Suez crisis creates winners and losers in the global supply chain

This article was published by Al Jazeera. 

Terminals II and III of the Piraeus Container Terminal

PIRAEUS, Greece - Yiorgos Gourdomihalis sounds very sanguine about losing $30,000 a day. 

Just hours before the Suez canal shut down last week, the CEO of Phoenix Shipping and Trading had clinched a time charter carrying porcelain clay from Ukraine to India, which would have made his company close to half a million dollars. 

“Our charterers did not complete the paperwork the next day, because the boat would have gone through Suez. We were sorry because it was a good price, but we’ll do something else,” the second generation shipowner tells Al Jazeera. 

Despite the loss of this charter, Gourdomihalis expects to be among the winners of the upset in global trade, which began on March 23 when the container ship Ever Given ran aground while entering the canal from the Red Sea. That is because upsets in global supply chains have historically tended to raise freight rates and profit shipowners. 

The Greek shipowning community, which controls more than a fifth of the world’s oceangoing merchant fleet and more than half of the EU fleet, is poised for a potential bonanza in rates. 

Time charters, which guarantee the owner a day rate, have the additional advantage of shifting the risk of delays to charterers. 

“I don't expect many owners to be suffering. Most charters these days are time charters. Simply speaking, If a ship is delayed as a result of the vessel stuck in the Suez, the owner of the delayed vessel still gets paid by the charterer,” says Ziad Nakhleh, CEO of TEO Shipping Corporation, another Greek drybulk owner and operator. 

Not everyone is poised to gain. The Suez Canal Authority announced on Monday that a frantic salvage operation appeared to have partly dislodged the ship. Even if the Ever Given is cleared this week, there will be significant financial fallout, analysts and shipowners say. 

“This crisis led to a lot of losses for freight owners and charterers,” says Ioannis Theotokas, professor of maritime studies at the University of Piraeus. 

Charterers, freight owners and insurers all assume the risks associated with price fluctuations of goods en route, and changes in the length and cost of the journey. 

Theotokas believes a two-week Suez crisis would simulate the effect of war on trade. “It would lead to a replay of what happened in the [1967] Arab-Israeli War, when shipping was redirected around the Cape of Good Hope, and there was an imbalance between demand and supply.” 

The war led to increases on freight costs and consumer prices. 

Problems in port

There is also going to be trouble in the ports of the Mediterranean, which depend on the canal and will now have to deal with a freight backlog. Some 400 ships are reported to be waiting to cross Suez in both directions. 

Here, too, the Greeks play an outsized role. With a throughput of over seven million containers last year, Piraeus is the Mediterranean’s biggest freight port, and fourth biggest in Europe. 

“We’re worried. We move about 33,000 containers a day. Multiply that by [a possible delay of] two weeks. The problem will be accumulation of ships that want to be serviced. It will create congestion. It won’t be easy to deal with,” says Tassos Vamvakidis, Commercial Manager of the Piraeus Container Terminal, which handles the bulk of container throughput at the port. “There is limited berthing. There will be delays.” 

More than five percent of global container shipping is now delayed on either end of the Suez canal or rounding the Cape of Good Hope, according to Ports Europe, a dedicated shipping news service. 

PCT does not expect financial losses because there are no cancellations yet. A much longer crisis, however, would imperil new business. The reason is purely geographic, says Gourdomihalis. 

“If you’re in the Indian Ocean, off Singapore or Madagascar, you can change course and go around the Cape. When you’ve arrived at the Sinai peninsula, you have to circumnavigate all of Africa. There it will cost you 2-3 weeks extra. So you wait for clarity.” 

Piraeus - a national project

The Greek government leased two of Piraeus’ container terminals to the China Ocean Shipping Company in 2009, after a seven-year lobbying effort. Greece’s argument was that offloading containers in Piraeus saved a week’s sailing around Europe, lowering costs and speeding delivery. 

Since 2009, COSCO has increased the port’s annual container throughput almost twentyfold, from a starting point of 400,000. In 2016, COSCO bought a 35-year lease for the entire Piraeus Port Authority, and took direct control of the remaining container terminal as well, which it plans to expand. The entire investment is predicated on the use of Suez. 

In a protracted crisis, Piraeus would lose business to Rotterdam and Hamburg on goods still being loaded onto ships in Chinese ports, potentialy taking Piraeus back to its pre-2009 days, says Vamvakidis. “When it comes to containers bound for northern Europe that still haven’t set sail, there we [would] have great losses.” That scenario now appears to be fading. 

Historic highs

Global trade briefly stopped flowing through Suez in 1956, when Egyptian President Gamal Abdel Nasser nationalised the canal in 1956, and for a period of eight years beginning with the Arab-Israeli War in June 1967. 

On both those occasions, shipping rates soared, making shipowners rich. “My father used to remember those days with joy,” says Gourdomihalis. 

In 1956, the legendary Aristotle Onassis feared he might go bankrupt, after US oil companies forced Saudi Arabia to cancel a contract naming him the exclusive conveyor of Saudi oil. The closure of Suez allowed Onassis to save his company, when oil conveyancing rates went from $4 a tonne to $60. 

Such a bonanza is not expected now, however. For freight rates to rise that much, a closure of months would be necessary.