Suez Canal/supply chains: stuck ship sinks trade flows

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Taiwan’s Ever Given container ship has made history by running aground and blocking the Suez Canal. The waterway has closed only five times since it opened 151 years ago. A stranded vessel longer than the canal is wide has wedged a stopper in the fastest seaborne trade route between Europe and Asia. That will be a blow to just-in-time supply chains.

The blockage may look like a bizarre one-off, but think again. Decades of pared-down trade delivery times and costs mean vessels keep getting bigger. The Ever Given may hold more than 20,000 containers (twenty-foot equivalent units), but there are even larger ships due for delivery from 2023. Depending on how low these sit in the water, there is a chance that they could get stuck in the Suez too.

About 50 ships pass through the Suez every day. Half are container vessels. The block will raise costs and delay deliveries. The alternative southern route, around the Cape of Good Hope in South Africa, adds days on the water. Delays could run from an extra nine days for a container vessel to double that for an oil tanker, estimate experts VesselsValue. That could cost more than $427,000 for the average container vessel’s journey.

Journey time in days using Singapore to Rotterdam as an example route at a charter cost at $48,000/day. The additional time translates into an extra $427,200.  Shippers have rallied with rising freight rates. Evergreen share price has rise 4 fold since March 2020  Air cargo rates are down from last spring. Air freight rates ($/kg) have fallen from March 2020 highs of over $10 to around 4

Alternatives to seaborne transport for intercontinental journeys are limited. Air freight provides a route but the cost is much higher per kilogramme. Only high-value items, or very urgent deliveries, are worth sending at the cost of $2 to $3 per kilogramme, points out Berenberg. A container ship costs just 4 cents. Both have risen above historical averages, particularly containers. Short term rates between China and Europe have quintupled in a year.

Share prices of both Evergreen and Maersk, two of the world’s biggest shippers, have soared. Even so, their earning valuation multiples have collapsed. Markets seem to believe freight rates will fall back later this year.

No matter. With so many supply chain glitches occurring for everything from automotive chips to medical supplies, expect companies to order more in a bid to ensure inventory cushions. The Suez Canal gridlock is not the only reason supply chains will stretch.

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