The Suez Canal crisis: Strategic effects on a global scale

The crisis of the Ever Given ship stranded in the Suez Canal has come to the attention of the global media, as it reveals its strategic importance in running the global trade flow especially since it is located on the international trade route, being the shortest route for international trade movement between East and West, and the link between global supply chains. About 12 per cent of world trade volume and 30 per cent of container traffic in the world pass through the Suez Canal.

The stranding of the Ever Given ship in the shipping lane of the Suez Canal caused confusion to the global trade movement and disturbed supply chains. The number of stranded ships is estimated at 321 according to what was announced by the Suez Canal Authority. The commodities passing through vary between oil commodities, consumer goods and intermediate goods, so what are the most important implications for international trade resulting from the suspension of traffic in the Suez Canal? And what are the possible alternatives to deal with this crisis?

Rescue efforts

Initial reports indicate that the stranding of the giant ship Ever Given ran aground in the shipping lane of the Suez Canal as a result of bad weather conditions while the region was in the middle of a severe dust storm. The Suez Canal Authority stated that the accident is basically due to lack of visibility because of bad weather conditions, as wind speeds reached 74 kilometres per hour, which made the ship lose control.

The two narratives of The Suez Canal Authority and the company that owns the Ever Given, were the same in this regard. The giant ship, at a length of 400 metres, ran aground in the Suez Canal, which does not exceed 250 metres. It blocked traffic between the Red and Mediterranean seas and hundreds of ships have lined up at the two entrances of the canal since the morning of Tuesday 23 March 2021.

Rescue efforts by the Suez Canal Authority are still going on in order to float the stranded ship, whose tonnage is about 220,000, and it may be necessary to subdivide or reduce the ship’s load, whether by transferring containers from them to another ship, or even diverting liquids from it, including the ship’s fuel. This would allow the ship to be moved from its place to deeper water, as the front part of the ship is located in a depth of five metres next to the eastern canal, and the Suez Canal Authority removed about 15-20,000 cubic meters of sand from the front of the ship, and a manoeuvre was carried out in order to float the ship by using nine gigantic tugboats, but efforts have not yet worked.

The company that owns the Ever Given vessel has hired Boskalis Westminster for marine rescue work to free the vessel, and Boskalis CEO Peter Berdowski said that it will take more time, as unloading the ship – one of the worst scenarios – requires a longer period of time. Therefore, the Suez Canal Authority temporarily suspended traffic movement along the waterway.

In its endeavours to try to float the ship, the Suez Canal Authority is working around the clock in order to re-open the shipping lane. There are options to reduce the load of the ship to move it, but the authority hopes it will not have to do this due to the length of time it may take. The Suez Canal Authority has not ruled out a human or technical error in how the ship came to be stranded, which undoubtedly will result in financial compensation for the owner of the company.

The Ever Given ship was in an accident in October 2019, when the ship wrecked a 25-metre transport ferry in Hamburg.

An illustration of the operations to rescue the stranded ship in the Suez Canal

The strategic importance of the Suez Canal 

Locally, the Suez Canal is of great importance to the Egyptian economy, as it contributes about $5-6 billion on average from the total foreign exchange resources. The Egyptian economy also relies on it to be a centre for attracting industries, developing the Suez Canal axis, creating many job opportunities and looking to increase traffic revenues to about $13 billion by 2030.

The Suez Canal achieved record revenues amounting to about $5.8 billion in the fiscal year 2019/2020, but the unfavourable conditions for the global economy due to the coronavirus pandemic and its implications on the global economy, especially the decline in global trade movement by 10 per cent, in addition to the contraction of the global economy by 4.4 per cent, meant that revenues decreased to $5.61 billion in 2020, and despite that, it is the third highest annual revenue in the history of the canal.

Internationally, about  18-19,000 ships pass through the Suez Canal annually, and an average of about 50 ships per day, which has led to hundreds of ships queuing because of the suspension of navigation in the canal, which affects trade traffic passing through and increases shipping costs and potential losses for perishable goods.

The importance of the Suez Canal stems from the fact that it is a maritime corridor linking three continents, located on the international trade route, and it accounts for about 12 per cent of the global trade volume, and is the link between global supply chains. Roughly 30 per cent of the world’s container traffic passes through it daily, and it contributes the largest share of the total seaborne container trade between Asia and Europe.

Lloyd’s List, a newspaper specialising in shipping, estimates that the value of trade passing through the canal is about $9.6 billion a day, as the canal’s traffic to the west is about $5.1 billion a day, and the eastbound traffic is about $4.5 billion a day. Given the increasing importance of the Suez Canal at the local and global levels, the suspension of traffic in it due to the stranding of the Ever Given ship means that the owner of the company is waiting for huge compensation claims.

Losses of the Egyptian and global economy 

The Japanese company, Shuy Kisen, which owns the Ever Given ship, as well as insurance companies, will likely face heavy compensation claims from the companies that own ships waiting to cross the Suez Canal shipping lane, some of which carry perishable goods, which increases potential losses. 

The suspension of traffic has caused daily losses, as the canal generates about $15 million per day average in fees for the movement of goods passing through the canal, and according to the head of the Suez Canal Authority, Lieutenant General Osama Rabie, about 321 ships are stuck waiting to cross and are lined up. The losses of the canal may increase if it takes a lot longer to free the ship, which will force ships to take other routes, especially around the Cape of Good Hope.

Some studies estimate that shipping costs increase each day of delay at sea by about 0.6 per cent to 2.3 per cent of the value of the goods on board the ship, and according to the International Shipping Chamber, about  $3 billion of goods pass through the canal daily, and some estimates indicate an increase in the price of shipping one container from China to Europe at about  $8,000  with disrupted traffic, which is four times the price in 2020.

According to Bloomberg, estimates have shown that halting traffic costs the global economy about $400 million per hour, according to Lloyd’s List.

The oil markets witnessed turmoil as a result of the suspension of traffic in the Suez Canal, and prices jumped by six per cent, which caused confusion in the global oil markets, as about 3 million barrels of oil pass daily through the Suez Canal, and there are about 27 ships on the waiting list transporting about 1.9 million tonnes of crude oil awaiting passage through the canal. Oil prices have returned to their levels before the crisis of the halt to shipping traffic.

The suspension of traffic affected supply chains especially intermediate goods that are used in later stages of production, and this affects global industrial and commercial activity, which is already suffering as a result of the corona pandemic. The costs of delaying the transit of various commodities are likely to be reflected in the final consumer prices; as consumer goods, auto parts and other goods, there is no doubt that the delay will further disrupt supply chains and slow down the delivery of goods to companies across Britain and Europe.

Also it has environmental costs, as shipping already contributes about two to three per cent of global greenhouse gas emissions, so using the Cape of Good Hope will increase fuel consumption and lead to additional emissions.

The crisis continues

Some shipping companies directed their ships to the Cape of Good Hope to avoid the Suez Canal corridor. However, this option, although it is currently being presented to many shipping companies, causes a delay of about 14 days for the length of time it takes compared to passing through the Suez Canal.

The company operating the Ever Given ship has already diverted one of its ships to sail towards the Cape of Good Hope instead of its traditional route from the shipping centre in Malaysia through the Suez Canal, and the container ship HMM Rotterdam can also be seen diverting its journey on the Strait of Gibraltar to avoid sailing towards Suez Canal.

Not only that, but hopes have been renewed to use alternative routes to the Suez Canal to take advantage of the crisis, including the use of the Russian North Sea, as the Russian Nuclear Energy Corporation (Rosatom) invited ships to pass through the Arctic, saying: “You may be stuck in the Suez Canal for days,” or the promotion of the Dubai-Ashkelon line to transport oil as an alternative to the Suez Canal, which puts great pressure to increase the competitiveness of the Suez Canal with such alternative navigation projects.

The Suez Canal Authority is working with its partners, in cooperation with experts in the field of maritime rescue, to restore movement in the Suez Canal, and it is expected that the United States of America will participate in the rescue operations and reopen the shipping lane. This came in a statement by Jane Psaki, a spokeswoman for the White House, who said: “We understand that Egyptian officials are working to remove the tanker as soon as possible and to continue its traffic.” And “as part of our active diplomatic dialogue with Egypt, we have offered US assistance to the Egyptian authorities to help reopen the canal.”

Finally, this crisis has shown the increasing strategic importance of the Suez Canal, which undoubtedly refutes the idea of its decline in importance vis-à-vis other ways of global trade but is putting pressure on it to work harder to avoid such incidents in the future.