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Suez Canal blockage further exposes ‘risks’ of global supply chains

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The ultra-large container ship Ever Given had broken free from the banks of the Suez Canal after a five-day salvage effort, but the rescue mission was completed on March 30th.

Any upheaval in the Chinese economy due to the blockage of the Suez Canal by a massive container ship is likely to be minimal given most of its intermediate supply chains are located in the Asia-Pacific region, economists and analysts say.

Although there will be some impact on China, it will be mostly limited to sectors such as battery and rubber manufacturing, which depend on intermediary raw materials from Europe, they added.

The grounding of the ultra-large Ever Given has raised the alarm again in economies dependent on trade with China and Asia, underlining the need to diversify supply chains, especially after the mayhem caused by lockdowns during the pandemic.

“Many of [Asia’s] intermediate supply chains are located within the Asia-Pacific region, which should initially mute the impacts of supply and price. Much depends upon the length of the shutdown of the canal,” said Steve Cochrane, Moody’s chief economist for the Asia-Pacific region.

The Ever Given broke free from the canal’s banks after five days of dredging 20,000 tons of sand and mud. While it is not fully buoyant – with another refloating effort scheduled for the next high tide – the ship’s course has been altered significantly and the stern has moved more than 100 metres from the shore, according to the Suez Canal shipping and transit agent Leth Agencies.

Consequently, the biggest casualty of the week-long traffic jam has been oil prices, although they have fallen since news of the partial refloating. The International Energy Agency has given assurance that global inventories of crude and refined oil products remain at comfortable levels.

China’s oil supply would not be severely impacted as less than 10 per cent of its crude imports had to travel through the canal, said Jean Zhou, an analyst at commodity intelligence services provider ICIS, in a note. Only one oil tanker, the Nordic Cygnus – bound for Tianjin port in north China from Novorossiysk in Russia – was currently stuck at the Red Sea anchorage of the canal, she added.

China’s LNG imports would also see limited disruption, ICIS analyst Wang Yan said. About 60 per cent of its LNG imports come from the Middle East, Africa, Australia and the US and do not pass through the waterway, Yan said.

But the blockage could cause disruptions in China’s synthetic rubber industry, as it imported raw materials from Europe. Likewise, European-imported copper cathodes, which are used in the production of rechargeable batteries such as lithium-ion batteries, could face supply shortages.

In general, the blockage would not have a lasting impact on China’s economy or force changes to its supply chains, especially with it clearing, according to Aidan Yao, senior economist at AXA Investment Managers China.

 

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