Unblocking of Suez Canal marks tension in world trade

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Already away from the main Suez Canal channel, Ever Given leaves behind several weeks or months of disruption in a global economy where the pandemic revealed both the strengths and weaknesses of world trade.

“This is not a time for uncorking,” said Peter Aylott, director of policy at the U.K. Chamber of Shipping. “We could still be days away from the canal being completely free.”

The reopening of the canal ushers in a new wave of stresses on supply chains: the intertwined network of ships, ports, trucks, trains and warehouses that transport goods from a factory on one side of the globe to a retail shelf or production line on the other.

The rise of e-commerce means greater consumer demand for speed, increasing pressure on transportation and driving freight rates to record levels.

Even a temporary traffic jam on a major artery like Suez is problematic because the world’s nearly 6,000 container ships operate on a schedule, with a finite number of pieces of equipment to deliver. They cannot be relocated where demand arises or move quickly out of regions where economic activity is slow.

Capacity can be modified by adjusting vessel speed, but also with a more blunt tool: canceling sailings that are no longer possible or economically viable. The Suez incident may trigger many of these.

This leaves cargo owners – and all the logistics industries that handle imports and exports – at the mercy of container carriers.

Domino effect impacts containerized equipment

“The metaphorical dominoes have already been toppled,” says Lars Jensen of SeaIntelligence Consulting. “We will continue to see developing congestion problems in Europe as cargo arrives, blank departures resulting from the severe delay of many vessels, as well as the deteriorating equipment situation.”

In the short term, ports from Europe to Asia are preparing to be inundated with goods held up near Egypt for nearly a week.

The port of Rotterdam, Europe’s largest, counted 59 container ships stuck in the Suez congestion heading there late last week, although it was not possible to estimate when they would arrive. In Spain, the ports of Algeciras, Barcelona and Valencia were reviewing arrival schedules and preparing contingency plans to increase working hours to manage the unpredictable flow of ships.

The disruption extends beyond container shipping: dozens of tankers, gasoline, natural gas and other vessels were halted by the blockade, hampering normal supply and delivery routines in the energy and chemical sectors. Before the Ever Given ran aground, some 2 million barrels of crude oil and petroleum products transited the canal every 24 hours.

Strained ports

In the short term, the gridlock may hamper efforts by European gas buyers to replenish stocks depleted by winter demand. This may offer U.S. gas exporters the opportunity to grab market share, according to Andy Weissman, managing director of EBW Analytics.

Freight rates for bulk carriers, used to transport grain and metals may also remain elevated. The Baltic Dry index recently hit an 18-month high amid strong Chinese buying of corn and soybeans and rising demand for metals.

Meanwhile, a Chinese logistics executive warned that the impact on global trade could persist as backlogs in Europe worsen.

One ship versus a 747

Ports already struggle to handle normal shipping volumes because of the pandemic, and will now have to cope with many delayed ships arriving all at once or in quick succession, said Max Wei, general manager of international business at Speedaf Logistics Ltd.

At best, it will take a month or more to sort out the congestion, he said.

With sea freight drying up, importers are looking for other modes, even if they are more expensive.

Vivian Lau, a Hong Kong-based logistics executive, says the surge in demand for airfreight will continue even after the Suez logjam is resolved. Online shopping and a shortage of available containers are among the reasons why sellers and buyers will continue to struggle.

“Over the weekend I was trying to find some 747s,” said Lau, vice president and group general manager of Pacific Air Holdings. “I was able to find one, but I couldn’t find a few.”

In a sign of that demand, Abu Dhabi’s Etihad Airways will temporarily convert a fifth Boeing Co. 777-300ER passenger jet to cargo service.

While the pressure on air cargo was already occurring without the Suez blockade, Lau sees another legacy of last week’s events: more debate over reshaping supply lines.

“We can’t sit in one part of the world assuming that things are going to run like clockwork and that we don’t need to hold any inventory because they will arrive ‘just in time,'” he said. “The Suez Canal blockade is just another reminder.”

Is rail an alternative to ships?

DB Cargo board member Sigrid Nikutta said rail offers another option when obstacles arise.

“During Covid, we have seen that trains can go through borders where roads were closed and we see it right now, when the sea lane is closed trains can go ahead,”

The Suez-related turmoil may spread beyond Europe and Asia

Charlotte, N.C.-based Premier Inc. helps more than 4,000 hospitals manage their purchasing and supplies. Last year, the huge increase in demand led to shortages of items such as gloves, gowns and masks. While crisis-level shortages have eased, they have left U.S. hospitals and suppliers with less stock on hand and more sensitive to further supply chain setbacks.

“For many, many, many products, there is no safety stock in the channel,” said David Hargraves, senior vice president of supply chain at Premier.

Suez’s delays are just the latest in a cascading series of events that will delay a key input for plastic medical equipment: resins. The company has warned member hospitals to prepare for “a greater number of short-term or sporadic shortages,” Hargraves said.

Source Bloomberg

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