How the Suez Canal Blockage Highlights the Risks of Massive Container Ships in Global Trade

A relook at the risks that massive container ships can pose is needed.

A desert storm that blew over the Suez Canal early morning on March 23 threw billions of dollars of goods off course, exposing the potential trade disruptions that giant ships such as the 'Ever Given' can cause, particularly while navigating the Suez Canal. This narrow, man-made waterway stretch, which is a key artery for shipping goods between Asia and Europe, carries some 12 percent of global trade.

As container carriers went ballistic a few years ago by betting big on mega box ships for economies of scale on long-haul trades, the attendant risks associated with size were probably glossed over. This was until Tuesday's freak incident that caused a maritime traffic jam and the world started fretting over the disruptions it has caused to the supply chain.

Archegos and how it impacts markets and investors

For global trade, already reeling under soaring freight rates, equipment shortages, and space crunch on ships in the wake of disruptions triggered by the pandemic, the grounding of the 'Ever Given' could not have come at a worse time.

The disruptions from the closure of the Canal could last for months, and port congestion, equipment shortages, and capacity shortages on ships are set to intensify.

Experts say that there are virtually no alternatives to the Suez Canal for shipping goods via Europe and Asia, except to take a longer detour via the Cape of Good Hope, which adds an extra two weeks and further costs to shipments.

To be sure, the Canal has not seen anything like this for years. The last time the waterway was blocked was in 2004 when an oil tanker got stuck and was closed for three days.

The magnitude of the current blockage is much bigger because goods shipped in containers have been the biggest casualty, hurting global markets trying to bounce back from the pandemic.

The key takeaway from the incident is that bigger ships create bigger problems. Taking a fresh look at the jumbo-sized problems that these ships bring in risk terms would be in order.

News courtesy The Business Line.

What exactly does the Archegos meltdown have to do with the Suez Canal?

The Archegos meltdown and the Suez Canal incident seem unrelated at first glance. The Archegos meltdown refers to the financial collapse of Archegos Capital Management, a family office run by Bill Hwang. On the other hand, the Suez Canal incident involved a massive container ship, the Ever Given, blocking the canal and disrupting global trade for several days. Despite their apparent differences, both events have significant implications for the financial and economic landscape. The Archegos meltdown highlighted risks in the financial system related to leverage and opaque market activities, while the Suez Canal blockage underscored vulnerabilities in global supply chains and the interconnected nature of international trade. Analyzing these events in conjunction could provide valuable insights into the fragilities and complexities of the modern economy.

Risk Management in Global Trade

Risk is part of life. Businesses cater to such risks, and nations also cater to risks. As a matter of fact, in 1956, Britain fought with Egypt when the Suez Canal was nationalized. The Suez Canal has remained a vital artery, like the Malacca Straits. Keeping it open is important for all nations. There is literally no way to prevent such accidents, and businesses and nations will have to adjust, reorient, build reserves, etc., or wait for a longer period when ships go round the Cape of Good Hope.

By and large, the Suez Canal has remained open for decades with rare incidents resulting in blockage. Such tests are necessary for businesses and nations to cross-check on contingency plans.