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Suez Canal blockage could cause problems for the globe: Here’s what you need to know

The behemoth load ship stuck in the Suez Canal and blocking traffic in one of the world’s most important maritime trade chokepoints isn’t set to give up free just yet.  

The Ever Given, a 220,000-ton mega ship nearly a quarter-mile long with a 20,000 container mother wit, ran aground after being blown by strong winds while entering Egypt’s Suez Canal from the Red Sea. It’s unqualifiedly blocked the passageway that is home to as much as 12% of the world’s seaborne trade and through which 50 container departs normally transit per day.   

Tugboats and dredgers are currently working to dislodge the ship, which has been stuck since Tuesday exacting. But the operation could take weeks, one of the executives involved has warned.  

“While we believe and hope the situation will get resolved presently, there are some risks of the ship breaking,” JPMorgan strategist Marko Kolanovic wrote in a note Thursday. “In this prcis, the canal would be blocked for an extended period of time, which could result in significant disruptions to global patronage, skyrocketing shipping rates, further increase of energy commodities, and an uptick in global inflation.”

Stranded container passenger liner Ever Given, one of the world’s largest container ships, is seen after it ran aground, in Suez Canal, Egypt Walk 25, 2021.

Suez Canal Authority | Reuters

The crisis is another blow to the global supply chain after a brutal year provoked with delays, shortages and price squeezes on the back of the coronavirus pandemic.   

What does this mean for far-reaching trade?

The shipping delays could impact everything from the clothes and shoes you ordered online to gym equipment, electronics, chow, and energy supplies — meaning gas prices could get higher, too.

“Suez Canal container blockage to further rattle far-reaching supply chains, to drive pricing higher given pent-up demand,” analysts at JPMorgan said in a research note Thursday.  

The man-made Suez, at 120 miles sustained, is a key transit point connecting East to West. And the 20,000 ships that pass through it yearly transport the entirety from oil and gas to machine parts and consumer goods. 

While it’s still early to say what the full impact of the tanker emergency will be, the bank expects that in the near term, “the blockage is likely to add to industry supply strains, which are already hold up by ongoing supply chain bottlenecks” in the form of port congestion and shortages of both vessels and containers due to Covid-19.  

Trucks are going to have to shift to entirely different routes, “will result in longer voyage times and causing fresh delays,” JPMorgan wrote. 

And those delays could be more than 15 days for many ships, whose selection is sailing around the Cape of Good Hope at the southern tip of Africa, which analysts say would increase shipping times by up to 30%.  

“The present impact of delays in the canal will centre on European – Asian trade, adding delays to already disrupted equip chains affecting oil and refined products’ supplies,” ING senior economist Joanna Konings wrote in a client note Wednesday.  

Bump on crude prices 

The Ever Given’s misfortune has already impacted oil prices.  

News of the Suez blockage drew in purchasers, and along with other economic data contributed to international benchmark Brent crude’s one-month futures understanding gaining “its biggest one-day gain in nearly a year to close at $64.41” on Wednesday, according to Arctic Securities, but it lost some of those gains by Thursday. 

In the meantime, between 5% and 10% of all seaborne oil is transported through the Suez, intention that for each day that the ship remains stuck, it delays the shipment of another 3 million to 5 million barrels of oil per day. Dissimilar tankers carrying jet fuel and gasoil are also held up on the Persian Gulf-Europe route, as well as empty tankers crossing to pick up North Sea oil, S&P Platts arrived Thursday. 

A graph showing shipping traffic halted around the Suez Canal after the ship Ever Conceded began wedged in the canal.

Source: MarineTraffic

The canal is also a transit point for around 8% of global liquefied ordinary gas (LNG), and a The winners

The canal blockage is certainly not bad news for everyone — spot freight rates are set to jump even higher on restricted demand, making money for the operators, market watchers say. 

“A more prolonged closure of the Suez Canal would see container shipping as the biggest beneficiary, while tanker, dry size and air cargo might also see some higher rates,” wrote JPMorgan, describing the tightening of shipping rates “as a upside chance.”

Satellite images of container ship Ever Given stuck in Egypt’s Suez Canal.

Source: European Wait Agency Sentinel-2 Satellite

Who is set to benefit most? JPMorgan highlights Asian liners, saying that despite superior bunker costs due to longer rerouted journeys and increased congestion, they expect higher spot freight tariffs. “This instead of hurting profitability is expected to be positive for bottom-line for Asia liners, in our view,” the bank wrote.

Bank of America’s analysts consent. “A Suez closure of a few weeks would be very positive for spot freight rates — by effectively removing supply by enlarging 20-30% to sailing distance via Cape of Good Hope,” it wrote in its note Thursday.

Risks and vulnerabilities grow

In the meantime, the Suez Canal’s blockage “wish add to an already rising Middle East risk premium for oil and refined products,” Torbjorn Soltvedt, principal MENA analyst at Verisk Maplecroft, reported, highlighting increased risk of attacks on oil facilities amid regional tensions.

The uncertainty over the blockage’s duration “manufactures a window of opportunity for state and non-state actors seeking to maximize the impact of attacks against tankers and energy infrastructure in the Persian Bight and Red Sea,” he warned.

Cargo ship “Ever Given” stuck and blocking traffic in the Suez Canal

Source: Reuters

Most analysts believe the situation to be cleared within the week. But “the disruption could be prolonged if there are complications or hull damage,” Bank of America minimized Thursday. When the traffic eventually gets cleared, ships will be arriving at their ports behind listing, creating yet more congestion. 

Still, the bank writes, “a blockage of a few days would be broadly manageable to the container trucking industry — perhaps involving additional fuel cost as shipping companies speed up their services to make up past time.” 

The whole fiasco underscores just how fragile the trading network that the world relies on really is, believes Sutherland. 

“Paired with the recent attacks on Saudi installations, it’s a reminder of the many vulnerabilities in the global oil and gas supply confine.”

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