Article / April 13, 2021

The Suez Canal Blockage: Assessing The Damage

The stability of global shipping lanes is something we often take for granted. The efficiency global trade is so unshakable that we are hardly aware of the immense logistical complexity that is required for goods to arrive at their destination.

All of that changes last month when the Suez Canal, one of the most significant shipping lanes on the planet, suffered an unprecedented setback. 

The massive Ever Given cargo ship and its crew learned the hard way that you can’t fit a two hundred thousand-ton cargo ship into the canal sideways. 

Having wedged itself into a geopolitically vital chokepoint, Ever Given found itself completely stuck on March 23rd

A single boat disrupted global trade by billions of dollars

 

It was odd to think that billions of dollars of goods were stuck behind this guy with an excavator.

Commodity prices swiftly reacted to the world’s most inconvenient traffic jam. 

Oil prices immediately jumped over 4% while global steel markets shuddered at the threat of another supply crunch.

Imagine the grimaces on the faces of executives all along the supply chain.

Reiner Heiken, chief executive of Hellmann Worldwide Logistics, reported to Reuters, “The blockage of the Suez Canal will increase the negative impact on global supply chains in the coming weeks, as the availability of empty equipment, particularly in Asia and Europe, will be affected.”

Connecting Asia and Europe by sea, the Suez Canal facilitates roughly 12% of global trade and between 5% and 10% of global oil and natural gas shipments. 

Unclogging the canal was crucial for the continuity of global trade and for stabilizing commodity prices. The only alternative route to the Suez Canal is an arduous journey around the Horn of Africa. 

The Suez Canal is a brief 120-mile passage while the Horn of Africa route is over 15,000 miles — a difference of 125-fold makes for a logistical nightmare.  

Anyone who has ever found themselves stuck in traffic knows the anxious feelings associated with indeterminate arrival times. 

Time is money, and when unexpected delays throw plans into disarray, there’s often a hefty price tag. 

Amplify that anxiety by orders of magnitude, and you have the Suez Canal blockage — for every hour the Ever Given sat marooned, $400 million worth of monetary losses occurred. 

With the global supply chain finally coming back online after a tumultuous 2020, the last thing global commerce needed was a $9.6 billion per day cork in the Mediterranean bottle. 

The situation sparked a flood of internet memes. The digger spotted in an iconic photo of the Ever Given stuck in the canal enjoyed instant fame.

 

Global trade isn’t something that can just stay blocked. Over six days, some of the greatest engineering minds in the world came together to dislodge Ever Given from its uncomfortable impromptu port. 

March 29th saw success — a Dutch specialist team, a handful of tugboats, and a small army of dredgers managed to dislodge the mammoth cargo ship. 

While celebrations are in short order, the Suez Canal blockage reminds us of a harsh reality for the global supply chain and its implication for commodity prices. 

Global trade stress points remain vulnerable.

 

Thankfully, an army of professionals did manage to dislodge the Ever Given and send it along its original course earlier this month. 

The President of Egypt commented on the matter, “And by restoring matters to their normal course, with Egyptian hands, the whole world can be assured of the path of its goods and needs that are carried through this navigational artery.”

With that strange episode out of mind for most people, we must point out that the Suez Canal isn’t the only significant chokepoint for global commerce.

The Strait of Malacca in Asia sees 15 million barrels of oil per day pass through its waters, comprising roughly 30% of the global energy marketplace. 

The Panama Canal cleaves an entire continent in half and sees over $270 billion per year in global shipping activity. 

The highly contentious region housing the Strait of Hormuz facilitates the largest share of energy shipping globally at over 20 million barrels of oil and petroleum products per day. 

Like a string passing through the eye of a needle, most of the world’s maritime commercial activity inevitably passes through incredibly narrow straits and canals.

Most of these vessels carry important commodities such as timber, oil, and steel. 

Thankfully, these durable goods won’t spoil if left idle for an unexpected week. However, the carefully laid plans involving these goods sour rapidly. 

The Suez blockage exposed a weakness in global supply chains. Still, more specifically, it reveals the pitfalls of globalization in its current state.

We rely on just-in-time manufacturing for reducing production and delivery times for utilizing commodities on delivery. Such convenience allows for seamless continuity of the global supply chain with minimal excess inventory. While the current arrangement is highly capital efficient, existing bottlenecks spell danger for manufacturing when unexpected delays occur.   

The Suez Canal blockage demonstrates the global supply chain’s fundamentally fragile nature and the intense value in manufacturing. While closed for just under one week, the Suez Canal blockage cost tens of billions of dollars in lost revenue and incalculable additional losses for the manufacturing sector. 

In an increasingly tumultuous geopolitical landscape, the likelihood of future supply chain disruptions at crucial maritime chokepoints is high.

A bottleneck implies enormous pressure ready to release

 

The Suez Canal blockage was a serious headache for global manufacturing, but for the average Joe, it was a surprising reminder of how fragile than one may have initially thought. 

The global supply chain is becoming more complicated, and for that reason, the potential for error increases. An event on the other end of the world can dramatically disrupt business on the opposite end, and the Ever Given mishap proves that.

The traffic jam worsened Asia’s shipping container shortage, spoiled goods stuck in transit, and created an embarrassing mess for decision-makers to attend to.

As the global middle class continues to grow and a new commodity supercycle well underway, it’s likely that we’ll continue to hear about supply chain bottlenecks in the coming years.