Boater Suppression: Why the Suez Canal Blockage is so Costly
And the importance of global trade routes
Happy Macro Monday!
At the end of last week, a cargo ship known as the Ever Given got stuck in the Suez Canal, making waves on Twitter (but unfortunately not in the canal) and bringing up some very important questions regarding global supply chains and the economics of transportation.
Owned by Evergreen Marine, a Taiwanese firm, the Ever Given is a cargo ship larger than the Empire State Building, coming in at 200 feet wide and 1,300 feet long, that lodged itself diagonally across the Suez Canal at 7:40 last Tuesday morning.
According to the Suez Canal Authority, the boat lost steering control during rough winds and dust storms, causing it to wedge itself in the canal. Mechanical failures have been ruled out, but a full investigation is still underway.
The Cost of Delays
The Suez Canal is an artificial waterway in Egypt that connects the Mediterranean Sea to the Red Sea through the Isthmus of Suez, separating the continents of Africa and Asia. It is a key cargo route, connecting trade from Asia to Europe, with the International Chamber of Shipping estimating that at least $3 billion worth of just cargo alone passes through the canal each day.
Lloyd’s List, a London founded journal providing maritime intelligence, estimates that blockage of the Suez Canal caused by the vessel is costing approximately $400 million per hour from the delay of goods.
Daily, the Suez Canal sees roughly 93 vessels pass through the waterway with westbound traffic worth approximately $5.1b and eastbound traffic worth about $4.5b.
Ships have already had to re-route around the Cape of Africa, which is a much more expensive and risky voyage that takes an additional two weeks.
The global supply chain was already immensely strained due to the impacts of COVID-19, and the effects of the block at the Suez Canal will only further strain the current supply chain shocks and drive up prices.
When it comes to re-floating the ship, time is of the essence — as Time Magazine noted, tides will shift next week, potentially stranding the ship for multiple weeks if not re-floated before the shift, and costing tens of billions of dollars in delays.
The Importance of Global Trade Routes
The Suez Canal sees an estimated 12% of global trade each year, and moves approximately 5-10% of the world’s seaborne oil. Hundreds of ships are expected to experience delays caused by the blockage, as the canal serves as a main cargo route.
Emphasis on the importance of global trade was prevalent in media almost exactly one year ago, at the outbreak of the pandemic, where we initially experienced global supply chain shocks that drove up the prices for goods coming from China. As many companies rely on supplies from China, dependent industries were hit with supply-shocks before the virus was even present in the United States. When the virus spread, these shocks followed and created rigidities across global trade.
As countries entered lockdowns, cargo ships were stranded at sea and freight-boats were barred from entering ports. With manufacturing plants shutdown, more cargo ships could not be quickly built to deal with increased demand for crucial products, and combined with the doubled-effect of lockdowns barring ships from entering ports, prices were driven up, pinning the cost of freight shipping at an all time high.
The already-strained global supply chains will be rocked by the Suez Canal blockage. Impacts of delays and costliness of re-routing will be experienced globally through increased prices and prolonged shortages of cargo ships.
In addition, the shifting market that has emerged from the pandemic has highlighted discrepancies between luxury and normal consumers, and when consumption shifts to that of luxury goods, we see an increase in imports, which further drives up demand for things like cargo ships.
Why do we even use boats?
A lot of people (myself included) took to the internet to meme* about why we would even need to rely on boats in the age of technology (*as in joke, I know why boats are important). Amidst this, I saw some genuine questions regarding why cargo ships are so important to global trade and supply chains, and how much more efficiency they offer compared to overseas shipping via air transport.
So why do we use boats and not just planes and trains? Linear shipping is still the most efficient mode for the mass transportation of cargo goods. According to the World Shipping Council, a single large containership can carry over 200,000 container loads of cargo per year, with enough space to carry several large warehouses of goods in just one journey. The large capacity of cargo ships makes shipments relatively cheap compared to air transport — Freightos Group estimates that a $195 ocean shipment could cost the upwards of $1000 if sent by air.
While cargo planes are the faster and more reliable mode of transportation, faster does not always mean more economically efficient. The substantially lower payload of aircraft, combined with high costs of usage, means that they are overall less economically efficient for the mass transportation of cargo than via cargo ships. Of course, there is still an optimal usage of cargo planes (or else they would not be used), but the main point is that they are not a perfect substitute for cargo ships.
Effect on oil
As I mentioned above, the Suez canal moves 5-10% of the worlds seaborne oil. The supply shocks caused by transportation delays have driven up the price of oil, and at the end of last week, the market rallied from a previous low.
On Wednesday, Vortexa, an oil and gas analytics platform, tweeted out that 13 mn bbl carried by 10 crude tankers were already expected to be affected, with the canal experiencing a 50-tanker rate of back log.
While prices rebounded in light of shortages, there is a general consensus that the effects of the blockage are not likely to have substantial long term effects for oil, but the increased prices driven by supply shocks could linger for a while longer.
Most concern for the oil industry is still in regards to the overall demand for oil, with lockdowns in Europe and lingering effects in the U.S. driving demand and numbers down. With a good majority of the working population still operating remotely, many places still not open for tourism, and overall uncertainty about when we will “return to normal,” demand for oil has seen better days.
At the time of writing this, the boat is still stuck in the Suez Canal, and could be there for a few more days, or even weeks.
In the United States, we are very privileged with quick delivery through services like Amazon, and it can be easy to neglect the impacts and implications of delays globally, where shipping already follows traditional, slower standards.
Even if the ship were to be re-floated tomorrow, we are still certain to see prices driven up as a result already incurred delays. With inflation already on the horizon, it is likely that these supply shocks will only fuel the flames in the short-run, as the combination of supply chain disturbances coupled with the expected household return to consumption will add another unexpected layer to the mix.
I would like to stress that, once again, we should not expect to see double digit numbers, nor is the Fed to blame for this one (unfortunately). The supply shocks will inevitably lead to heightened prices, and with demand already expected to increase, we could see the effects of demand-pull inflation surface sooner, not only in the United States, but elsewhere across the global supply chain.
As for my thoughts on the matter —
hey Allison! We sent you a DM on Twitter... We're Pixel Wassies :) sorry for being offtopic, but we're too smol to understand Macro