EXPLAINER: Suez Canal block could hit product supply chains

The cargo ship blocking the Suez Canal is holding up traffic that carries nearly $10 billion worth of goods every day, so a quick clearing of the logjam is key to limiting the economic fallout.

Efforts continued Thursday to dislodge the Ever Given container ship and restore traffic on the critical man-made waterway that connects the Mediterranean to the Red Sea and provides a shipping shortcut between Europe and Asia.

HOW VITAL IS THE CANAL TO SHIPPING?

About 10% of all global trade flows through the 120-mile-long canal, which allows tankers and container ships to avoid a long trip around the southern tip of Africa.

The iconic shipping journal Lloyd’s List estimates that goods worth $9.6 billion pass through the canal every day. Lloyd’s says about $5.1 billion of that traffic is westbound and $4.5 billion is eastbound.

About one-fourth of that traffic is on container ships –- like the one that is currently burrowed into one side wall of the canal. Lloyd’s says more than 50 ships traverse the canal on an average day, carrying 1.2 billion tons of cargo.

WHAT EFFECT WILL THIS HAVE ON SUPPLY CHAINS?

When it comes to shipping goods from Asia to Europe, there are virtually no alternatives such as rail or truck transportation, said Sharat Ganapati, an economics professor at Georgetown University. The blockage will delay a range of parts and raw materials for European products such as cotton from India for clothes, petroleum from the Middle East for plastics, and auto parts from China, he said.

“The fact that you have the most pivotal node in the trading network being blocked is going to have important welfare effects around the world,” said Woan Foong Wong, an economics professor at the University of Oregon.

There will be less direct impact on the United States, which receives most shipments from Asia on the West Coast. Still, imports from Europe may be delayed, and the blockage will prevent empty shipping containers from being returned to Asia, adding to a container shortage caused by rising demand for consumer goods during the pandemic.

“If you get a bump in one place, that is going to percolate through the system,” Ganapati said. “It is going to take a while to get things un-gummed up.”

HOW WILL CONSUMERS BE AFFECTED?

It’s possible that U.S. consumers will feel some impact if shipping is disrupted for more than a few days. Finished products from Asia to the United States go over the Pacific. However, some components for products that are assembled in Europe and shipped to the U.S. could be delayed by the canal closure.

Mark Zandi, chief economist at Moody’s Analytics, said the canal blockage likely won’t have much impact on the U.S. or global economies unless it drags on for weeks or months.

It may push up oil prices, “but we are not talking dollars on the barrel, we are talking pennies on the barrel,” Zandi said.

Germany’s economy could suffer, though, if the blockage delays the shipment of auto parts to that company’s large car manufacturers, Zandi said.

And Spain, Italy, and France could see higher gas prices because they rely on oil shipments through the canal, Ganapati said.

WHAT ABOUT OIL SHIPMENTS?

About 1.9 million barrels of oil a day go through the canal, according to Lloyd’s. That’s about 7% of all seaborne oil. The closure could affect shipments of oil and natural gas from the Mideast to Europe. S&P Global Platts Analytics said about 1 million barrels of crude and 1.4 million barrels of gasoline and other refined products flow from the Middle East and Asia north through the canal to Europe on the average day.

Jim Burkhard, who heads crude oil research at IHS Markit, said the impact on the global oil market will be limited if the canal is cleared soon. Energy demand is still weak due to the pandemic, and the Sumed pipeline has unused capacity to move oil around the canal, from one end near Alexandria, Egypt, to a terminal near the Red Sea.

“If this were to last a month, there are other options — you can sail around Africa. Of course, that would add cost,” Burkhard said. “If this ship is moved in the next week, it will be a footnote in history when it comes to the oil market.”

The price of benchmark international crude rose after the blockage, but prices retreated Thursday. Analysts attributed the price drop to an industry group’s report of large U.S. inventories and concern that pandemic-related lockdowns in Europe will further dent demand for energy – outweighing concern about the stuck ship.

COULD OIL-RELATED PRODUCTS BE SLOWED?

Shipments of Europe-bound refined petroleum products such as gasoline and jet fuel also go through the canal, and they will be delayed. Burkhard said refineries in Europe could be pushed to temporarily increase production to pick up the slack, Burkhard said.

Tankers using the Suez carry 8% to 10% of the world’s liquefied natural gas, according to research firms. Wood Mackenzie analyst Lucas Schmitt said only a few LNG shipments were near the canal when the blockage occurred.

“We don’t expect major bottlenecks unless the situation drags on,” Schmitt said. He added that the timing of the incident — it’s spring, when LNG demand typically eases — means it will have less impact on prices than recent delays at the Panama Canal had. Those delays caused LNG shipping rates to surge, according to data from S&P Global Platts Analytics.

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