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What the Suez Canal Blockage Means for Global Trade

What the Suez Canal Blockage Means for Global Trade

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On Tuesday 23 March 2021, a large ship blocked the Suez Canal. Up to the time of writing, efforts to unblock the Canal had proved futile. The Suez Canal is a 120-mile-long artificial waterway in Egypt, connecting Port Said on the Mediterranean Sea to the Indian Ocean via the Egyptian city of Suez on the Red Sea. The Canal allows for more direct shipping between Europe and Asia, essentially eliminating a 3,500-mile circumnavigation of Africa.

It is estimated that 12% of global trade passes through the Suez Canal on a yearly basis. In dollar terms, this is over $1tn worth of goods each year. Apart from regular merchandise consumer goods, the Canal also provides passage for oil and liquified natural gas. According to Kpler, a market research firm, oil tankers carrying about one-tenth of a day’s total global oil consumption have been impacted by the blockage. At the time of writing, well over 200 vessels, including oil tankers and dozens of container ships, were waiting to transit the canal.

Even prior to the blockage of the Suez Canal, global trade had been reeling from the impact of the novel coronavirus (COVID-19) pandemic. On account of the pandemic, many countries have experienced a drop in exports and global supply chains have also been adversely impacted. In essence, the pandemic has affected the availability and supply of a number of raw materials, intermediate goods, and finished products.

Writing for CNN Business, Hanna Ziady notes that COVID-19 lockdowns temporarily closed factories and disrupted the normal flow of trade. According to Ziady, economic activity slowed dramatically at the start of the pandemic, and the rapid rebound in trade volumes that followed caught companies off-guard. Therefore, suppliers have been stretched and this has made it difficult for consumers to find products especially since manufacturers have also struggled to secure critical inputs.

The blockage of the Suez Canal is likely to exacerbate the trade and supply chain difficulties already occasioned by the COVID-19 pandemic. Given the inter-connected nature of the world, businesses in many countries will experience delays in getting their products. This will create a shortage of some goods and ultimately, consumers will be required to pay higher prices.

The emerging crisis at the Suez Canal has already spooked global energy markets and just a day after the blockage, Reuters reported that oil prices rose by 4%. We can also expect container shortages and port congestions around the world. Freight costs will also likely soar. Already, according to S&P Global Platts, between June last year and March this year, the cost of shipping a 40-foot container had increased from $1,040 to $4,570 respectively, an increase of close to 340%.

Beyond the immediate problem of the current blockage of the Suez Canal, there are two other related systemic issues.

First, ships have gotten bigger over the past several years and second, global supply chains have become very concentrated. These two systemic issues have been further exposed by the current problem.

The ship currently blocking the Sues Canal is 400 metres long (1,312 feet). For comparison, that is about the size of four football fields. The ship’s gross tonnage is in the region of 220,000 tonnes. According to Reuters news agency, the ship has the capacity to carry 20,000 20-foot shipping containers. Built in 2018, the ship’s large size represents the continuation of a trend that intensified in the early 2000s. As supply chains largely shifted to China and the availability of cheap credit grew after the global financial and economic crisis (2008/09), shipping companies started building larger ships.

While larger ships do make sense in that they allow for more cargo to be transported at once, there are nonetheless some downsides. For example, many countries, especially smaller countries, simply are not able to accommodate these larger vessels and should the trend of mega cargo ships continue unabated, it could complicate trade logistics and facilitation for several countries. The other problem is currently being played out in the Suez Canal which is a demonstration of the extent to which one mishap involving these large vessels can have global implications.

Finally, regarding the concentration of global supply chains, the current blockage of the Suez Canal is another reminder of the need to diversify away from China specifically and Asia more generally. Such diversification is sound business and risk management strategy.

“The World Around Us” by Joel Richards is usually published on Tuesdays in the Searchlight Midweek. We include it in today’s Weekend edition as a bonus for our Weekend Searchlight readers.

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