HomeMediaMedia PublicationsAnalyticsA global traffic jam: where the new Suez crisis will lead

A global traffic jam: where the new Suez crisis will lead

26 March 2021

Salikhov Marcel R. President, Principal Director on Economic Studies, Head of the Economic Department

Forbes published a column by Marcel Salikhov, President of the Institute for Energy and Finance Foundation “Global traffic jam: where the new Suez crisis will lead”.

Blocking the Suez Canal raises the question of reducing the dependence of world trade on such bottlenecks. Russia considers the Northern Sea Route as a good alternative route, but has not yet been able to make it attractive for international transit, Marcel Salikhov said.

Reconstruction did not help

In 2019, the canal transported 1.2 billion tons of cargo on almost 19,000 ships and earned $ 5.5 billion. On average, the passage of one transport vessel through the canal brings Egypt about $ 300,000.

It looks like it may take several weeks for the channel to be unblocked. All this time, vessels stuck in a traffic jam will have to wait for the passage to be cleared or use other routes - primarily around Africa, past the Cape of Good Hope. This way will take two to three weeks and will require additional costs from the shipowners. Another problem is that blocking the channel leads to rupture of established supply chains. In particular, the freight rates in the Mediterranean have almost doubled in recent days due to the fact that ships stuck in traffic will be forced to stand idle and will not be able to participate in the next voyages.

The canal and oil

The Suez Canal is very important for the global oil and liquefied natural gas (LNG) market. According to Kpler, 97 million tons of crude oil, 77 million tons of petroleum products and 39 million tons of LNG pass through the canal annually. Russian oil companies are one of the largest users of this transport corridor for oil supplies to South and Northeast Asia. The canal is also the main route for oil supplies from the Middle East to Europe; LNG from Qatar factories is also transported through it. Now about 30 oil tankers are awaiting the clearing of the congestion, some have already begun moving along a bypass route through southern Africa.

However, in general, the reaction of the oil market to the blocking remains quite moderate. Two days after the incident, when the scale of the problem is generally clear, it is not possible to find a premium in prices due to Ever Given. It seems that players believe that even if it takes several weeks to take a container ship aground, it will not have any critical impact on the market. Rising freight costs and increasing uncertainty may have a temporary impact on prices, but the logistical difficulties are likely to be overcome. For Russian oil companies, blocking the channel may even prove beneficial. Lack of supplies of oil and oil products from the Middle East will for some time increase the demand for Russian fuel. Delays in the delivery of Qatari LNG at the moment will increase the demand for Russian pipeline gas. However, these are all short-term factors. The canal will be unblocked, and after a certain period of "clearing the blockages" the traditional supply routes will be restored.

The Northern alternative

Russia has been trying for a long time to initiate the use of the Northern Sea Route (NSR) as an alternative option for goods supply in the Europe-Asia corridor. In theory, it has serious competitive advantages: the average time for transporting goods through the NSR is two weeks less than through the Suez Canal, in addition, costs can be significantly reduced both due to fuel costs and due to more efficient use of ships. However, in practice, the Northern Sea Route is practically not involved in international transit. Most of the cargo turnover is provided by LNG supplies from Yamal, as well as oil supplies from Gazpromneft. In 2020, the volume of freight traffic under the NSR amounted to 33 million tons, that is, less than 3% of the indicators of the Suez Canal. According to official plans, in 2024, 80 million tons should be transported along the Northern Sea Route. However, this task cannot be achieved without a significant expansion of international transit.

One of the problems is that high tariffs for passage through the Northern Sea Route largely devalue the potential cost savings. And the time savings are lost due to the necessity to wait for icebreaker assistance in winter. We need additional infrastructure and a more flexible approach to tariffs. All these problems cannot be resolved quickly, but the current crisis may force international companies to pay attention to the NSR, and the Russian side to think about a more “client-oriented” approach to the development of this route.

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