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How far-reaching will the Suez blockage be?

26 March 2021

Jonathan Marriott, Chief Investment Officer

When the Ever Given container ship blocked the Suez Canal, we were served a reminder of the fragility of the supply chains that cross the world. The Suez Canal carries over a billion tonnes of goods each year, representing 12% of world trade. Over 230 ships are currently backed up, waiting to go through the canal. Lloyd's List has reported that the Ever Given's sister ship, the Ever Greet, has already turned south to take the route around the Cape of Good Hope, which will delay deliveries by two weeks. It is unclear how long it will take to reopen the canal and it may take several weeks. The Ever Given has capacity to carry 20,000 containers, which will take a long time to remove if they have to be offloaded. There is already a global shortage of containers so this disruption will result in containers being in the wrong place at the wrong time, making a bad situation worse. 

The latest Purchasing Managers’ Index had shown a recovery underway as markets recovered from the pandemic effects. However, the recovery is precarious and supply issues may slow the nascent recovery. European manufacturers who rely on just-in-time deliveries of components may have to cut production as a result of the Suez blockage. Elsewhere, the global shortage of computer chips had already constrained production, with General Motors announcing temporary shutdowns of some car production lines.

The disruption is just one in a series of events that calls into question the difficulties that extended supply chains can bring. At the start of 2020, the wholesale shutdown of manufacturing in China caused fears over supplies of components manufactured there. More recently, the European Union has threatened to stop the export of vaccines to the UK and may disrupt what has been a rapid rollout of vaccines here. 

Manufacturers are beginning to take action to address these issues. This week, Intel announced a $20 billion investment in two new factories to manufacture electronic chips in Arizona. Other manufacturers will no doubt look to shorten supply chains where possible. Outsourcing to the Far East was driven by cost considerations, and cheap labour in particular. Robotics and artificial intelligence, using fewer workers, may make bringing production closer to home financially viable.  However, this takes time and investment; the easy solution for many companies may be to put up with disruptions that hopefully are infrequent.

Throughout the pandemic, the manufacturing sector has been more resilient than services, which were hit hardest by the economic shutdowns. Although there were signs that European manufacturing was picking up, the resurgence of COVID-19 cases in Europe, coupled with the slow vaccine rollout, was already threatening the economic recovery. If the Suez blockage continues, many manufacturers will be faced with a shortage of components, which is the last thing they need. 

The disruptions in supply may be temporary, but the impact is far-reaching and significant. Removing the risk is expensive and requires investment. Security of supply chains will remain important and, as we have seen with Intel, will drive investment in home markets.

(Data source: Lloyd's List)

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