‘Some risks of the ship breaking’: How the Suez Canal blockage could move from meme to ‘serious obstruction’

The mammoth cargo ship marooned in a busy maritime thoroughfare has spawned lots of viral memes, but has the potential to inflict damage on a global economy that’s still recovering from the shock of the COVID-19 pandemic.

The improbable crisis in the Suez Canal — a major chokepoint for consumer goods and natural gas shipments — involves the 430-yard long Ever Given, and is now entering its fourth day. The Japanese firm that owns the ship is working frantically with Egyptian authorities to rectify a problem that’s put upward pressure on global shipping rates and energy prices.

Thus far, the problem appears isolated in nature, with the current base case being a transitory boost to consumer and commodity prices. And in the meantime, the situation has become grist for the gallows humor of social media users.

Yet the situation could become more perilous than it appears the longer the disruption persists. On Friday, German insurance giant Allianz estimated the blockage could cost global trade at least $6 billion per week, a price tag that could spiral higher if it drags on for days, if not weeks.

For months, the resurgence in global demand has already put a strain on worldwide container shipments, Mark Szakonyi, executive editor of IHS Markit’s Journal of Commerce, told Yahoo Finance in an interview on Friday. “The amount of imports going into Western countries from Asia is staggering,” he said.

“So this is really kind of the last thing that’s needed” for supply chains, but he warned that European companies would likely bear the brunt of a Suez Canal slowdown.

“That’s not to say that there’s not some North American cargo coming through the Suez Canal…but this is mostly a European play,” Szakonyi added.

A prolonged closure “is a serious obstruction to global trade,” Ayham Kamel, Eurasia Group’s practice head for the Middle East & North Africa. He pointed out the Suez Canal does brisk business, with nearly 12% of global trade traversing the waterway, and 30% of all daily container volumes.

“The direct effect from shipping delays is likely to be focused on a limited number of goods. This would only prove more material if the incident takes weeks to resolve,” Kamel added. “Moreover, there is also a risk that markets could be pricing in risk premia on uncertainty, which could be felt more widely beyond the immediate goods affected.”

Stranded container ship Ever Given, one of the world's largest container ships, is seen after it ran aground, in Suez Canal, Egypt March 26, 2021. REUTERS/Mohamed Abd El Ghany

Stranded container ship Ever Given, one of the world’s largest container ships, is seen after it ran aground, in Suez Canal, Egypt March 26, 2021. REUTERS/Mohamed Abd El Ghany

Thousands of vessels like the Ever Given transport around 60% of seaborne trade, representing more than $4 trillion worth of goods per year, according to data from the World Shipping Council (WSC).

To be certain, some of those liners could find alternative routes. However, the Suez is considered strategically important because its geographical location opens up the shortest sea route between Asia, the Mideast, Europe and the U.S. The WSC estimates that the Suez cuts travel time by as much as 43% — meaning alternate shipping routes could take days or weeks longer for cargo vessels to navigate.

“The alternative route passing around the southern cape of Africa is considerably longer and more expensive; for example the canal cuts the journey distance between the Gulf and UK by around half, and from elsewhere in Asia by even more,” Eurasia’s Kamel wrote this week.

Current options to dislodge the Ever Given include removing some of its cargo to make it less heavy, or using tugboats to move the gigantic vessel. However, it’s unclear whether those efforts will be successful.

“While we believe and hope the situation will get resolved shortly, there are some risks of the ship breaking,” JPMorgan’s Marko Kolanovic wrote in a note to clients on Thursday.

“In this scenario, the canal would be blocked for an extended period of time, which could result in significant disruptions to global trade” — including soaring shipping rates and commodities prices, which may nudge up global inflation, he said.

In the meantime, the global recovery from the COVID-19 outbreak threatens to amplify the impact of supply chain disruptions.

While analysts at Capital Economics wrote this week that the temporary jump in producer costs is impacting demand, they warned that the Ever Given’s grounding “could hardly have come at a worse time,” given that freight rates on Asia and Mediterranean routes have tripled since mid-November amid rebounding demand for traded goods.

Eurasia points out that air cargo is less of an alternative given the deep cuts to international flights because of COVID-19, as well as the resulting changes in global trade patterns that have made it tougher for ports to process shipments.

“An opening of the canal by early next week would be especially benign. A few days disruption involves some marginal cost to energy shipments but is on balance not that material,” Kamel wrote.

“However, closure of the canal for a few weeks would create additional shipping costs that would be reflected in” higher crude oil prices, he added — which are already projected to go higher because of rebounding global demand.

Javier David is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek

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