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  • Writer's pictureSahastha

Suez Canal Crisis

Updated: Oct 4, 2023

The Ever Given, a 1,300-foot, Japanese-owned container ship en route from China to Europe that became stuck the Suez Canal for days, was freed on Monday after a round-the-clock scramble to unblock the shipping thoroughfare. The Ever Given, operated by Evergreen Shipping, is one of the world’s largest container ships, nearly a quarter-mile long. Buffeted by high winds and with poor visibility, it ran aground on March 23, and the authorities scrambled to free it for days.

The 120-mile artificial waterway known as the Suez Canal has been a potential flash point for geopolitical conflict since it opened in 1869. The canal connects, Egypt on the Mediterranean Sea to the Indian Ocean via the Egyptian city of Suez on the Red Sea. The passage enables more direct shipping between Europe and Asia, eliminating the need to circumnavigate Africa and cutting voyage times by days or weeks. It is the world’s longest canal without locks, which connect bodies of water at differing altitudes. Now the canal, a vital international shipping passage, is in the news for a different reason: a blockage affecting more than 300 vessels that sent tremors through the world of maritime commerce.

What has the impact been?

The ramifications of the blockage in the canal, which is believed to handle about 10 percent of global maritime commercial traffic, have been huge. By the morning of March 29, hours before the Ever Given was freed, 367 vessels were waiting to pass through the canal. Maritime industry experts have said that such a large backlog could take weeks to clear.

Shipping analysts estimated that the traffic jam had held up nearly $10 billion in trade every day.

The delays could prove very expensive for the owners of ships waiting to transit the canal. Some ship owners had already decided to cut their losses and reroute vessels around the Cape of Good Hope, at the southern tip of Africa, adding weeks to shipping journeys.

The owner of the Ever Given was already facing millions of dollars in insurance claims and the cost of emergency salvage services.

Oil prices that had tumbled earlier this week on worries of lockdown, sharply reversed on Wednesday as the news became known. Nearly 10 percent of the global oil and 8 percent of liquefied natural gas passes through the Canal. Russian companies use this route to export their oil to Asia. With this much traffic dependent on the canal, the blockage may fuel the oil prices. It may also lead to more expensive shipping container contracts, analysts said. In the yesterday’s edition of The Indian Express* they elaborated that, India is the top importer of crude oil and products via the Suez Canal, higher than China, South Korea or Singapore and more than two-thirds of India’s crude comes from the Gulf region. If the issue is not solved quickly it will start to have implications on the bigger trade flow and shipping sectors. India imports around 500,000 barrels per day of crude products via the Suez Canal, followed by China, which imports just above 400,000 barrels per day, and South Korea and Singapore, which import a little less than 400,000 barrels per day from the Suez Canal. Reportedly, at its peak in December 2020, India imported nearly 5 million barrels of crude oil per day.

Among exporters of crude products via the Suez Canal, India is sixth in the pecking order behind Russia, Saudi Arabia, Iraq, Libya and Algeria at a little less than 200,000 barrels per day.

There were potentially thousands of insurance policies taken out on the steel boxes stacked high on the massive boat blocking the Suez Canal and upending world trade. They could result in millions of dollars in payouts. The blockage is set to unleash a flood of claims by everyone affected, from those in the shipping industry to those in the commodities business. Owners of the goods on board the Ever Given and other ships stalled because the fastest waterway connecting Europe to Asia is closed will seek payment from their insurers, if they have one. And the insurers for cargo on board will in turn file claims against Ever Given’s owners, who will turn to their insurers for protection. March 29th edition of the Business Standard** stated, among the things insured is the ship itself. That’s usually covered anywhere in the region of $100 million to $200 million, according to insurance broker and risk adviser Marsh. But the payout would depend on how bad the accident is. While the propeller could be damaged given the depth of the grounding, the sandy surfaces mean the damage could have been worse. If a process called general average is declared which involves sharing costs among all stakeholders the payouts, which will be well into the millions, become incredibly complex. It adds a huge complexity to settling the final claim. While major risk modelers aren’t putting out estimates yet, the eventual payout for the vessel will span a whole host of insurance sectors.

When the traffic eventually gets cleared, ships will be arriving at their ports behind schedule, creating yet more congestion. The whole fiasco underscores just how fragile the trading network that the world relies on really is.

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