 25, 2021, shows a backhoe trying to dig up the keel of Ever Given, a Panama-flagged freighter stuck through the Suez Canal and blocking traffic in the vital waterway. (Suez Canal Authority via AP)

Virus restrictions have trapped crews on merchant ships. Congested ports have led to container ships anchoring off the coast of California, unable to dock and unload their cargo. Shortages of semiconductors and rare earth elements have hit manufacturers of cars and other consumer products.

“We have a lot of things indicating a vulnerable supply chain at risk of disruption, and now you put one more thing on top of that,” said Julie Swann, logistics expert at North Carolina State University.

How will consumers be affected?

US consumers may feel some impact if shipping is interrupted for more than a few days. Finished goods from Asia to the United States pass through the Pacific. However, some components of products assembled in Europe and shipped to the United States may be delayed by the closure of the channel.

Mark Zandi, chief economist at Moody’s Analytics, said blocking the channel is unlikely to have much of an impact on the US or global economies unless it continues for weeks or months.

It could drive up oil prices, “but we’re not talking dollars a barrel, we’re talking pennies a barrel,” Zandi said.

This photo released by the Suez Canal Authority on March 25, 2021, shows Lieutenant General Ossama Rabei, head of the Suez Canal Authority, investigating the situation with the Ever Given, a Panama-flagged freighter, after getting stuck across the Suez Canal and blocking traffic on the vital waterway. (Suez Canal Authority via AP)

The German economy could suffer, however, if the lockdown delays the shipment of auto parts to that company’s major automakers, Zandi said.

And Spain, Italy and France could see gas prices rise as they depend on oil shipments through the channel, Ganapati said.

What about oil shipments?

About 1.9 million barrels of oil per day pass through the canal, according to Lloyd’s. This represents about 7% of all oil transported by sea. The shutdown could affect shipments of oil and natural gas from the Middle East to Europe. S&P Global Platts Analytics said that approximately 1 million barrels of crude and 1.4 million barrels of gasoline and other refined products circulate from the Middle East and Asia to the north through the canal to the Europe every day.

In this photo released by the Suez Canal Authority, a freighter, named Ever Given, sits with its bow stuck in the wall on March 24, 2021, after getting stuck in the Suez Canal in Egypt and blocking everything traffic in the vital waterway. (Suez Canal Authority via AP)

Jim Burkhard, who heads crude oil research at IHS Markit, said the impact on the global oil market would be limited if the channel was cleared soon. Energy demand is still low due to the pandemic, and the Sumed pipeline has unused capacity to move oil around the canal, from one end near Alexandria, Egypt, to a terminal near the Red Sea. .

“If this were to last a month, there are other options: you can sail around Africa. Of course, that would increase the costs, ”said Burkhard. “If this ship is moved next week, it will be a footnote in history when it comes to the oil market.”

The benchmark international crude price rose after the lockdown, but prices retreated on Thursday. Analysts attributed the price drop to an industry group’s report of large inventories in the United States and fears that pandemic lockdowns in Europe could further reduce energy demand – outweighing energy demand. concerns about the stranded vessel.

Could petroleum-related products be slowed down?

Shipments of refined petroleum products to Europe, such as gasoline and jet fuel, also pass through the canal and will be delayed. Burkhard said refineries in Europe may be pressured to temporarily increase production to take over, Burkhard said.

Oil tankers using the Suez transport 8-10% of the world’s liquefied natural gas, according to research firms. Wood Mackenzie analyst Lucas Schmitt said only a few LNG shipments were near the canal when the blockage occurred.

“We don’t expect major bottlenecks unless the situation drags on,” Schmitt said. He added that the timing of the incident – it’s spring, when demand for LNG typically declines – means it will have less of an impact on prices than recent delays at the Panama Canal. These delays have pushed up LNG shipping rates, according to data from S&P Global Platts Analytics.

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