Suez Canal closure adds more strain to global supply chains, Moody’s says

Europe’s manufacturing and auto suppliers are set to be the most affected, according to new report

The temporary closure of the Suez Canal after container ship Ever Given ran aground could lead to supply chain delays, particularly for European manufacturers and auto makers, according to a report by Moody’s Investors Service.

Supply chains across the world are already strained and “highly vulnerable” to even the smallest of external shocks due to a very high consumer and industrial demand, a global shortage of container capacity and low service reliability from global container shipping companies, the credit rating agency said.

The canal’s temporary blockage could exacerbate this as around 10 per cent to 15 per cent of the world's container throughput is expected to be affected, according to Moody's.

Europe's manufacturing and auto suppliers are expected to be hit most by the Suez Canal snarl since "they operate ‘just-in-time’ supply chains", Daniel Harlid, a vice president at Moody’s, said.

“This means they do not stockpile parts and only have enough on hand for a short period, and source components from Asian manufacturers.”

The Ever Given, a 200,000 deadweight-ton ship carrying 20,000 containers, got stuck in the Suez Canal on March 23 after high winds blew it off course – blocking a vital waterway for global trade.

Nearly 19,000 ships, or an average of 51.5 ships a day, pass through the canal with a net tonnage of 1.17 billion in 2020 alone, according to the Suez Canal Authority. Tariffs paid by ships entering the waterway are also a major source of income for Egypt.

The blockage could cost global trade $6 billion to $10bn a week, according to a study by German insurer Allianz on Friday.

Even if the situation is resolved within the next 48 hours, port congestion and further delays to an already constrained supply chain is inevitable

“Even if the situation is resolved within the next 48 hours, port congestion and further delays to an already constrained supply chain is inevitable,” Mr Harlid said.

Alternative modes of transportation are also out of the question since airfreight capacity is already tight owing to the coronavirus pandemic and rail transportation between China and Europe is very limited, the credit rating agency said.

The canal, which connects the Mediterranean to the Red Sea, provides the shortest sea link between Asia and Europe.

Ships that were about to enter the Suez Canal will soon need to decide whether to turn back and use the alternative, longer route around the Cape of Good Hope. That would “add around 10 days to their journey”, the report added.

“For carriers diverting their vessels around Africa instead of going through the Suez Canal, fuel costs will increase. However, spot freight rates will most likely increase or at least stop decreasing from their currently very high levels,” Mr Harlid said.

Moody’s does not expect the disruption caused by the Suze Canal blockage to affect Egypt’s balance of payments.

Suez Canal receipts amounted to almost 2 per cent of Egypt’s gross domestic product on average before the pandemic, providing a significant contribution to total current account receipts. However, Suez Canal receipts declined to 1.3 per cent of GDP during the acute phase of the pandemic, according to Moody’s.

“A temporary disruption will not materially change our expectation of a return to pre-crisis canal receipts as global trade recovers,” Mr Harlid said.

The Moody’s report added that oil-exporting countries in the Middle East that rely on the Canal for hydrocarbon exports “are unlikely to be affected in the absence of an extended disruption”.