Suez Blockade | Six day war on world trade

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The Suez canal made headlines around the world on 23rd March, 2021. One of the busiest waterways in the world, Suez was blockaded by a 400 meter long container ship Ever Given for six days. The crisis ended when finally the large ship was able to move, thanks to dredging operations and tugboats. Ships getting sideways due to strong current or wind is not an uncommon occurrence. But this happening in the Suez created an unprecedented difficulty in some business sectors, along with the international economy. Probably since the closure of the canal from 1967 to 1975, this is the first time the Suez canal made headlines around the world.
Ever Given: why so important?

Owned by Japan’s Hoei Kisen Kaisha, Ever Given was chartered by Taiwan’s Evergreen Marine Corporation. It’s a massive container ship; 400 meter long and has the capacity to carry 20,000 containers. At the time of the incident, 18,300 containers were on board.

Suez Canal Authority (SCA) states that the wind speed during the incident was around 40 knots. However, there are other probable causes, which needs further investigation. It could be technical or human errors. 14 tug boats were used to pull out Ever Given. The 2,24,000 ton vessel was finally pulled free after a king tide at 3.05 local time. By this time around 450 ships were queuing on both ends of the canal, 200 in the mediterranean, 200 in the red sea and 50 more in the artificial great bitter lakes.

Economic impact of Suez blockade

Suez is responsible for 12% of global cargo freight carrying an estimated 1 trillion USD worth of goods per year carried by more than 18 thousands transits. Every day around 50 ships pass through this 120 mile long canal, carrying freight worth 3 to 8 billion USD between Port Said and Port Suez. European and North American countries rely on the canal to access the oil and gas stores of the Middle East. Around one million barrels of oil, along with 8% of the world’s liquefied natural gas goes through the Suez canal. It’s a place where the loss of a minute is equivalent to millions of USD. In the age of super tanners and giant container carriers, canals are often a dangerous route to steer. The Panama, for example, is not suitable for many super sized ships. The Suez being deeper and wider, can contain larger carriers but unexpected gusts of wind makes it difficult for the captains. In 2013, the canal was blocked in the same fashion, but that lasted only for a few hours.

Suez and world trade

Suez has always been a source of revenue for Egypt. It is estimated that 2% of Egypt’s 300 billion USD GDP is dependent on the Suez. The blockage cost Egyptian government 14 to 5 million USD per day. Before the pandemic, Egypt received an estimated 5.6 billion USD revenue from Suez crossing ships per year. This canal is mostly used for cargo transport, though warships also use the canal to shorten their sea routes.

The ship itself is one of the largest container carriers in the world. The stranded ship was holding up about 9.6 billion of trade each day as it stranded many ships on both ends of the canal. That equates to $400m and 3.3 million tonnes of cargo an hour, or $6.7m a minute.

It’s difficult to gauge the extent of trouble caused by Ever Given. Experts estimate that the blockage did cost global trade between 6 to 10 billion a week and reduced world annual trade growth by 0.2 to 0.4 points. The cost of cargo shipping to and from the Middle East and Asia has jumped to 2.2 million USD, an increase of 47%. This is because the other waterway through South Africa’s Cape of Good Hope takes 8 more days and extra 3500 miles to reach the desired destination. 8 extra days for cargo shipping means rising costs thanks to fuel.

Countless businesses, supermarkets, import-export companies and retailers are facing problems since their goods were stranded in the Suez. The delay has prompted them to order more goods by air freight to meet the demands on time. Air freight costs three times more than sea routes. Oil price, interestingly, rose after the blockade and plummeted when the Suez was back in operation. Smooth operation of the canal is vital to maintain global supply chain and market demands. Prices will rise and businesses will be disrupted. Some ships carry goods that can’t be held on for long. Food grains and medicines specially are particularly vulnerable to disruption.

The delay at the Suez has created legal complexities regarding insurance and compensation. The ship owners argue that the chargers should take responsibility for the cargo owners. insurers claim will create a chain of claims between Ever Given’s owner, this insurers on the other hand will meet demands from the owners of the goods. The blockage at the canal is likely to reduce the global insurer’s profit. The coronavirus pandemic has hit the insurance sector hard already. Prices of marine reinsurance are likely to shoot up which may cost hundreds of millions of USD. Due to the delay, goods owners are likely to demand compensation.

The insurers will have to bear the most burden. For example, the ship itself is insured and amounts to something between one and two hundred millions. Lots of things depend on how worse the accident is. In this case, Ever Given’s propeller and parts of the lower body could be damaged. If the costs are shared among all stakeholders, there will be long legal procedures which may take years to complete. In 2012, the cruise ship Costa Concordia was stranded, resulting in damage payment of 1.6 billion USD. Plus there are costs of the dredging operations.

Global supply chain management disruption

In the past few decades. Global industry has become overly reliant on global supply chains. Instead of stockpiling large amounts of goods, companies are now depending on just-in-time-manufacturing according to limited costs. The Internet has created a window of opportunity and the global shipping network makes it easy to send products in a comparative quick time to anywhere in the world. This means, importers aren’t very interested in stockpiling large amounts of goods. Many are not interested understandably to spend money inorder to stockpile the warehouses while a continuous global supply chain is in place.

However, global supply chains proved to be less robust than previously regarded. During the ongoing covid crisis, millions of masks, gloves, medical equipment and medicines were ordered but very few actually reached in time. Interdependencies created fragility. Short term interest in trade overshadowed the preparation for large disruptions. Now as the delay has been made, chartered will have to pay extra for perishable goods and other vital imports.

Suez Canal Authority, due to its own regulatory policies, demanded that the master of the vehicle is responsible for any trouble. Though ship owners stated that two Suez Canal Authority pilots were on board during the incident. The Dutch dredging company SMIT Salvage will also demand millions for its dredging operations.

Many prior bookings were cancelled, and freight rates increased. Some european ports were overflowing with containers. Many ships discharged containers wherever possible. These goods often took long delays to reach the destinations. Various authorities expect it will be till June when all the supply chain disruption created will be properly addressed.

The Suez authority has claimed a whopping 916 million USD payment for the damage created by Ever Given. On 13th April, 2021, the container ship was impounded by Egyptian authority. It’s yet to see where the legal battle goes. The incident exposed the vulnerability of world trade against a gust of wind, funny after so much achievement by human civilization which claims to have defeated the power of nature.

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