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Blockade in Suez Canal hits global economy like a stroke

Berlin, Zurich The ongoing blockade of the Suez Canal, along with other disruptions in global supply chains, is becoming a problem for the global economy, which is still ailing from the pandemic. Companies in Europe in particular will be hit hard.

“This is a low blow for the global economy,” says Mark Szakonyi, “the blockade of the Suez Canal comes at the worst possible time.”

The global supply and value chains have been under enormous pressure for months, reports the analyst at the American market and data analysis company IHS Markit in Washington.

Above all, he is keeping an eye on the bottlenecks at large seaports, the shortage of containers and the rise in freight costs in maritime shipping. “The beginning recovery of the world economy is facing strong headwinds”, predicts Szakonyi.

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Businesses’ operating costs would rise, and inflationary pressures would grow with them. “There will be a little slower growth and perhaps a slight upward pressure on prices,” admitted US Federal Reserve Chairman Jerome Powell.

Fear of traffic jams in Europe’s ports

The new “Suez Crisis” is not the only brake on the supply chains of the world economy, which are trimmed for “just in time”. In addition, there are delivery failures due to extreme weather events – be it the frost period in Texas, which hit the petrochemical industry in particular, or the drought in Taiwan, which is now threatening the semiconductor industry, which is already struggling with bottlenecks.

The fire in a chip factory in Japan, the delivery disruptions due to the corona pandemic and the trade war between the USA and China have also thrown the sand in the gears of the global economy.

Many industrial preliminary products are affected by the delivery problems, which is particularly troubling for the German economy. “The already faltering maritime supply chains between Asia and Europe threaten to come to a complete standstill. The longer the closure of the Suez Canal lasts, the greater the risk of supply bottlenecks in German industry, ”said Holger Lösch, Deputy General Manager at the Federation of German Industries. As soon as the blockade is resolved, traffic jams will arise in Europe’s ports.

Freight costs explode

A current BDI sentiment from the sea-loading industry criticized the stagnant container shipping from China to Europe and back shortly before the blockade of the Suez Canal. “Europe is hardest hit,” confirms IHS Markit expert Szakonyi.

Cargo ships wait at the entrance to the Suez Canal

The blockade in the Suez Canal leads to a traffic jam on the busy waterway. Here cargo ships are waiting to enter the canal.

(Photo: AP)

According to a survey by IHS Markit among purchasing managers, Germany as a trading and industrial nation is much more affected by delivery delays than the USA and the average for the rest of the euro zone (see graphic).

“The freight costs from Asia to Europe are about five times as high as in the opposite direction,” reports Philip Beblo, an expert in property and business interruption insurance at Allianz’s AGCS division. This is mainly due to the strong demand for high-tech goods, which are often essential components for German industry.

“The European economy is now very dependent on supplies from Asia,” states the Allianz expert. Most of the European economy would be able to cope with the delays if the blockade lasted only 14 days. The specialist information service Lloyd’s List estimates that the Suez blockade holds up goods worth around ten billion dollars a day.

The longer the blockade continues, the longer it will take for the ships’ congestion to clear. The calculation is simple: Last year, an average of 51 ships per day passed through the Suez Canal. According to the World Shipping Council, the canal’s maximum throughput is 106 ships per day.

The Egyptian canal authority currently has a total of 320 ships that are stowed in front of the canal, but more are added every day. If the waterway were only closed until Monday, it would take at least five more days to clear the queue after it opened. With each day of the blockage, however, the number of days it takes to clear the backwater increases.

The Suez Canal also plays an important role in the global oil trade. Large producing countries in the region, such as Saudi Arabia or Iraq, but also Russia, are dependent on oil transports between the European continent and Asia through the canal. Ten percent of the oil transported by ship passes through the waterway.

In addition to the Suez Canal, there is also the Sumed Pipeline, which pumps oil from the Red Sea to the Mediterranean. But it holds significantly less than the tankers can transport across the canal on a daily basis.

The oil market is reacting nervously

The blockade has therefore intensified the fluctuations on the already volatile oil market. As an initial reaction to the “Ever Given” accident, the oil price initially rose by six percent. The oil price collapsed on a similar scale on Thursday after speculation made the rounds that the Suez Canal could soon be passable again.

On Friday, the price of Brent oil rose again by four percent to around $ 64 per barrel (around 159 liters) after it became clear that the recovery work could drag on even longer.

But even if the traffic jam between Suez and Port Said has cleared, there will likely continue to be delays in world trade, experts expect. Because then significantly more ships than usual arrive at the destination ports around the globe at once, says Eva Savelsberg. She is Head of Logistics at Inform, an IT company that advises ports and airports on the handling process.

graphic

Savelsberg says: “There is an enormous load on the handling in the ports.” Container giants like Ever Given would need a certain amount of time for docking, casting off, loading and unloading. “It cannot be easily accelerated.”

There had already been enormous traffic jams at important ports on the US west coast because the capacities affected by the pandemic were not sufficient to handle the sharp rise in the number of container ships.

The ports rely on detailed planning when handling freighters. They sometimes get confused because of bad weather. “But the fact that 30 percent of global container freight traffic is disrupted is an extreme amount,” says Savelsberg.

The logistics expert is convinced: “It will take days or weeks to reduce the backlog.” The first thing that will be noticeable is the traffic jam in seaports such as Hamburg or Rotterdam, “but this will also continue in hinterland transport”. In the meantime, it seems almost impossible to avoid the interruption of supply chains.

Most logistics experts and economists are convinced that the Suez blockade will be resolved in the foreseeable future and that the worldwide movement of goods will then be able to flow again undisturbed through the eye of the needle. However, the effects of such delivery disruptions can still be felt for months. After the extreme frost period in February, the petrochemical industry in Texas has not yet reached its full capacity utilization. The result is rising prices for plastic products in Europe and Asia.

Decoupling creates barriers to world trade

However, world trade is also hampered by obstacles that a few tugs and shovels cannot remove. In particular, the supply bottlenecks during the corona pandemic and the supply chains between the USA and China that were cut for political reasons have become a permanent burden for the hyperglobalized world economy.

The so-called “decoupling”, that is, the deliberate decoupling between the previously strongly networked economic regions, has become a nightmare for globalization. Under its ex-President Donald Trump, the US in particular has begun to cut itself off from certain trade flows from China.

His successor Joe Biden has already announced that he will maintain trade sanctions and technology embargoes against Beijing. China, on the other hand, has put the global supply chains before a permanent acid test with the construction of artificial military bases in the South China Sea: 30 percent of the total world trade volume is shipped through the busy waterway in Southeast Asia.

The increased risks in terms of globalization have triggered a rethink among companies. Many have already started diversifying their supply chains and stocking up after the shock of the pandemic.

“At the moment, only a few companies are considering relocating their production facilities to Europe again,” reports Allianz specialist Belko of his talks with customers.

Such a relocation of production facilities would, however, make the supply chains much more robust, also against geopolitical risks. “The price that companies would have to pay for this, however, is a loss of international competitiveness,” warns Belko.

More: First ships capitulate to Suez blockade – German importers expect empty shelves from mid-April

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