Suez Canal freed up, but backlog to hit producer prices, container supply

AFTER being blocked for the past six days by a massive container ship in the Suez Canal, a key global shipping route looks set to reopen soon, as the Ever Given was refloated on Monday.

Although businesses are surely heaving a sigh of relief that this ordeal is ending, it may take at least six days to clear the backlog of vessels queuing to use the canal. The knock-on effects of the delays could persist in the coming months.

Already, some businesses are expecting a worsening of the container shortage that started in end-2020, companies told The Business Times. Factors contributing to the shortage include a surplus of exports from Asia to Western countries, and the cancelling of new container orders last year due to the pandemic.

Low Heng Huat, chairman of interior fit-out firm and furniture manufacturer Falcon Incorporation, said he is paying more than three times as much as he usually does for shipping to the US.

"When the market pickup in the US happened this year, there were no containers to load products from Asia to Europe and the US," he said. "The Suez Canal issue makes this worse. Now my factory is full of products, but no containers are available."

Said Abhay Sharma, chief executive of food and beverage distributors The Asian Food Factory and Sonnamera: "Shipping has been quite reliable so many companies don't hold much in stock. But I see disruption taking place again (due to the blockage), because companies will not have containers to load products into, or vessels to put them onto."

He added: "There used to be negotiation where a factory shipping 3,000 or 4,000 containers a year could negotiate freight rates. Now people are willing to pay anything just to get a container."

The extended closure of the canal, which handles about 12 per cent of world trade, created a backlog of about 450 vessels that were unable to pass through the channel. Others have chosen to take a longer route around Africa, which would more than double the time, distance and cost of the voyage, according to Fitch Solutions Country Risk and Industry Research.

In a report on Monday morning, Fitch Solutions noted that the delays could drive up oil and gas prices including crude, petroleum products and liquefied natural gas. One solution was to increase the flow of oil through the Sumed Pipeline, at a cost roughly similar to that of rerouting tankers around the Cape of Good Hope.

The other alternative was to wait it out in the hope of a quick resolution to the issue, which has since begun to materialise.

However, some delays and disruptions should still be expected as the backlog of tankers will take time to clear after the obstruction is removed, said the Fitch Solutions report. Container shipping company Maersk said in a customer advisory on Monday that the current queue of vessels could take six or more days to clear.

The Fitch Solutions report noted: "Crucially, oil and gas supplies are not being lost from the market, only delayed in their delivery. With the global demand recovery still in its infancy and following strong storage builds in most key hubs and across most products over much of the past year, the market should be able to absorb the disruption in the near term. As such, while (we) see scope for further upside to prices, any increase should prove short-lived."

Moody's Analytics chief Asia-Pacific economist Steven Cochrane said higher oil prices will push up producer prices, with higher transport costs likely to have less of an impact since they are a small component of the final cost for most goods.

Mr Cochrane noted that the shutdown highlights the need to reconsider global supply chains, which have come under pressure in recent years from geopolitics in the US-China trade war and the challenges of Covid-19.

"The immediate impact of the closing of the Suez Canal may be minimal but may lead many industries to look deeper at their supply chains to diversify risk and to monitor those risks closely," he wrote in an analysis published on Monday.

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