The new Suez crisis will boost inflation

The grounding of the Ever Given container ship halted traffic on the Suez Canal for almost a week before the vessel was finally freed on Monday. 

The blockage resulted in vast maritime tailbacks as hundreds of container ships waited to pass between the Mediterranean and the Red Sea, disrupting an estimated £7bn of trade in goods every day, according to shipping data from Lloyd’s List. Shipping line Maersk warned that knock-on congestion at ports could potentially take “months” to clear. 

A crucial chokepoint 

The Suez Canal carries about 12% of world trade. It reduces shipping times between Europe and Asia by almost two weeks (boats would otherwise have to go around the whole of Africa). An estimated 7% of the world’s oil passes through the canal, but oil markets remained calm during the blockage. Renewed virus restrictions in Europe and plentiful global oil stockpiles meant that shortages remained far from traders’ minds. 

The Suez Canal is one of four major “chokepoints” for global shipping, says Deutsche Welle. The Strait of Hormuz, which separates Iran from the Arabian Peninsula, occupies a special place in the nightmares of oil traders: about a quarter of seaborne oil and one-third of liquefied natural gas pass through the narrow strait. The Panama Canal carries 5% of world trade; in Asia, 40% of global trade and 80% of Chinese oil imports pass through the Strait of Malacca . “At its narrowest point off Singapore” it is 1.7 miles wide. 

Prices will rise 

Global shipping was already “in chaos” before the Suez blockage, says Hanna Ziady for CNN Business. Covid-19 disruption, which has closed factories and tightened border controls, has put global supply chains under “unprecedented” stress. On the demand side, US seaborne imports are up by 30% in a year because of booming demand for “televisions, furniture and exercise bikes”. 

The result is that container-shipping rates have soared, says the Financial Times. The cost of shipping a 40-ft container from east Asia to the US has risen from $1,500 in January 2020 to $4,000 today. Supply chains have held up during the pandemic; prolonged shortages have been rare. Yet the “New Suez crisis” is a reminder that our “just-in-time” logistics model prioritises efficiency over “resilience”. 

Pricier shipping costs will eventually be passed on to consumers in the form of higher prices, says James Thomson in the Australian Financial Review. Ports from Los Angeles to Auckland to Chittagong in Bangladesh are already badly congested. A surge in demand for goods from locked-down consumers has manufacturers working flat out to keep up: the PMI gauge of eurozone manufacturing activity recorded its highest reading since 1977 in March. “It’s hard to see how this pressure doesn’t manifest [itself] in higher inflation.”