Why the Suez Canal blockage is an issue for trade
Rebecca Harding, CEO

Even if the 400m-long Evergreen container ship is refloated in the Suez Canal on the neap tide due on the 29th March, there will be a lasting legacy for supply chains, and potentially supply chain finance. How is it that one ship, albeit a mighty one, can disrupt 12% of global trade, 10% of the world’s oil and 8% of the world’s Liquified Natural Gas trade by a desert storm that made it run aground? And why are the consequences likely to be lasting ones for the way the world thinks about trade?

 19,000 ships went through the Suez Canal in 2020, and that was a quieter year because of the Coronavirus pandemic. Volumes of freight through the canal had not fully picked up to their pre-pandemic levels, but even so, Lloyds of London estimates that around $10bn in value terms goes through a day.[1] The route is the shortest one between Asia and Europe, and it is not just oil that goes through – bulk shipping and containers account for around 50% of the traffic.

 This means that there are two potential spillovers from any disruption, however brief, to the flow through the Canal. First, and quite obviously, is the impact on freight itself. Just by way of example, Maersk alone has over 50 ships en route to or in the Suez Canal traffic jam, and a further 15 ships that have been diverted via the Cape of Good Hope, adding at least 30% on to their travel time.[2]  In order to minimise long-term disruption, with every day that passes, there is an increased risk of “blank sailings” – in other words, ships and containers that do not set sail because the containers aren’t full, or the destination won’t be reached or because a port is skipped on a journey.

 There is already evidence that there is a risk of blank sailings increasing.[3] As the likelihood of the Ever Given’s cargo having to be unloaded increases, so to does the risk of increasing numbers of blank sailings. This clearly matters because it disrupts global inventories as goods take longer to get to their destinations, and leaves containers empty on docksides with the supply chains broken until the full effects have worked through.

 The second reason why this matters is because if there are challenges to the shipping system, then there will also be an increase in freight costs. These had already started to rise as a result of the sustained impact of the pandemic; the last week has seen a further upward drift in prices and the result will be inflationary pressure through the global trade system.

The third impact that will be felt by everyone will come from oil prices. So much of the world’s oil is produced in the Middle East, North Africa and Central Asia and these countries use the Suez Canal as to connect with European markets. Oil prices had been falling as the threat of a third wave of Coronavirus in Europe suggested a slowdown in demand. The Suez Canal blockage has had the effect of limiting supplies of oil, so prices have started to drift up again and the longer the Ever Given takes to shift, the more there will be an increase in oil prices.

 Trade and trade finance have been under significant pressure for the last year. Many goods are supplied on a “just in time” inventory basis; the pandemic and the Suez Canal blockage show how fragile this system is – easily disrupted by the whims of political expediency, as in the case of vaccine nationalism, or easily “blown off course” by events. Let’s be clear: this will not affect vaccine supply chains because these predominantly originate in Europe and North America; vaccines have to be transported in refrigerated containers and these tend to be carried by air rather than sea. However, if goods don’t get from Asia to Europe, then components of supply chains go missing and it begins to have a knock-on effect into manufacturing and industrial production, even if the disruptions are only for a few days.

 Trade has just started to recover in volume, if not in value terms globally according to Coriolis Technologies data. However, the prospect of a further disruption lasting weeks will only serve to put upward pressure on prices and downward pressure on volumes. This adds to a general uncertainty that has surrounded trade for the last year and potentially holds off business investment decisions while creating pent-up demand in the global economy.

 At the very least the downside risks to any economic recovery around the world have increased as a result of the incident in the Suez Canal. What is more risky over a longer term, however, is if the trade sector itself does not start to spread the risk of inventory shortages. At the beginning of the pandemic, the challenge was over-reliance on one supplier. Now we are seeing an equal challenge of over-reliance on a few trade routes. The last year has raised many questions for trade, but the one around the sustainability of the current supply chain models is the biggest and remains unanswered.