Ever given aftermath prompts re-evaluation of supply lines

On March 23, a giant container ship became wedged across Egypt’s Suez Canal, blocking one of the world’s busiest shipping routes. The MV Ever Given was finally freed mid-day on March 29, with some 450 ships stuck and waiting on either side. 

The Suez Canal is a crucial artery for world trade that connects the Mediterranean with the Red Sea and provides the shortest sea route for ships between Asia and the Middle East and Europe. The canal provides passage for roughly 12 per cent of global trade, with an average of 50 vessels moving along it per day. As a result of the temporary Ever Given crisis, Suez Canal Authority (SCA) Osama Rabie claimed that the canal incurred losses of roughly US $15 million per day.

Weighing 200,00 tonnes and carrying 18,300 containers, the MV Ever Given is the length of four football pitches and is one of the world’s largest shipping containers. The ship initially appeared to be forced off course due to strong winds, but with wind speeds recorded at 40 knots, SCA believes that technical or human errors may also be at fault. Many container ships stuck on either side of the Ever Given pursued alternative passage around the Cape of Good Hope at the southern tip of Africa, which adds up to 3,500 miles and 12 days to the journey.

What happens to the global supply chain after a congestion crisis of this nature? Although the canal has resumed regular operations after the Ever Given was freed by rising tides, the blockage created frustration by industries that were heavily impacted by the delays, and raised concerns regarding the short and long-term implications on global supply chains, which are already stretched as a result of COVID-19.

The variety of goods that traverse the canal is enormous, and the Suez Canal can see anything from toilet paper to livestock pass through its shores on a given day. The Suez Canal is also an important avenue for oil and liquefied natural gas. With one million barrels of oil and 8 per cent of natural gas passing through the canal per day, the energy industry was hardest hit by the blockage. International crude oil prices rose 3 per cent after just one day of the canal jam, indicating the volatility of the global economy and trade industry.

Apart from natural resources, other affected industries across the US and Europe include restaurants and grocery stores, auto and home supply stores, hardware and construction, and wholesale trade. Although the Ever Given blocked goods from all over the world, Europe and Asia will be most negatively impacted by the blockage. Companies in Asia are not only dependent on shipments from Europe (and vice versa), but Asian companies are also facing a shortage of empty containers being returned to the region. This further hinders the ability of these companies to continue delivering goods around the world, stalling the entire global supply chain and delaying production capacities for recipient companies awaiting necessary parts or equipment.

The ripple effect of the blockage of the Suez Canal will be felt for weeks or months by companies whose production is reliant on international trade and highlights the fragility of the global supply chain. While interconnectedness of economic activity has supported specialization of production and expedited global economic growth, a six-day closure of the canal underscored potential weaknesses of globalization. International inter-dependency has caused firms to reconsider their supply chain management and diversification.

Furthermore, the blockage has prompted major shipping companies, such as Maersk and Hapag-Lloyd, to plot alternative routes that avoid the canal. Although the Suez negates the need for ships to circumvent the African continent, the blockage caused losses and delays that may outweigh the benefits of the direct route. Not only would this reduce efficiency of marine trade overall, but tariffs and business from trade passing through the canal contributes roughly 2% of Egypt’s GDP. 

As a preceding wake up call to the fragile interdependency of supply chains, COVID-19 prompted many businesses to switch from a “just in time” supply model to a “just in case” one. In the “just in time” model, firms relied on deliveries to factories only as needed for manufacturing. Although this model required businesses to predict their demand, this was a relatively straightforward process prior to the pandemic. Now, firms are holding onto more materials, to create a buffer to avoid shortages and lessen the impact of supply disruptions as they occur.

The Suez Canal blockage also incentivizes companies to diversify their suppliers. Rather than relying on a small subset of suppliers for their products, companies look to protect themselves from delays caused by crises by sourcing multiple products from many different suppliers. To ensure that one small sub-supplier does not have the power to hamper the productivity of the firm should congestion occur, companies prefer to have many products coming from many different places, avoiding dependence on a single trade channel like the Suez Canal.

The congestion caused by the Ever Given is forcing big businesses to review and protect their supply chains, or change their supply chain models altogether. The size of container ships doubled in the past decade due to rapid expansion of global trade, and it raises concerns about international interdependency as a result of globalization. While we may be able to spread more goods across the globe, the cost of not doing so came to roughly US $400 million per hour in trade. The Ever Given incident may not bring businesses to seek localization of their suppliers, but they are certainly altering their behaviour as a result.