What the ship blocking the Suez Canal means for global trade

In the early morning hours of March 23rd the container shipAlways givenwas thrown off course by strong winds on its way through the Suez Canal. With a length of 400 meters, the Ever Given is longer than the width of the canal, and the ship has been firmly wedged in both banks, completely blocking traffic.

Dredgers, dredgers and tugs are working feverishly to free the ship, but operations can take weeks. according to the head of one of the rescue teams. About 10% of the world’s maritime trade goes through the canal, which allows ships to cut the journey between Europe or the American east coast and Asia by thousands of kilometers, saving a week or more of travel time.

Under normal circumstances, around 50 ships pass through the canal every day, almost equally divided between bulk carriers, container carriers (like the Ever Given) and tankers. While the blockade continues, some shipping lines are up in view of Directing ships around Africa instead of waiting for it to clear.

In addition to the COVID-19 pandemic, this event highlighted the fragility of global supply chains – and is likely to accelerate the changes that are already underway in the global economy.

Good news for oil tankers

The blockage disrupts important energy businesses, but probably not dramatically as there are alternative routes and sources should the blockage last for a long time.

Around 600,000 barrels of crude oil are shipped from the Middle East to Europe and the USA via the Suez Canal every dayEvery day around 850,000 barrels are shipped from the Atlantic basin to Asia via the Suez Canal. While the SUMED pipeline, which runs parallel to the Suez Canal, continues to flow crude oil between the Mediterranean Sea and the Red Sea, European and North American refineries will want to replace Middle Eastern oil with oil from sources that normally do not go through the canal . Asian refineries will also want to replace the crude oil in the North Sea.

Interest in transporting crude oil around the Cape of Good Hope is growing, adding seven to ten days to shipping time from the Middle East to Europe and North America, and increasing the demand for extremely large crude oil carriers.

While the diversion of crude oil is unlikely to have much of an impact on oil prices in general as inventories are currently high, it comes at an opportune time for crude oil tanker owners as charter rates for such ships have been depressed due to global demand for oil and the Consequences of pandemic lockdowns. Owners of tankers carrying refined oil or LNG can expect a similar increase in demand for their ships, and therefore charter rates.

A reminder of the fragility of the supply chain

For raw materials such as oil, LNG, coal and iron ore there is a global demand and a global supply that must be balanced. However, one source can often be replaced by another. This means that the blockage of the Suez Canal will affect the spot price of the goods on site and the charter rates for the ships they are carrying, but trading will continue.

The situation is different for products that are carried by container ships such as the Ever Given. These products are usually very differentiated and more difficult to replace. The blockage of the Suez Canal will undoubtedly lead to bottlenecks in certain products around the world, either because they don’t get to their destination on time or because manufacturers lack key inputs or components.

Bottlenecks will remind manufacturers of the fragility of global supply chains, and they may consider how to reduce their reliance on certain sources, especially those that are far away and rely on container shipping.

Global supply chains are already shrinking

Advances in technology related to digitization and automation are making manufacturers less dependent on large, skilled workers that can only be found in certain parts of the world. Production is becoming more mobile and can therefore be located closer to the markets served.

More mobile production as well as the increasing miniaturization of some products (e.g. flat screen televisions, which are becoming ever thinner) and the increasing digitization of things such as books and manuals are gradually shrinking global supply chains and reducing freight kilometers, measured in terms of value or volume. Major disruptions such as the COVID-19 pandemic and the blockade of the Suez Canal can only accelerate this development.

This trend precedes the pandemic and the current blockade. This comes from a number known as the global multiplier between trade and GDP at sea, which measures how much the world’s economic activity depends on shipping.

After the 2008-09 global financial crisis, that number is fell below 1% on average. This shows us that a 1% increase in world GDP now leads to an increase in world maritime trade of less than 1%.

Who pays the price?

The cost of the disruption caused by the blockage of the Suez Canal will weigh heavily on the Ever Given insurers. The ship belongs to the Japanese company Shoei Kisen Kaisha and was chartered by the Taiwanese line Evergreen. The hull and the engines are insured in the Japanese marine insurance market, but at the moment the damage to the ship seems minimal.

The main costs are lost earnings for the Suez Canal Authority while the Canal is closed to traffic and losses to cargo owners in the many ships held up by the blockade. Depending on how long the blockage lasts, these can lead to large insurance claims. Third party claims are covered by the London P&I Club, which is reinsured by the International Group of P&I Clubs.

However, in the long run, blocking can be a good thing. If it provides another push to shorten supply chains, the benefits to the global economy and the environment will surely outweigh the costs to insurers.

Michael Bell, Professor of Ports and Maritime Logistics, University of Sydney

This article is republished by The conversation under a Creative Commons license. read this original article.

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