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Suez Canal blockage adds more pressure to already strained supply chains
Published in The Saudi Gazette on 27 - 03 - 2021

On March 23, container ship Ever Given ran aground and became lodged across the Suez Canal, blocking passage through a vital waterway for global trade. It is unclear when the ship will be refloated and the canal will reopen, raising the prospect of further delays to already strained supply chains, particularly for European manufacturers and automakers, a credit negative, according to a Moody's report.
Depending on how global and regional volume is calculated, Moody's estimates that the canal's temporary closure affects around 10%-15% of world container throughput. The implications of delays for global supply chains would, under normal circumstances, not be a big issue.
However, very high consumer and industrial demand, a global shortage of container capacity and low service reliability from global container shipping companies already causing long delays, has made supply chains highly vulnerable to even the smallest of external shocks. In that context, the timing of this event could not have been worse.
The vessel is a so-called ultra-large container ship with a capacity of 20,100 twenty-foot equivalent units (TEUs), spanning 399 meters long and 59 meters wide. It is owned by Japan's Shoei Kise Kaisha and leased out to Taiwanese container ship company Evergreen. The canal, which connects the Mediterranean to the Red Sea, is part of the Asia-Europe trade lane and provides the shortest sea link between the two continents.
Ships that were about to enter the canal will soon need to decide whether to turn back and use the alternative, longer route around the Cape of Good Hope. That would add around 10 days to their journey compared with the main route that includes the Suez Canal.
The effect of delays on individual sectors is hard to quantify because of the uncertainty over how long the canal will be blocked. However, we believe that Europe's manufacturing industry and auto industry, including auto suppliers, will be most affected.
This is because they operate "just-in-time" supply chains, meaning they do not stockpile parts and only have enough on hand for a short period, and source components from Asian manufacturers.
Even if the situation is resolved quickly, port congestion and further delays to an already constrained supply chain are inevitable. Alternative modes of transportation are more or less out of the question, because airfreight capacity is already tight owing to the coronavirus pandemic and rail transportation between China and Europe is very limited.
For container shipping, the effect is credit neutral. For carriers diverting their vessels around Africa instead of going through the Suez Canal fuel costs will increase. However, spot freight rates will most likely increase or at least stop decreasing from their currently very high levels.
As a reference, around 50% of the Asia-Europe volume is shipped at contracted rates that offer little flexibility to offset increased costs due to external events.
From a sovereign perspective, we do not expect significant disruption to Egypt's (B2 stable) balance of payments as a result of this incident. Suez Canal receipts amounted to almost 2% of GDP on average before the pandemic, providing a significant contribution to total current account receipts.
While declining to 1.3% of GDP during the acute phase of the pandemic, Suez Canal receipts have proven more resilient than other cross-border services such as travel receipts. A temporary disruption will not materially change our expectation of a return to pre-crisis canal receipts as global trade recovers.
Despite the canal's importance especially for hydrocarbon products transported by sea, we expect that other Suez Canal-reliant exporters, including oil-exporting countries in the Middle East, are unlikely to be affected in the absence of an extended disruption.
Meanwhile, Ranjith Raja, head of MENA Oil & Shipping Research at Refinitiv, commented: "As of this morning until the end of March, there are at least 137 ships that are expected to be reaching either side of the Suez for the canal transit.
"This is in addition to the ships (around 200) that have already reached and have been waiting since Thursday. As more ships update their tracking (AIS) destination and ETA, further updates will become available.
"Despite ongoing efforts to unblock the channel, we're looking at the mother of all traffic jams shipping-wise over the next week or so. It's inevitable that we'll see vessels choosing to divert via the southern tip of Africa adding to costs in terms of time and fuel.
"This also includes having to contend with the Piracy Zone, off the coast of Somalia, where ships need to factor in a security risk assessment to pass through or take the longer route around."
Meanwhile, Rystad Energy's Head of Gas and Power Markets Carlos Torres Diaz said that the LNG shipments are affected by the blockade at the Suez Canal.
"It's not often that LNG vessel traffic is disrupted and the current blockade at the Suez Canal can be considered as a major obstacle for LNG flows to Europe, it is a rather unusual event.
"The Suez Canal is one the world's busiest trade routes, and this blockade is having great implications on global trade, including LNG, as shipments to Europe from one of the world's largest LNG producers — Qatar — essentially all pass through there.
"The Canal is the main route for LNG cargoes heading from the Middle East to Europe and for some cargoes heading from the Mediterranean to Asia. During 2020, close to 260 LNG cargoes were sent from Qatar to Europe via the Suez Canal, or an average of five per week.
"Data shows that currently there are three loaded cargoes in the Suez Gulf waiting to cross to the Mediterranean that were originally expected to arrive at European regasification terminals during the first week of April.
"There are at least another two in the Arabian Sea that are headed to the Suez Canal. These cargoes have a combined capacity of more than 1 million cubic meters of LNG or close to 0.5 million tons that cannot be delivered to their European buyers.
Dredges are already in place trying to dig out the huge Ever Given vessel to liberate the route. But according to preliminary reports from rescuers, the canal could even remain blocked for several weeks." — Agencies

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