(ATF) Disruptions from the Suez Canal blockage may have been relatively short-lived but the supply chain lessons will linger for a long time as manufacturers mull raising inventory levels and diversifying supply sources.
The Suez Canal, a man-made waterway connecting the Mediterranean Sea and the Red Sea, is a vital maritime trade route that connects much of Asia and Europe. But it is not indispensable – ships can spend an additional two weeks at a greater cost by traversing the Cape of Good Hope.
Around 10% of global seaborne oil trade passes through the canal and when “Ever Given” — a skyscraper-sized shipping vessel owned by Japan’s Shoei Kisen Kaisha and operated by Taiwan Based Ever Green group – was stuck in the waterway, preventing ships from passing through, global markets went into a tizzy.
“The first thing that they will be doing is looking quite carefully, I think. It's not just their logistics chain, because they'll be trying to find alternatives. If they're a buyer trying to find alternative goods, if they are being badly affected by this,” Philip Young, a partner and solicitor advocate at Cooke, Young & Keidan LLP, told Asia Times Financial Television.
“But looking at their logistics trading, more generally, with a view to having greater redundancy built in so that if anything like this happens again; they're not going to be quite so drastically affected as they might be being affected at the moment, and I think that's probably something that is a more general experience actually in business at the moment because it's not just this – it is also the Covid-19 pandemic and that's having dramatic impact upon a lot of businesses supply chains.
"And a lot of businesses have started to move away from the idea of things like just in time manufacturing and start to think about having some form of redundancy in terms of some type of stockpile and some ability to cope with unexpected significant unexpected events.”
The Ever Given is a 400-metre long, 200,000-tonne colossus, with a maximum capacity of 20,000 containers. It was carrying 18,300 containers at the time of the blockage.
The blockage came at a time when ports on major shipping routes are grappling with a backlog of vessels as sea freight traffic ramps up after disruptions caused by the coronavirus pandemic last year. This caused a 400-ship tailback waiting to pass through the 193km (120-mile) canal – on either side of the blockage.
Shipping rates nearly doubled and remain elevated and container scarcity has intensified as unloading holdups and delays on the return of vessels means a further blow to availability and higher prices.
In China, average prices for used 20-foot containers increased 94% between November 2020 and March 2021.
The blockage has dealt a blow to the “just in time” inventory management style -- where parts and components are delivered to manufacturing and assembly plants exactly when required -- even as the trade war between the US and China left severe cracks in global supply chains.
Buyers are keeping much higher levels of inventory to avoid being caught short by disruptions and also moving away from single sources of supplies.
These heightened political tensions had already set in place plans for more critical goods to be produced domestically -- Intel recently announced the tech giant will soon establish more factories in the US and Europe to reduce its reliance on external microchip supply chains from Asia.
“And so that has an impact, of course, at the Asian end too because if you're an Asian business and you're supplying to Europe, and you're trying to supply in a sort of just in time method. Then one of your difficulties is going to be, where do you store the excess material that you're generating.. if they're not going to go onto the ship at the Asian end in time,” Young said.
“There'll be pricing implications for all of this.. pricing implications for the shipping world because prices already have gone up because of the Covid-19 pandemic and will probably go up a bit more as a result of this. There'll be pricing implications for Asian suppliers who will have to take into account the impact on them and increasing their prices, and also pricing implications for European purchasers, who will have to bear in mind that the extent they've lost money as a result of the Suez Canal incident, they will have to somehow find a way to recoup that from their customers.”
The port handling bottleneck and transport capacity constraints further down the line will push deteriorating delivery times up further for shippers of electronic products, clothes and manufacturing components and they will last longer than the Suez blockage itself, according to ING economists.
They said that normally 75% of container vessels arrive on time globally but in the last two months, this reliability measure sank to only a third.
“The first thing that they will be doing is looking quite carefully I think -- it's not just their logistics chain -- because they'll be trying to find alternatives. But looking at their logistics trading, more generally, with a view to having greater redundancy built in so that if anything like this happens again, they're not going to be quite so drastically affected as, as they might be being affected at the moment.
"I think that's probably something that is a more general experience actually in business at the moment, because it's not just this, it is also the Covid-19 pandemic and that's having dramatic impacts upon a lot of businesses supply chains.”