Suez canal mishap puts battered supply chains under more pressure
By DAVID J. LYNCH | The Washington Post | Published: March 27, 2021
The blockage of the Suez canal by a grounded container vessel threatens to deepen a supply chain crisis that has left global companies, port operators and shipping lines battling soaring costs and product shortages for more than a year.
In Egypt Saturday, specialized crews continued efforts to free the Ever Given, a 200,000-ton cargo carrier that has blocked the canal since becoming stuck against the shore there earlier this week. The price of commodities such as oil and East African coffee beans rose Friday as buyers bet on scarcity.
If the blockage persists, the disruption could ripple through the arteries of the global economy, affecting the flow of oil, chemicals, apparel, iron ore and manufactured goods. About 13% of world trade passes through the Suez canal, according to Allianz, an investment firm. Even a return to normal operations in a week or so would leave supply chains struggling to work through the accumulated backlog.
"Ships, containers, goods -- they all are not in the place we need them," said Douglas Kent, executive vice president of strategy and alliances at the Association for Supply Chain Management. "So the knock-on impact is not going to be measured in days or weeks. It's going to be measured in months."
The European economy is more dependent on the Suez link, but the United States will also be affected if the channel can't soon be cleared. At the White House, Press Secretary Jen Psaki said Friday that officials saw "potential impacts on energy markets" from the closure and had offered to help Egyptian officials try to dislodge the ship.
The Suez mishap caps a year of extraordinary tumult for companies involved in moving goods around the world. What began in early 2020 with shortages of personal protective equipment like gowns and masks later morphed into semiconductor shortages that idled major General Motors and Ford plants.
A beached container ship choking one of the world's vital maritime routes only adds a random note of bad luck to this serial supply chain nightmare.
"There wasn't a lot of slack in the system and this is a major artery," said Phil Levy, chief economist of Flexport, a San Francisco-based freight forwarder. "That makes this a very big deal."
Suez would be drawing less attention if the blockage had occurred at any other time. But the pandemic last year unleashed a rolling series of economic shutdowns, idling factories, first in China and later in Europe and the United States. The stop-and-go sequence disrupted traditional buying patterns on multiple continents.
In the U.S., consumers trapped at home shifted their spending from services like restaurants to imported goods needed for their new work-from-home lifestyle. The sudden shift moved faster than shippers and port officials could react.
The cost of shipping a standard container of goods from China to the West Coast has doubled since June. Prices on the China-to-Europe route have tripled since November, according to the Freightos Baltic Index.
With normal trade flows thrown out of whack, metal shipping containers piled up in some ports and ran short in others. Illness thinned the ranks of longshoremen on the docks even as dozens of container ships waited off the coast of California, like shoppers circling a mall parking lot. Once unloaded, goods were slowed by a persistent shortage of truckers.
"This week it's the Suez Canal that's clogged up, next week who knows what's going to happen," Jose Boisjoli, chief executive of BRP Inc., told investors this week.
The Canadian manufacturer said its inventories of snowmobiles, boats and other recreational vehicles are thin and despite running factories full speed it will struggle to keep pace with consumer demand.
Major shipping lines are deciding whether to wait out the delay or take another route. Hapag-Lloyd of Hamburg, Germany, said it had six massive container ships idling near Suez in hopes of transiting the canal and already had re-routed six others around the southern tip of Africa.
One of those, the HMM Rotterdam, made a hard right turn early Friday at the western entrance to the Mediterranean to avoid the canal's traffic jam. The 23,000-container vessel abandoned its route from the United Kingdom to Singapore via Suez and instead headed for the longer, costlier journey around Africa, according to maritime tracking services.
"It is now clear that the container lines do not believe in a rapid resolution in the Suez Canal," Lars Jensen, CEO of SeaIntelligence Consulting in Copenhagen, wrote in an online post.
Once normal canal traffic resumes, the accumulated backlog of cargo will flood into European ports "like ketchup out of a bottle," he added.
Major East Coast U.S. ports also are likely to feel the effects. Some container ships that are scheduled to arrive in Norfolk, Va., next month will be late, said Joe Harris, a port spokesman.
At HB Fuller, a maker of adhesives, sealants and paint in Saint Paul, Minn., the Suez crisis is only compounding supply chain woes that include the recent bout of icy weather in Texas, which idled petrochemical plants. An internal supply chain task force, which tracks thousands of raw materials, is monitoring the Suez situation.
"It's an issue that we're watching very carefully. We're tracking exactly what materials that our suppliers have that might be on those ships," CEO Jim Owens told investors this week.
The Suez mishap will reverberate through the global shipping industry.
Over the next several weeks, freight forwarders will negotiate their annual contracts with retailers and manufacturers that rely on global supply chains. Companies will face a choice between locking in today's high prices for the next year or gambling that they will ease as the system rebalances, said Levy.
After a year of pandemic-related hiccups, the canal incident also could cause global executives to rethink hyper-efficient production strategies designed above all else to reduce costs. That "just-in-time" philosophy produced fatter profits but left companies vulnerable to unexpected events, such as a global pandemic or a container ship captain having a very bad day.
Even before the canal shutdown, P&F Industries, a maker of air-powered tools in Melville, N.Y., had added six to eight weeks to its delivery schedules because of pandemic-related disruptions. Executives also have increased their "safety stock" of inventory to cope with supply chain interruptions.
"But it's a balance. We don't want to buy too much; that consumes money," said CEO Richard Horowitz.
Companies that rely on ocean-spanning supply links need a better handle on what might go wrong, according to Kent. More than half of all companies do not have information on their supply chain, beyond their immediate vendors, according to a study by his trade association and the Economist Intelligence Unit.
"I may know that I don't have anything on that ship, but I may not know whether my supplier's supplier does," he said.
For now, economists say the canal closure could be a costly headache for specific companies. But it is unlikely to become a major impediment to the economic recovery.
"It's not going to make or break the global economy," said Gregory Daco, chief U.S. economist for Oxford Economics.
Apparel maker Oxford Industries, which sells the Tommy Bahama and Dockers brands, moves only 7% to 10% of its product through the canal, K. Scott Grassmyer, the company's chief financial officer, said on an earnings call.
"We do have some goods on some containers and then we're looking at, if need be, some contingency plans," he said, referring to goods that were about to leave the company's overseas factories.
Commodities such as oil and African coffee rose about 4% on Friday. But robusta coffee remains about 10% less expensive than in September and oil is down from its year-to-date high earlier this month.
The canal incident may push shipping costs higher, which would add to inflationary pressures as the post-pandemic recovery proceeds. But any increase is likely to be too insignificant to require action by the Federal Reserve.
The coming months should see a gradual easing of the logjams. As economies reopen, consumers are likely to revert to their traditional spending patterns. That means more restaurant meals and movie theater visits and fewer purchases of laptops or televisions that need to be shipped from Asia.
"From a macro perspective, this is a temporary kink in the supply chain," said Torsten Slok, chief economist for Apollo Global Management.