Michael Bell, professor at the University of Sydney and maritime specialist, describes the consequences of the blockade of the Suez Canal, which was not bad news for everyone.
In the early hours of March 23, the container ship Ever given was diverted from its route by high winds as it crossed the Suez Canal. At 400 meters long, the Ever Given is longer than the canal is wide, and the ship got stuck between the two shores, completely blocking traffic.
Dredgers, excavators and tugs worked frantically to free the ship, which ended up being refloated on March 29. About 10% of world maritime trade passes through the canal, which allows ships to shorten the journey between Europe or the American east coast on the one hand and Asia on the other by several thousand kilometers, which represents a saving of almost a week in travel time.
Normally, around 50 ships pass through the canal every day, divided almost equally between bulk carriers, container ships (like Ever Given) and tankers. During the blockade, some shipping companies have considered to divert their ships to Africa rather than wait for the canal to be cleared.
This event, which came on top of the Covid-19 pandemic, highlighted the fragility of international supply chains and is likely to accelerate the changes already underway in the global economy.
Good news for oil tankers
The blockage had a notable effect on the flow of oil.
About 600 barrels of crude oil are shipped from the Middle East to Europe and the United States via the Suez Canal every day, while around 850 barrels per day are shipped from the Atlantic Basin to Asia, also via the Suez Canal. If the SUMED pipeline, which runs parallel to the Suez Canal, allowed some of the crude to continue to circulate between the Mediterranean and the Red Sea, this episode is likely to encourage certain European and North American refiners to replace the oil from the Middle East by oil from other sources, from which delivery does not generally pass through the canal. Likewise, Asian refiners will be tempted to replace North Sea crude oil.
There is growing interest in transporting crude oil around the Cape of Good Hope, which extends transport time from the Middle East to Europe and North America by seven to ten days - increasing demand for very large oil tankers.
While the diversion of crude oil is unlikely to have much of an effect on oil prices in general, with inventory levels currently high, this blockage comes at a good time for tanker owners, as charter rates for these vessels are at an all-time low due to depressed global oil demand and the aftermath of pandemics. Owners of tankers carrying refined petroleum or LNG can expect a similar increase in demand for their vessels and hence in charter rates.
A reminder of the fragility of the supply chain
For commodities such as petroleum, liquefied natural gas, coal, and iron ore, there is global demand and global supply that must balance. However, one source can often be replaced by another. This means that the blockade of the Suez Canal will affect the spot price of commodities locally and the charter rates of the vessels that carry them, but the trade will continue.
It is different for products transported by container ships such as the Ever Given. These products tend to be very differentiated and more difficult to replace. The blockage of the Suez Canal will undoubtedly cause shortages of specific products around the world, either because they will not reach their destination on time or because manufacturers will run out of key inputs or components.
Shortages will remind manufacturers of the fragility of global supply chains; they could therefore seek to reduce their dependence on certain sources, in particular those which are distant and depend on container transport.
Global supply chains are already shrinking
Technological advancements associated with digitization and automation make manufacturers less dependent on a large, skilled workforce that can only be found in certain parts of the world. Production is becoming more mobile and can therefore move closer to the markets served.
This more mobile production, along with the continued miniaturization of some products (for example, flat-screen TVs that are getting flatter and flatter) and the gradual digitization of objects such as books and manuals, are gradually shrinking the chains of companies. global supply and reduce freight kilometers, measured in terms of value or volume. Major disruptions such as the Covid-19 pandemic and the blockage of the Suez Canal can only accelerate this development.
This trend predates the pandemic and the recent lockdown. It translates into a number called the global maritime trade-to-GDP multiplier, which measures the share of global economic activity that depends on maritime transport.
After the global financial crisis of 2008-09, this figure fell below 1% on average. This means that a 1% increase in global GDP now results in an increase of less than 1% in global maritime trade.
Who will pay?
The cost of the disruption caused by the blockade of the Suez Canal will weigh heavily on Ever Given insurers. The vessel is owned by the Japanese company Shoei Kisen Kaisha and is chartered by the Taiwanese company Evergreen. The hull and the machines are insured in the Japanese marine insurance market, but so far damage to the vessel appears minimal.
The main costs are the loss of revenue for the Suez Canal authority while the canal is closed to traffic, and the losses incurred by the cargo owners of the many vessels stranded by the blockade. Depending on the length of the blockage, these costs can give rise to huge compensation claims. Third party compensation claims are covered by the London P&I Club, which is reinsured by the International Group of P&I Clubs.
In the long run, however, the blockage can be a good thing. If it offers another push to shorten supply chains, the benefits to the global economy and the environment will certainly outweigh the cost to insurers.
Michael Bell, Professor specializing in Ports and Maritime Logistics, University of Sydney
This article is republished from The Conversation under Creative Commons license. Read theoriginal article.