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Suez Canal disruption: How a grounded container vessel is choking global trade



29 Mar 2021

Pictures of the gigantic container ship stuck in the Suez Canal have sparked a meme fest on social media but the economic outcome of the mishap is way more serious than it seems. Here is all you need to know:

A 400-metre cargo vessel, more than double the size of Statue of Unity, continues to block Egypt's Suez Canal three days after losing control while entering the narrow passage from the Red Sea.

Pictures of the gigantic ship stuck in the narrow canal have sparked a meme fest on social media but the economic outcome of the mishap is way more serious than it seems.

For starters, the ship -- Ever Given -- has blocked 12 per cent of the world's seaborne trade and has already led to losses worth billions of dollars. And the salvage company trying to refloat Ever Given said on Friday that it may take weeks before the task can be accomplished.

Peter Berdowski, CEO of Dutch company Boskalis, one of two rescue teams trying to free Ever Given, told a Dutch television programme that the process of freeing the ship could take weeks. "We can't exclude it might take weeks, depending on the situation," Berdowski said.

Meanwhile, the Suez Canal Authority has suspended all navigation through the all-important channel. Almost 50 container ships pass through this canal every day and roughly 30 per cent of the global container traffic passes through the canal annually.

The current 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 of the Suez Canal could also lead to a sharp rise in essential commodity prices including crude oil and food grains among other items.

$400 MILLION PER HOUR!

Experts fear that the blocked ship could severely impact global trade and the economy. The blockage 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.

It has already been more than three days since the 2.20 lakh tonne Ever Given blocked the narrow 193.3 kilometre Suez Canal passage, considered one of the world's busiest shipping channels for oil and refined fuels, grain and other trade linking East to Wast.

More than 200 large container ships including tankers carrying oil and gas, and vessels hauling grain have been forced to back up at either end of the canal, shows tracking data. Experts have said that this is the worst shipping jams witnessed in years.

Many ships that have been diverted due to the temporary blockage will take five to six additional days to complete their journey between Asia and Europe. However, the disruption in maritime trade due to the blockage has worried many companies, including e-commerce firms.

According to experts, the suspension traffic in the Suez Canal passageway will deepen problems for shipping lines that were already under pressure. Some analysts say that the larger impact would be on smaller tankers and oil exports from Europe to Asia, in case the canal remains shut for weeks.

Moody's Investors Service analysts said in a note that "very high" consumer and industrial demand along with a global shortage of container capacity and low service reliability from global container shipping companies could make supply chains highly vulnerable to even the smallest of external shocks.

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

COST OF DIVERSION, LONGER ROUTES

As the Suez Canal is expected to remain blocked for at least some more days or even weeks in the worst-case scenario, experts have warned about the added cost of re-routing ships.

Sri Paravaikkarasu, director for Asia oil at FGE, told news agency Reuters that around 20 per cent of Asia's naphtha is supplied by the Mediterranean and the Black Sea via the Suez Canal.

He added that re-routing ships around the Cape of Good Hope (south of Africa) could add about two more weeks to the voyage and more than 800 tonnes of fuel consumption for Suezmax tankers. Operating expenses of ships - in the absence of the availability of the crucial Suez Canal - could jump sharply due to higher fuel requirement.

JPMorgan strategist Marko Kolanovic recently wrote in a note that if the blockage continues for an extended period of time, it could lead to significant global trade disruptions, much higher shipping rates and an uptick in global inflation.

GLOBAL TRADE IMPACT

The blocked passageway has already led to massive shipping delays, stoking a rise in prices of many commodities including crude oil. The blockage has also delayed e-commerce product deliveries - from shoes to clothes and even food.

While it is too early to calculate the impact of the blockage on world trade, it has certainly rattled the global supply chain and the situation may stay this way till the mammoth ship is refloated.

GLOBAL CRUDE OIL PRICE HIT

The Ever Given mishap has led to a momentary rise in global crude oil rates that have now retreated due to the volatility in the wake of rising Covid-19 cases. However, if the Suez Canal continues to remain blocked for weeks, prices could shoot up.

Crude oil prices have again increased by at least 2 per cent on fears that the Suez Canal blockage may last for a few weeks. Brent crude was trading higher at $63.04 a barrel by 1:20 pm on Friday after dropping over 3.8 per cent on Thursday. US West Texas Intermediate (WTI) crude was also up 2.1 per cent at $59.78 per barrel.

Meanwhile, Refinitiv data quoted in a Reuters report suggested that more than 30 oil tankers have been waiting at either side of the canal to pass through from Tuesday.

"Aframax and Suezmax rates in the Mediterranean have also reacted first as the market starts to price in fewer vessels being available in the region," shipbroker Braemar ACM Shipbroking told Reuters.

At least four Long-Range 2 tankers that were headed towards the Suez from the Atlantic basin are now likely to be reevaluating a passage around the Cape of Good Hope, Braemar ACM said. It is also worth mentioning that each LR-2 tanker can carry around 75,000 tonnes of oil.

As the situation stands, Egypt's Suez Canal Authority is looking forward to cooperating with the United States in efforts to refloat the stranded container ship that has blocked shipping traffic for over three days. All eyes remain on efforts as each day of delay is adding billions of dollars of losses as far as global trade is concerned.