Bottleneck at the Canal

Friday Reflection | March 26, 2021

The Suez Canal is one of the most transited waterways in the world. As far back as 1850 BCE, the Pharaohs of ancient Egypt constructed the earliest version of this aquatic trade route to ferry goods and soldiers to further outposts of a growing empire.1 In the more than three millennia since then, the canal has grown in scope and importance to accommodate the needs of an increasingly globalized economy. The modern waterway was constructed by the Suez Canal Company in 1869 and a few years ago underwent a $9 billion expansion to handle two-way traffic and new classes of giant container ships.2

A massive 1,300-foot long container ship ran aground Tuesday, blocking the entire canal. Traffic is fully halted in both directions after the ship, the Ever Given, became lodged in the embankment during a sandstorm. While the 120-mile long canal is a modern engineering marvel, this week’s accident makes the normally invisible global supply chain uncharacteristically visible. The image of ships lining up to enter the canal looks exactly like what it is, bottled-up trade. (Here is a visual guide.)

Waves of Impact

Thousands of ships travel through the narrow passage each year in a tightly choreographed parade, and even a temporary disruption can have dramatic economic ripple effects. “You’re not supposed to think about, or even notice, global freight, but the Ever Given has made cartoonishly noticeable this crucial infrastructure of global capital.”3

One impact will be shortages of a variety of goods in a variety of places, which will take months to come back to normal. Disruption means delays, and delays mean less supply arriving to end consumers. In particular, oil and liquefied natural gas prices already jumped by 6% on Wednesday, even though Europe’s new lockdowns will reduce demand and offset some of the anticipated shortages.4

This blockage is also exacerbating a worldwide shortage of shipping containers. Global patterns of shipping have been disrupted during the pandemic; continued consumption in the US is bringing in full containers, but a lack of exports has created challenges to filling the containers as they make their return voyages. Now, with thousands of containers waiting on ships in the Suez traffic jam, the scarcity of available containers is causing products to pile up on factory floors in China and delays in raw materials. Europe is most dependent on the Suez Canal for imports, so it will be most impacted. Analysts already expect coffee prices to increase as imports from Vietnam, the world’s largest robusta coffee producer, are delayed due to a shortage of shipping containers.5 Similarly, Brazilian company Suzano SA – the world’s largest producer of wood pulp, needed to make toilet paper – is warning that the demand for shipping containers is delaying shipments to producers.6

Another ripple effect from this incident follows the adage ‘the show must go on’, or in this case, global trade must go on. Global shipping giant Maersk said they are “considering all options to deliver cargo for our customers including air, rail, and sending ships around South Africa.” The price of air freight has sharply increased in recent days, offering welcome (short-term) profits for airlines struggling to recover from the past year. Other niche beneficiaries include Smit Salvage, the Dutch maritime firm that freed the stranded Costa Concordia cruise ship in 2012. They have been hired to help refloat the massive container ship, a process that may take days to weeks. Cost is not an object in the coordinated effort to restore movement through the canal.

Fascinating but Temporary

This massive trade disruption is expensive, and resources from tugboats to specialty salvage crews are being mobilized to address it. The crisis is also temporary: no one doubts that the canal will re-open and trade will resume. The bottleneck and the slowdown that it’s caused will ultimately be a short-term detour in the long-term trajectory of global trade.

The past year has been an experience in a similar phenomenon. The global pandemic will ultimately also be a shorter-term detour and has been viewed by most investors as a temporary disruption. Specific industries and patterns will be changed, and certain trends like remote work capability were accelerated by years, but by and large, life will return to a familiar path once vaccination rates bring the pandemic to an end. This transitory perspective, along with an ample serving of government stimulus, has provided the ingredients for the US equity market to remain resilient and even robust as prices recovered from the panic lows of last March.

As difficult as it can be to zoom out in the current moment, we believe the pandemic will ultimately be a short chapter in the much longer narrative of economic growth. In the near term, not unlike the current disruption in the Suez Canal, history tells us that unexpected headlines will periodically arise and rattle market prices. That’s ok. We value flexible resiliency in both financial planning and portfolios, which allows our clients to navigate the unexpected and be patient in the pursuit of sustainable growth.

1 The early Canal of the Pharaohs linked to the Nile River instead of directly to the Mediterranean and was only navigable during flood season. University of Chicago

2 Navigation Statistics SuezCanal.Gov

3 The Big, Stuck Boat Is Glorious. The Atlantic

4 The Suez Canal and SUMED Pipeline are critical chokepoints for oil and natural gas trade US Energy Information Administration

5 Your Instant Coffee May Soon Be at Risk From Suez Blockage Bloomberg

6 Toilet Paper Is Next Likely Victim of World’s Container Crisis Bloomberg

Brian Kozel, CFP  

About Brian Kozel, CFP®

Brian Kozel works as a partner and lead advisor at North Berkeley Wealth to help his clients feel confident in their financial decisions.

Read more about Brian

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By |2021-03-31T11:07:23-07:00March 26th, 2021|