Last week, the Ever Given, one of the world’s largest container ships, was freed after becoming lodged in Egypt’s Suez Canal for six days. Around 12% of global trade flows through the Suez Canal, including about 7% of the world’s oil, making it one of the busiest waterways for international trade. In fact, according to the longstanding shipping journal Lloyd’s List, more than $9 billion worth of goods pass through the 120-mile waterway each day, equaling about $400 million per hour. Ships like the Ever Given can hold up to 20,000 containers, carrying everything from consumer products to cars and oil.
In the age of efficiency and low-cost goods, ships have become increasingly large in order to increase economies of scale and minimize the cost of distribution. However, not all ports can support 1,300-foot vessels like the Ever Given. Thus, our trade systems and routes are becoming more and more concentrated. During its six-day obstruction, the Ever Given blocked more than 350 vessels from passing through the canal, causing overcrowding at ports and delayed shipping schedules. In other words, this event has further undermined supply chains, which have already been struggling due to the COVID-19 (coronavirus) pandemic.
Shortages & Delays: What to Expect
The pandemic gave global supply chains a shock last year when commerce was disrupted amidst coronavirus outbreaks in China, which is known as the world’s factory. The Suez Canal disruption is less dramatic and unlikely to disturb the economic growth that is projected for this year. However, according to William Lee, chief economist at the Milken Institute, the blockage is another wake-up call for companies that have designed their business to rely heavily on global supply chains with little room for error.
“This is a warning about how vulnerable our supply chains are and how the just-in-time inventory techniques that have been so popular have to be rethought,” Lee said.
In other words, the world runs a tight ship when it comes to trade. As a result, there are bound to be repercussions when a delay of this size occurs. For instance, when containers arrive late at their destinations, shipping costs are likely to surge, resulting in price increases that ultimately filter down to buyers. To avoid the Suez Canal pileup, some shipping companies, including the global German shipper Hapag-Lloyd, decided to reroute around the Cape of Good Hope in South Africa. The solution is less than ideal, however, because it increases sailing time by at least a week, which leads to higher fuel costs.
The incident also strains the shortage of shipping containers in Asia, which means retailers may be late getting certain goods such as TVs, furniture, clothes, auto parts and other popular items shipped by containers. The semiconductor industry, Lee points out, is also shortage prone, making it particularly susceptible to shipping delays.
Experts Disagree on US Resiliency
Despite the unarguable ramifications on global trade, experts disagree on the extent to which the blockage will affect U.S. consumers. Stephen Flynn, a professor of political science at Northeastern University, stated, “The disruption . . . is going to continue to have cascading effects . . . it’s got to be at least 60 days before things get sorted out and appear to be back to normal.”
Flynn, who is also founding director at the Global Resilience Institute, agrees that this is one of the challenges of a just-in-time system. “It’s never been stressed this badly before, and it’s going to take a really long time, and they’re just beginning the process of sorting it out . . . you’ve essentially created this traffic jam that doesn’t allow you just to reset and restart—you have to restack and reset the system, and that’s something that’s going to take a lot of choreography,” Flynn said.
Conversely, Jeffrey Bergstrand, professor of finance at the University of Notre Dame’s Mendoza College of Business, says that the incident “will have only a minor and transitory effect on prices of imported goods. Since most of the imports blocked over the last week are heading to Europe, U.S. consumers will likely see little effect on prices of U.S. imports, except to the extent that intermediate products of U.S. final goods are made in Europe.”
Flynn, on the other hand, said that prices in the U.S. will “almost certainly” rise due to the world’s interconnected supply chains.
One thing is certain: It’s been a year of supply chain lessons. The pandemic revealed a lot of weaknesses that are still being straightened out, and the incident at the Suez Canal is yet another string unraveled. It’s clear that companies need to continue prioritizing resilience, even if that comes at the expense of efficiency. To learn more about creating resilient supply chains, check out the following articles in ProcurementIQ’s archive:
By: Mara Michael
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