Update (1315ET): Bloomberg has published more details on the push for global shippers to divert ships around Africa. Torm, a Danish owner of tankers, said its customers have asked about the cost of options to divert. BBG said the diversions are being considered as markets on everything from oil to feedstock to refined petrochemicals are being impacted by what's now being widely referred to as the "Suez crisis."
Suez Crisis 2 Electric Boogaloo https://t.co/qxlS9tnGQw— Bohemian Jacksody (@BJacksody) March 25, 2021
Torm A/S, a Danish owner of tankers, said its customers have asked about the cost of options to divert. Rates for so-called LR2 vessels are up 10%, and ships could divert around South Africa, according to Jacob Meldgaard, chief executive officer of Torm A/S, which owns product tankers.
Already, shipbrokers are reporting that oil traders have started hiring tankers with "just-in-case" options to sail around the Africa should the blockage drag on. Vessels sailing empty to collect oil in northwest Europe could get delayed, forcing the region’s exporters to seek alternative carriers, market participants told BBG. Another consequence is that prices of naphtha, a must-have feedstock that Asian petrochemical plants buy in large volumes from Europe, have soared, per data from the Baltic Exchange in London.
Due to rising demand, prices for VLCCs carrying crude from the Middle East to China rose to $1,371 a day, registering a profit for only the second day in over 7 weeks, according to Baltic Exchange data. It's the highest since Jan. 27. The canal blockage "is having more of an impact on the Suezmax sector where rates are starting to rise and where a lengthy blockage will more quickly affect vessel supply balances," Claire Grierson, senior director of tanker research at SSY, told Bloomberg.
The congestion is hitting bulk carriers that ship products from wheat to iron ore. Just shy of 40 of these bulk ships are stuck in the Suez traffic jam, according to Peter Sand, chief shipping analyst at trade group BIMCO.
"Unless the situation is resolved very quickly we will soon see ships sailing south of Africa," Sand said. "Oil tanker rates are terribly low at the moment so that’s where there’s most upside. Then some upside for dry bulk."
"In the past 24 hours, we have received several requests for price options to divert vessels," he said. "New arbitrage trade flows could emerge, but this all depends on how long the Suez Canal will be blocked."
The Suez is responsible for 2MM barrels a day of oil flows, according to Braemar estimates shared with Bloomberg.
Bottom line: as we mentioned earlier, higher shipping costs will inevitably stoke higher inflation, which could create problems for Fed Chairman Jerome Powell and his expectation that rising inflationary pressures will be "transient."
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As shipping companies grapple with the possibility that the Suez canal might be blocked to all traffic for a week or more, Maersk, the world's biggest and most important shipping and supply-chain management company, is reportedly planning to divert ships around the southern tip of Africa.
Taking the long way around could add as much as 6,000 miles to some of the world's most important shipping routes - those that carry goods and commodities from Asia to the West - which could force shippers to shoulder enormous additional costs - costs that must at some point be passed along to the end-consumer.
To be sure, the company is also reportedly considering air routes as a potential for substitution, Bloomberg reports.
"Regarding the possible alternatives, we are looking at all of them, including the Cape of Good Hope but also many others, for example air solutions for critical and time-sensitive cargo," Maersk said in a statement. "No concrete decision has been taken yet. It will depend on how long the Suez Canal remains impassable.
And Maersk isn't alone: Hapag-Lloyd, the major German international shipper, is also considering rerouting ships around the Cape of Good Hope (the southern tip of the African Continent).
Owners of supertankers hauling 2MM-barrel cargoes had been losing money for weeks on the industry’s benchmark trade route due to of OPEC+ withholding millions of barrels of supply from the global market. However, on Wednesday the carriers nudged back to profitability, while rates for smaller crude-carrying ships are climbing too, and earnings on oil-product vessels sailing from the Middle East to Europe have also jumped. But re-routing could change all of that.
Earlier, the Maersk Denver, one of the ships stuck behind the "Ever Given" (the ship that's stuck in the canal), managed to back out of the canal. It's now back in the Red Sea.
Only other ship Maersk Denver behind EverGreen is also back in Red Sea. This means...— Energy Blogger (@energy_blogger) March 25, 2021
- Whenever freed EverGiven will be floated back to Red Sea
- The other ship either giving way or they realized it’s gonna be a long wait hence not worth to stay in the canal.#OOTT #Suez #Oil https://t.co/ra7C3fJJQ3 pic.twitter.com/tXcCAUUpLB
Five Hapag-Lloyd ships have also been affected by the Suez Canal blockage.
In an emailed newsletter to employees, management advised "we are presently looking into possible vessel diversions around Cape of Good Hope." As far as the Ever Given's situation goes, the firm said it had no special insight into the situation, and must plan accordingly. "We don´t have any clear indication when the vessel will be refloated again," the firm said, referring to the Ever Given, the container ship blocking the Suez Canal
The five Hapag-Lloyd ships affected are:
- Tsingtao Express, waiting in outer anchorage in Port Said
- Salahuddin, waiting in outer anchorage in Port Said
- Athenian, waiting in outer anchorage in Port Said
- Al Rawdah, scheduled to reach Suez Canal tonight
- New York Express, locked in at Great Bitter Lake
Meanwhile, the queue of ships waiting at the Suez Canal now stands at 237, compared with 185 Wednesday and 100 at the start of the blockage. Such a backlog could take days to clear on its own, even if the shipping lanes reopened immediately.
Shares of Maersk and Hapag-Lloyd tumbled Thursday as the crisis entered its third day, moving lower on reports of re-routing traffic. Maersk shares slide as much as 3.3% after Wednesday’s 1.6% fall, while Hapag-Lloyd was down as much as 5.4%, adding to Wednesday's 3.8% drop.
As exporters scramble to implement contingency plans, economists and market strategists are trying to suss out how this blockage might impact inflationary pressures, and market prices. While others are contemplating worst-case scenarios, as well as why the world wasn't better prepared for something like this. After all, while there isn't a known political dimension to this dispute, the Suez isn't the only major chokepoint for global trade. In a note entitled "Central Banks Are Going To Need A Bigger Boat," Rabobank's Michael Every contemplates all this, and more.
"It seems an appropriate title today given one wonders who said that about the vessel still blocking the Suez Canal: was it trying to do a U-turn? If one ever wanted to imagine what blockading the Suez Canal looked like physically, and what it would deliver to already-strained global supply chains economically, well, enjoy. This obviously risks exacerbating the cost-push inflation pressures we are already seeing in many sectors. It may also briefly refocus analysts’ attention on just how vulnerable global trade is to blockages in key logistical bottlenecks, such as the South China Sea. Just imagine if it, or the Straits of Malacca, or the Straits of Hormuz were to be subject to geopolitical disruption. It’s a good job nobody is talking about any of these things ever happening, isn’t it?"
As Maersk and others order ships to re-route around Africa, the world will be watching to see how global supply chains are impacted.