The world watched for a week as a cargo vessel as long as New York City’s Empire State Building blocked the Suez Canal. What viewers may not have realized, however, is they were witnessing just how vulnerable the global supply chain really is.
About 12 percent of the world’s trade flows through the Suez Canal, a 120-mile manmade channel carved in Egypt between Africa and Asia, connecting the Mediterranean Sea and the Red Sea when it opened in 1869 as a way to shorten the maritime route between Europe and the western Pacific. While air transport has reduced reliance upon the canal for global trade over the decades, a significant part of the global supply chain still travels through the channel.
Blocking the global supply chain
To understand what a blockage of the Suez Canal means, you first must understand what the global supply chain represents, an appreciation for the difference between procurement vs supply chain. Put simply, procurement is the process of companies getting the goods needed to produce their products, while the supply chain is the process of getting those products to consumers. In the case of the Suez Canal, it plays an important role in the world’s supply chain to get products to consumers, either as raw products or as components that businesses use to produce products.
On March 23, the Ever Given, one of the world’s largest container ships, became wedged sideways in the Suez Canal during a sandstorm that battered the ship and greatly reduced visibility to navigate. As a result, the slender passageway became blocked to the 50 or so ships each day that pass through it, grinding global trade traffic to a halt as experts considered ways to refloat the massive vessel and reopen the canal.
On March 29, a team of tugboats, with some help from Mother Nature’s high tides brought on by a full moon, cleared the lodged Ever Given, setting the cargo ship free. After a week of stalled traffic through the Suez Canal, the passage was reopened. While some ships chose to take the longer 3,500-mile route to the western Pacific around the southern coast of Africa’s Horn of Good Hope, others remained idle for days and still, others waited to start their treks to avoid the resulting maritime traffic jam.
Cost of blockage
It was a costly accident. Some estimates suggest as much as $9 billion a day in trade that flows through the Suez Canal was lost, which would mean as much as $63 billion in trade was disrupted during those days and billions more in the global supply chain continued to be disrupted as shipping schedules were thrown off by the backlog of cargo vessels waiting to make their way through the channel. While this was not the first time the Suez Canal was blocked by a cargo ship, the two previous times were for only short periods and caused minimal disruption to trade and traffic.
Port authorities noted that 367 vessels were waiting to pass through the canal, requiring at least three days to work through the backlog. Many of those ships were carrying cargo like livestock, oil, and consumer goods like clothing, furniture and car parts.
The impact on prices was swift, most notably as the cost of oil and aluminium increased in response to the blockage. And some other goods experienced temporary price hikes, although most of those increases are expected to subside by the summer.
The vulnerability of the global supply chain revealed
The blockage caused by the enormous cargo ship highlighted a particularly troubling reality to those familiar with the Suez Canal. The canal’s infrastructure that has served the world for more than 150 years is vulnerable to accidents and other incidents. As global shipping vessels have grown in size, the Suez Canal has not kept up with the increasing mass of ships. The channel has been widened since its opening, including the most recent $8 billion expansion project in 2015.
But many maritime and trade experts agree, and this latest incident helps illustrate, that the Suez Canal needs widening to accommodate the larger, more efficient cargo ships traveling through its narrow passageway. There are plans for further canal expansion over the next decade, providing deeper and wider channels that will accommodate larger ships and more tonnage that could likely transport oil tankers. However, the question is will more expansion and widening be enough to handle global carriers.
The canal is expected to see more use in the coming years, as cargo shipping traffic is expected to nearly double by 2023 with two-way navigation through the channel also reducing waiting times, according to the authority that manages the canal.
As the best shipping route for goods between Asia and Europe, a blockage of the canal delays raw materials from India, petroleum from the Middle East, and also manufacturing pieces from China. The impact on the U.S. is relatively smaller because the country relies on the majority of its overseas trade shipments from Asia to the West Coast.
Europe is the region most impacted by the blockage of the canal, while companies located in Asia also suffered from the delay in shipments from Europe but also from the delay in shipping containers returning empty to the region for scheduled hauls. Those delays have a ripple effect on the global supply chain because they stall the ability to ship goods around the world, according to an analysis of the global trade impact of the Suez Canal blockage outlined in an article in Forbes.
How to protect the global supply chain
The analysis identified a wide range of industries affected by the blockage in the U.S. and across the world, including groceries, retail stores, auto, and home supply stores, semiconductors, plumbing, heating, and air conditioning suppliers, surgical and medical equipment, hardware stores, and warehousing and storage.
The Suez Canal’s blockage underscored the need for businesses to come up with an alternative supply chain that uses technology to develop a more geographically dispersed network that can meet global trade demands to avoid the inevitable disruptions that can occur from unexpected events, the Forbes article quoted a Dun & Bradstreet general manager as saying.
The analysis called on business leaders to assess their critical suppliers to determine if they are located in the regions most impacted by problems in the Suez Canal to identify alternative suppliers in other regions not affected who may be able to step in to maintain the necessary supply chain and mitigate any possible future shipping delays.
Straining an already struggling supply chain
The cargo ship accident that blocked the canal only exacerbated the ongoing problems with the global supply chain caused by the COVID-19 pandemic. Much of the world’s trade was impacted last Spring when the virus began to spread, forcing countries to shut down most businesses and activities to reduce the impact on health and public safety.
Activity gradually had been increasing to pre-pandemic levels before the blockage occurred, but many industries were still recovering from the gap in trade activity created by the world’s response to COVID-19. But many ports remained congested as crews have worked restricted schedules during the pandemic, leaving some ships to wait to have their goods unloaded. That’s another reason for the earlier supply chain disruption caused by a shortage of goods that had adversely impacted manufacturers.
While U.S. consumers saw an increase in gas prices as a result of reduced shipments during the blockage, only about 7 percent of the crude distributed around the world was impacted by the incident. Instead of experiences increases in the number of dollars per barrel for oil, the increases turned out to be only in pennies per barrel, according to USA Today.
For the most part, U.S. consumers were not nearly as affected as those in European countries, like Germany, Spain, and Great Britain.