• Andrzej Tkacz

What have we learnt from the Suez Incident?

Imagine the Empire State Building, lying horizontally in the Suez Canal and blocking this one of the key shipping passages in the world. Weird, right? This illustrative metaphor might sound preposterously, but it depicts accurately the seriousness of the incident that occurred in March 2021 in Egypt. Ever Given, a 400-meters-long vessel with a deadweight tonnage of about 200,000 tons has become famous not only for being one of the largest existing watercrafts in the world, but also for shutting off a connection between the Mediterranean Sea and the Red Sea for the longest time since 1975. For 6 days heavy machinery was struggling to re-float the vessel, and suppliers were impatiently calculating costs and wondering how severe this obstruction would be for the global trade and supply chains.

Picture: Maxar Technologies via AP

What really happened?

On 23rd March, the Ever Given ship, operated by the Evergreen Marine, was knocked off its course by turbulent winds and accidentally grounded in the middle of the Suez Canal, across the water passage. By 28th March, at least 369 ships were unable to enter the canal from west and east, creating a massive queue on the Mediterranean Sea and in the Gulf of Suez. Fortunately, the stuck container ship was partially moved a next day, and eventually fully re-floated that afternoon.

The whole operation successfully finished within a week, and the canal could be reopened. Luckily, no containers were required to be removed from the vessel, which would significantly complicate whole action and prolong the obstruction “by days, even weeks” (as Peter Berdowski, the chief executive in the team appointed to re-float the ship, said). The whole situation was still very unfortunate - Ever Given was the biggest vessel in the convoy, and it was stuck in the worst possible part of the canal, narrow and with only one lane.

Comparison of the traffic in the Gulf of Suez on 21 March and 25 March; source: the European Space Agency

What does the incident mean for the global economy?

The most obvious and annoying consequence of the blockage are massive delays in deliveries around the world, especially in a chain between Asia and Europe. Lloyd’s List estimated that each hour of the Suez Canal blockage meant a delay of goods worth $400 million, which is equivalent to almost $10 billion worth delays a day. However, the container cargo represents only 26% of total traffic through the canal, hence the actual value of delays is likely to be much higher.

The Suez Canal is not an ordinary maritime passage. It plays a key role in the global trade, and its importance in the supply chain may seem shocking. The Suez Canal handles around 12% of all global trade – more than 50 ships use this shortcut every day to avoid additional 8-10 days of sailing around the Africa. Since the majority of the global retail trade relies on maritime transport, literally any company could be affected by the “Ever Given” incident.

European industries are the ones that could be especially harmed. European assembling companies may face shortages in deliveries of the components imported from Asia. The US supply chain should not experience any hardships, since it operates mostly through the Pacific Ocean. But even in European case a six-day delay should be absorbed by the shipping industry and suppliers, and only industries with already visible shortages might feel the pinch.

The blockage has not significantly affected the oil market. James Williams, an energy economist at WTRG Economics, claimed that eve few days of delays in oil delivery would not considerably affect the prices. The Suez Canal traffic accounts for no more than 7% of seaborne oil, so the obstruction would need to take weeks to wreak havoc on the oil market, especially in the light of pretty weak energy demand due to the pandemic. In a regional view, some European countries that rely on oil shipments through the canal might note higher oil and gas prices.

Should it had taken weeks to re-float the ship, the disruption would have been much more severe. Lots of containers would not arrive to Europe, and the time of turnaround for the vessels would increase gratuitously. Moreover, ships already stuck in the Gulf of Suez could not reroute and circumnavigate Africa due to their high congestion. New transports would have to choose a much longer route, which would escalate a current problem of delays (according to Sea-Intelligence, about 75% of all container ships sailing from Asia to Europe arrived late in February). Additionally, after reopening of the canal, suddenly released vessels would arrive at ports all at once, causing another unnecessary jams and delays. All these negative effects would exacerbate consequences of the Covid-19 pandemic and all restrictions that trapped many merchant ships and delayed deliveries of some components, e.g. semiconductors and rare-earth materials.

Lessons from the unfortunate incident

The Suez incident will likely bring minor consequences to the global trade. However, it gives us an important warning message: a heavy reliance on global supply chains does entail serious risks. We should ask ourselves what are the limits of the globalisation (if there are any) and think how a complex interdependence of sectors around the world may ravish the economy. The just-in-time strategy, constant optimisation of stocks and deliveries provide significant savings. However, too much of the good thing can lead to a serious trouble. Signs of this risk were revealed during the first wave of the coronavirus pandemic, when majority of countries experienced shortages of face masks and protective gloves. Private and public sectors failed to provide basic tools to cope with the pandemic. This is an extreme but topical example, and it highlights the problem of real-time-deliveries based on global supply chain and shipping web. The whole economic mechanism runs smoothly and cheaply, until a small and seemingly insignificant cog falls off. And in the light of excessive optimism and weak protective measures, this single cog, or a single ship, could make the whole system fall apart.

Andrzej Tkacz