Suez Canal blockage supply chain disruption impacts growing

The container ship Ever Given (IMO 9811000) - en route to Rotterdam - ran aground on 23 March while transiting the Suez Canal. At the time of writing, the canal authorities had halted transit of all other vessels through the canal. The ship was reported to have lost power amid high winds and deviated off course, although a spokesperson for the ship's technical manager stated that there were no reports of mechanical or engine failure as cause of the accident. The Suez Canal Authority announced on 25 March that navigation through the canal was being temporarily suspended until the Ever Given was refloated.

The current blockage of all vessel traffic through the Suez Canal has lasted long enough to have significant supply chain costs on the economy, especially in Europe, the Mediterranean, the Middle East, Eastern Africa, and the Indian Subcontinent. Vessel arrival time at ports have already been missed and the expected cargo deliveries are late. In the context of recent container port congestion, caused by COVID-related supply chain changes, this is not very remarkable so far. However, this disruption affects every type of cargo and ship using the Canal, not just containerized cargo.

Impacts on retail and manufacturing sectors are being noted in Europe, with the spread of the delays quickly expanding to other regions due to delayed arrival times on those longer trade routes. Even North American businesses will soon be impacted with missed arrivals of vessels scheduled from Asia and the Indian Subcontinent coming across the Atlantic Ocean via the Suez Canal.

With over 200 ships awaiting transit, including carrying over 700,000 twenty-foot equivalent units (TEU) of container cargoes, the volume and variety of imports and exports affects 1000s of businesses in the Northern Hemisphere. With almost 25 percent of one month's maritime import and export volumes on key trade routes now halted enroute, the mitigation costs are rising quickly.

Buffer stocks used to supply factories, retail distribution centers, and warehouse inventories are being drawn down and alternative restocking options are extremely expensive and scarce. The follow-on effect in the global supply chain is even less effective vessel capacity, meaning equipment needed a week or a month from now is not going to be as available as expected prior to this disruption. In the face of continued strong global shipping demand, rates will increase further and shippers will be paying more. And with inventories already running below desired levels in many sectors, such as retail, this added strain on the global trading system will extend the time it takes for businesses to be able to achieve their desired levels of inventories, and they will only do so at a higher cost.

The impacts of disruptions like this can continue to expand the longer it lasts, so attention to the end of the blockage is warranted. The recovery time and economic impacts following a return to Canal operations will depend on the duration of the blockage, as the Canal has limited extra capacity for daily vessel transits due to the remaining one-way portions of the route. If the disruption is to last much into next week, vessels will increasingly divert to the much longer and more expensive 'Cape Route' south around Cape Horn, which adds 10-30 days to a voyage, depending on origin and destination of the vessel. Ultimately, a long-term disruption to the Suez Canal would have impacts limited by the Cape Route, and Panama Canal route alternatives for some voyages.

Posted 26 March 2021 by Paul Bingham, Director, Transportation Consulting at S&P Global Market Intelligence