The recovery of the world’s wealth and welfare from the pandemic is newly at risk with news the MV EVER GIVEN is thoroughly wedged into the Suez Canal – and the major trade route could now be blocked for weeks.
With the vital passageway for fuel and food shut down, Australia will not escape the consequences – and here’s what you can expect.
The first thing to expect is delays on anything travelling by ship.
Imagine if the main road in your town shut down: Melbourne without Hoddle Street, or Sydney without the Harbour Bridge or tunnel. You can still go the long way, but it makes everything far slower.
As the next map shows, the Suez Canal is a very tasty shortcut. The second best way from Asia to Europe is going all the way around Africa. That is 9000 kilometres further and adds ten days onto the trip for a big container ship.
It costs a container ship US$700,000 to go through the canal, which is just under A$1 million – and you thought toll roads were bad. The ships’ captains are delighted to pay it though, because they are carrying tens of millions of dollars worth of stuff and burn thousands of litres a of fuel each day, so getting there faster is well worth it.
The Suez Canal is a great thing for global trade, and the Egyptians make good coin from it. Estimates of canal revenue are around $5 billion a year – pretty good return for a ditch.
Although they are obviously not making any money this week.
If all the ships that thought they were going to or from Europe in late March are instead arriving ten days late, it throws out the shipping schedule for the rest of the year, slowing down all trade in a year where shipping is already under major strain because of the pandemic.
THE AUSSIES HURT MOST
It’s our exporters who are going to be hurt most by the canal disaster and they’ve been doing a ripper job recently, delivering big trade surpluses.
As the following chart shows, Australia uses the Suez Canal both to import and export. The imports are mostly oil and oil products, such as fuel for cars and trucks. The exports are mostly coal and container cargo.
Now, be aware the chart below is measured in tonnes – the actual value of the container products we are sending through the Suez to Europe will not be as small relative to coal as it seems. The Euros obviously pay more for shipments of King Island Brie and Barossa Shiraz than lumps of coal.
As the next graph shows, Australia is an exporting powerhouse these days. We can be proud. Gone are the days when Australia imported more than it exported.
Now the world relies on us more than we rely on them. And that’s great news because it drives growth.
When you calculate GDP, exports add to the total (that’s money we earn from overseas) and imports subtract (money we pay overseas).
The more that exports outstrip imports, the bigger the boost to Australia’s GDP, which is a measure of our national income.
Anything that disrupts our exports is likely to disrupt this incredible winning streak and reduce our economic growth.
Of course, the world has been through some pretty major disruptions to trade recently.
This canal kerfuffle is not as serious as April-May 2020 where the shelves of supermarkets and Kmart were bare. It’s more limited. And obviously a lot of our trade goes to Asia, so it is not directly dependent on the Suez Canal.
But still, the global disruption of shipping will have an effect.
The price of shipping has risen to its highest level in a year, and the price of oil briefly spiked too, as the Suez Canal carries a lot of the world’s oil, which now has to go the long way.
If shipping costs more, that adds to the price of all our imported goods, which means higher prices on tins of Italian tomatoes, German cars and Japanese gaming consoles.
The ship has EVERGREEN written on the side, but its name is EVER GIVEN. EVERGREEN is a shipping company and its ships all have similar names, like EVER GOLDEN and EVER GLORY.
The current situation is funny but it might have been even funnier if the ship that got stuck was the EVER GENIUS. Sadly for the comedic potential, that one is floating around just off the coast of China.
It is hard not to see the fate of the MV EVER GIVEN as funny, even though it is ruining a lot of businesses. But at least it hasn’t sunk (yet).
In 1967 a Japanese ship sank in the Panama Canal and had to be salvaged, blocking all trade through that canal for many days.
However, at the time, the world economy was a lot less dependent on trade. One expert interviewed by the BBC said that in the worst case scenario, the MV EVER GIVEN could break in half as they try to rescue it.
If it sinks in the canal, it could be blocked for much longer. Maybe we will have to wait until winter until Evergreen leaves.
We don’t pay a lot of attention to the infrastructure that permits global trade until it fails.
The longer the failure lasts, the more serious the economic impact and the less funny it will be.