One Large Ship Blocking Suez Canal Halts Billions in Trade
This past week saw one of the busiest waterways and most important trading passages in the world blocked for days. An enormous container ship stopped all traffic from passing through the Suez Canal in Egypt. The halt in trade amounted to billions of dollars per day and shows how fragile the world economy is.
Three Days Blockage in Suez Canal Causes Billions of Dollars in Trade Standstill
On Tuesday, March 23rd, a single enormous container ship the Ever Given became stuck within the Suez Canal. In the first three days it was lodged in this critical trade waterway, literally billions of dollars worth of trade became delayed at the two sides of the crucial waterway. One research firm StoneX estimated that over 150 individual ships were delayed and awaiting their chance to go through the 120 mile long canal. Photos of the jam were sobering.
This canal is critically important to global commerce. It carries approximately 12 perecent of all ocean going trade today. The Associated Press reported from Lloyd's List that every day the canal is blocked interupts over $9 billion in goods. Information from StoneX research company revealed that 24 of the ships waiting to pass through were carrying crude oil, 16 of them were hauling liquified petroleum or liquified natural gas, and 15 of them were refined product tankers.
Alternative Travel Route Options Are Limited
Making the trade pileup worse was the fact that there are few other choices available for the ships that were stuck waiting for a chance to go through the Suez Canal. Kpler a commodity data firm shared with their clients in a note that:
“As delays continue, shippers will have to broach the unpalatable decision of whether to make a U-turn and head for the Cape of Good Hope or wait it out in the Red Sea and Mediterranean.”
The problem with rerouting the vessels is that it would greatly lengthen their journeys to the final destinations, thereby increasing the costs. While going through the Suze Canal to Amsterdam only requires 13 traveling days running at 12 knots, it takes 41 days for them to traverse the Cape of Good Hope down on Africa's most southern tip as this graphic demonstrates:
Heavy Winds Cause Ship to Be Stranded
The Ever Given ship's course was disrupted when heavy winds caused it to become stuck horizontally in the critical canal. A number of different tugboats were dispatched to its location along with a Smit Salvage team that was brought in to help the vessel caught while traveling on its way from China to Rotterdam. The vessel's technical manager Bernhard Schutle Shipmanagement stated that:
“Dredging operations to assist refloating the vessel continue. In addition to the dredgers already on site a specialized suction dredger has arrived at the location.”
Despite these efforts, two attempts on Thursday and Friday were unsuccessful in freeing the Ever Given and releasing the flow of critical trade. The problem was made worse by the size of the massive carrier. At over 1,300 feet in length and 193 feet in width, the ship weighs in at over 200,000 tons. With one of the ship's ends pressed into one of the canal's sides, the other end reached almost to the other bank.
The situation was made more critical because of the amount of traffic that typically flows through the canal. Last year in 2020 around 19,000 ships transitted the canal, bringing the average to 51.5 vessels each day per the Suez Canal Authority.
Blockage Causes Oil Prices to Spike
Another side effect of the Suez Canal blockage pertained to oil. Oil prices leapt around six percent Wednesday alone giving the Brent crude and West Texas Intermediate futures their biggest daily gain since November. Prices as of Thursday came back down with fears of demand falling alongside ongoing lockdowns in Europe. Yet the supply chain had already been strained thanks to the coronavirus disruptions that were present. JPMorgan warned its clients in a note that:
“While it remains premature to assess the full impacts arising from the incident, our channel checks indicate within the near term, the blockage is likely to add to industry supply strains, which are already hampered by ongoingg supply chain bottlenecks (port congestion and vessel/container shortages) caused by COVID-19 as liners re-route current voyages to alternative routes which will result in longer voyage times and causing further delays.”
Concerns that Suez Canal Might Have Needed Weeks to Unblock
Concerns were also centered on oil prices that had jumped on the fears that the enormous container ship which was backing up the Suze Canal could require weeks to free and might tighten global oil supplies. Some maritime historians were concerned that it could take a long time to fix the blockage problem. On Friday afternoon Brent crude had risen to just over $63 per barrel.
One previous Merchant Mariner Sal Mercogliano warned on Thursday that he feared it could take a longer amount of time to move the 220,000 ton ship than some were thinking. He warned that:
“One of the most ominous things we are seeing, right now, is the parent company, Evergreen, has started to route two of their vessels around Africa. That's telling us this may take a lot longer than they were initially expecting.”
It was a sandstorm coupled with strong winds that caused the ship to veer off course according to officials. The containers atop the deck functioned like huge sails in the windy conditions knocking the vessel off course.
Blockage Puts Global Supply Chain in Flux
The blockage had put the world supply chain in “a state of flux” according to Mercogliano. NBC reported that each day around $3 billion in goods passed through the Suez Canal. Over the weekend in excess of 150 ships were stuck waiting to move through the passageway. Extended delays might have threatened inflation. Mercogliano warned in an interview that:
“Most importantly right now, the ports that were expecting to receive these vessels are not receiving these vessels, and you're going to have a situation very similar to what we're seeing in the U.S. right now with ships lined up off our ports, because demand was pent up, in this case, supply is being held back.”
According to Mercogliano, the extended route around the Cape of Good Hope means that, “You're talking about adding 3,500 miles on a route from Singapore to Rotterdam, you're talking about 12 to 14 days.” It is a result of the considerably longer journey involved with not beign able to pass through the 120 mile long Suez Canal that connects the West to the East. Mercogliano warned that oil prices might not be the only ones to feel the impact with possibly factories next. The economic recovieries of the EU and Asia were already lagging. He explained that:
“There may be production plants, automobile factories, for example, will have to shut down, waiting to get parts. We don't live in a society today where we store a lot of parts.”
Fortunately for the state of global trade rescue teams were able to float the Ever Given free from its wedged position on Monday. The few days blockage did demonstrate how vulnerable the world is to disruptions in critical waterways like the Suez Canal. It reminds you why gold makes sense in an IRA. There are a number of different Gold IRA storage options available today.