The Suez Canal is open for traffic again after the six day closure and the resultant queue of vessels is being reduced as quickly as operational realities allow. But we are only in the beginning phase of the ripple effects which will have repercussions for all shippers globally, irrespective of whether they actually ship cargo through the canal or not.
But before delving into the ripple effects, it is also useful to provide a bit of perspective. Approximately 22% of all container volumes are moved via the Suez Canal. This of course means that 78% are not directly affected. Furthermore, it is worth keeping in mind that the Suez Canal is not a choke point for most of this cargo. Asia to North Europe and Asia to North America East Coast cargo can be perfectly well shipped south around Africa. It will take approximately one week longer and require extra fuel, but is perfectly viable. Actually, it is such a viable option that the carriers themselves chose to use it extensively in 2016 and to lesser degree in Q2 2020 as fuel prices dropped to a point where it was more cost effective to bypass the canal. As a result the canal authorities had to institute discounts for such vessels to regain the traffic. The trade corridor for which the Suez Canal is much more difficult to easily bypass is cargo between the Eastern Mediterranean and Asia – at least this requires a much more extensive detour.
The impact also will not come from the increased fuel costs of the vessels which have been diverted around Africa. We are talking about a few handfuls of ships, and the cost of additional fuel is a modest 50/1000 USD/TEU.
The impact will come from three other elements.
The first element is the port impact in Europe. Right now we are facing a rapid decline in export capacity as the vessels caught in the queue do not arrive. Then this will be followed by an effect resembling ketchup coming out of a bottle. A substantial amount of vessels and cargo will arrive at the same time in the European ports, temporarily placing significant strain on the infrastructure, likely leading to congestion issues. This will be followed by another round of missed sailings as the vessels already taking the long route around Africa will be a week delayed. Followed by yet another spike as the vessels round-Africa arrive at the same time as the normalised flow coming in from Asia.
The second element is the impact this will have on equipment repositioning. The re-balancing of empty container flows was a process already being hampered especially by the port congestion off the Californian coastline, and now we will have a significant pool of empty containers which got stuck north of Suez being delayed into Asia.
All in all, these two elements are by nature temporary. But as the carriers need to gradually re-establish their normal sailing schedules, this will likely take 2-3 months before the ripples from the closure can be reasonably normalised.
And this leads to the third and most important element related to freight rates: The shipper behaviour. We are faced with a Suez Canal disruption coming on top of an already strained supply chain. This means there is a very high risk for shippers that in the coming months not everyone will be able to move all the cargo they want to. Some might have to wait a very long time before getting the product moved.
As a consequence, shippers are now faced with an acute competitive pressure within their own respective industries. Securing capacity in the supply chain becomes a key competitive advantage as this secures the ability to get the product to the market. Failing to secure capacity could lead to product not moving at all and, at worst, financial ruin for the shippers impacted by such.
To perhaps simplify and popularise the effect a bit too much: from a consumer perspective we might face a period where instead of having 500 different shoes to choose from in the store, we might now only have 480 different shoes to choose from. From a consumer perspective, not a massive impact. But if you are a producer of shoes it is absolutely critical that your 20 types of shoes are amongst the 480 that actually get shipped and not the 20 which do not make it to market.
Hence, even though freight rates remain at very high levels, despite have come down slightly over the past month, we might see another upwards pressure. This time the pressure will come from shippers who in the present situation will prioritise equipment and vessel capacity higher than pricing for the competitive reasons outlined above.
About Lars Jensen, CEO, SeaIntelligence Consulting
Lars is a leading expert and thought leader in analyzing global container shipping markets. Lars has 19 years’ experience hereof the last nine within multiple companies he has founded, with the main focus as CEO of Seaintelligence Consulting.
Source: The Baltic Briefing