The blockade of the Suez Canal cargo ship could create problems for the world

The shipwrecked container ship Ever Given, one of the world’s largest container ships, was seen after it ran aground in the Suez Canal, Egypt, on March 25, 2021.

Suez Canal Authority Reuters

The star cargo ship stuck in the Suez Canal and blocking traffic at one of the world’s most important maritime trading points has yet to be released.

Ever day, a 220,000-ton mega-ship nearly a quarter-mile long with a capacity of 20,000 containers ran aground after being blown away by a strong wind as it entered the Egyptian Suez Canal from the Red Sea. The passage, which is home to as much as 12% of world trade by sea and through which 50 containers pass daily, is completely blocked.

Tractors and excavators are currently working to remove the ship that has been stranded since Tuesday night. But the operation could take weeks, one of the executives warned.

“Although we believe and hope that the situation will be resolved soon, there are certain risks that the ship will break down,” JP Morgan strategist Marko Kolanovic wrote in a note on Thursday. “In this scenario, the channel would be blocked for an extended period of time, which could result in significant disruptions in global trade, rising shipping rates, further growth in energy goods and rising global inflation.”

The crisis is another blow to the global supply chain after a brutal year riddled with delays, shortages and pressure on the backs of the coronavirus pandemic.

What does this mean for global trade?

Delivery delays could affect everything from clothes and footwear you order online to gym equipment, electronics, food and energy supplies – which means gas prices could be higher.

“Blockade of Suez Canal containers to further shake global supply chains, to increase prices given the urgent demand,” analysts at JPMorgan said in a research note Thursday.

The artistic Suez, 120 kilometers long, is a key transit point connecting East with West. And 20,000 ships that transport everything from it annually, from oil and gas to machine parts and consumer goods.

Although it is too early to say what the full impact of the tanker crisis will be, the bank expects that in the short term “the blockade is likely to increase supply tensions in the industry, already hampered by persistent bottlenecks in the supply chain”. a form of port congestion and shortages of ships and containers due to Covid-19.

Ships will have to be diverted to completely different routes, “will result in longer voyage times and causing further delays,” JPMorgan wrote.

And those delays could last more than 15 days for many ships, whose alternative is sailing around the Cape of Good Hope on the southern tip of Africa, which analysts would say would increase shipping time by up to 30%.

“The immediate impact of the canal delay will focus on Euro-Asian trade, adding delays to already disrupted supply chains affecting the supply of oil and refined products,” ING senior economist Joanna Konings wrote in a client note Wednesday.

Impact on crude oil prices

The Ever Given accident has already affected oil prices.

News of the blockade in Suez attracted buyers, and along with other economic data contributed to Brent crude oil’s one-month futures contract gaining “the biggest one-day gain in nearly a year on Wednesday, closing at $ 64.41,” according to Arctic Securities, though, lost some of those gains by Thursday.

Meanwhile, between 5% and 10% of all offshore oil is transported by Suez, meaning that every day a ship is stuck it delays the delivery of another 3 to 5 million barrels of oil per day. Several jet fuel and gasoline tankers are also staying on the Persian Gulf-Europe route, as well as empty tankers crossing to pick up oil from the North Sea, S&P Platts reported on Thursday.

A chart showing shipping traffic stopped around the Suez Canal after the Ever Given ship began to wedge into the canal.

Source: MarineTraffic

The canal is also a transit point for about 8% of global liquefied natural gas (LNG), and a long-term disruption could disrupt flows primarily to the European market.

Any pricing effect is likely to be brief, however, says Peter Sutherland, president of Houston-based energy investment firm Henrietta Resources LLC.

“It won’t have a lasting impact on prices, but it will help provide support ahead of the OPEC + meeting,” Sutherland told CNBC.

“The risk premium in the oil markets is likely to be short-lived, but the channel’s backup still managed to shift the narrative in the market.”

Winners

Channel blockade is certainly not bad news for everyone – freight spot price tariffs are set to jump even further to inadequate demand, earning money for operators, market observers say.

“With the longer closure of the Suez Canal, container shipping would be the biggest beneficiary, while tankers, bulk cargo and air cargo could also see some higher rates,” JPMorgan wrote, describing the tightening of shipping tariffs “as a major risk.”

Satellite images of the Ever Given container ship stuck in the Egyptian Suez Canal.

Source: European Space Agency Sentinel-2 satellite

Who will benefit the most? JP Morgan points to Asian ships, saying that despite higher bunker costs due to longer diverted trips and increased congestion, they expect higher freight spot prices. “It is expected that this, instead of harming profitability, will be positive for the lower end for Asian ships, in our opinion,” the bank wrote.

Bank of America analysts agree. “The Suez closure of a few weeks would be very positive for the cargo price spot – by effectively removing the offer by adding 20-30% of the sailing distance across the Cape of Good Hope,” he wrote in his Thursday note.

Risks and vulnerabilities are growing

Meanwhile, the blockade of the Suez Canal will “add to the already rising risk premium for the Middle East for oil and refined products,” said Thorbjorn Soltvedt, MENA’s chief analyst at Verisk Maplecroft, noting the increased risk of oil attacks amid regional tensions.

Uncertainty over the duration of the blockade “creates an opportunity for states and non-state actors to maximize the impact of attacks on tankers and energy infrastructure in the Persian Gulf and the Red Sea,” he warned.

The cargo ship “Ever Given” got stuck and blocked traffic in the Suez Canal

Source: Reuters

Most analysts expect the situation to clear up within a week. But “the disorder could be prolonged if complications or damage to the hull occur,” the Bank of America wrote on Thursday. When the traffic is finally cleared, the ships will arrive in their ports with a delay, creating an even bigger crowd.

Still, the bank writes, “the blockade of a few days would be widely managed in the shipping container industry – which might involve additional fuel costs as shipping companies speed up their services to make up for lost time.”

The whole fiasco underscores how much of a trade network the world relies on, Sutherland says.

“Paired with recent attacks on Saudi installations, it is a reminder of the many vulnerabilities in the global oil and gas supply chain.”

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