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Another Blocked Artery 🚢

Everyone seems to have put nazar on the markets, with Nifty seeing almost a 1% decline this week (this was bound to happen with the euphoric rallies we’ve seen lately and is a much-needed breather).


Speaking of nazar, it seems like the Suez Canal is jinxed, and if you haven’t heard yet, here is a rundown on what’s happening.


What’s Happening?

Amidst the Israeli-Palestinian war, Yemen's Houthi group has taken to the Red Sea, blocking and outright attacking ships in the Suez Canal to retaliate and take a stand against Israel.


To counter this, the ships are being re-routed towards the Cape of Good Hope in South Africa, a journey that adds a week more to the total time taken to go from the East to the West of the globe.

It seems like only yesterday when memes were being circulated of the Ever Given ship getting stuck in the Suez Canal, stopping trade for a whole week through a route that is nothing short of a critical artery in the trade cardiovascular system, being a route that facilitates 12% of the world’s shipping traffic (if in a given period, the Suez Canal sees 2,000 ships passing it, the Cape of Good Hope sees 50).




So, while this does look super annoying to have to go through, considering anyone would be livid if they have to delay their travel plans by a week, what real effect is this not-so-funny incident going to have on trade?


What’s Going To Happen?


More Distance - Unfortunately, what already has started happening, is massive shipping delays due to the additional 6,400+ km of distance to be covered due to the re-route towards South Africa, causing companies that need to stock for the new year to be nervous (since those companies have also been on a de-stocking phase from all the excess inventory it held during COVID)


More Costs - Due to the longer distance (and subsequent fuel costs), and the possibility of a safety issue, shipping companies will now charge much more, with costs already being expected to triple over the next few days (for context, when the Ever Given ship got stuck for a week, cost of shipping a container rose from US$ 2,000 to US$ 14,000)


Hence, a delay in filling up inventories + additional costs that companies will have to pay to get its goods delivered in the first place = possible rise in the cost of the product the company sells, i.e. inflation.


Furthermore, it’s not just normal goods being transported via ships, but a more pressing concern is the black liquid that runs the world - crude oil, 10% of the global demand of which flows through the Suez Canal!


Is Everyone Doomed?

Not really. With the US stepping up to try and increase naval security in the Suez Canal for the ships that are already stuck there and to clear up the route for trade to resume, this conflict may not last for too long but has already caused weeks’ worth of delays.


Fortunately, shipping companies learnt from the Ever Given incident as well, diversifying and expanding their fleets to accommodate for such a repeat episode.


Still, while immediate supply won’t be an issue, stocking for February seems dicey. An even more concerning matter is the almost immediate effects being seen in the energy department for Europe, a region that desperately relies on the oil, coal and gas that is now taking its own sweet time to reach, for no fault of the shipping companies.


What About India?

On the import front, crude oil might be a little worrying since 50% of our crude oil needs to flow through the Suez Canal to reach us, but measures are being taken to ensure this issue doesn’t persist for too long.


Similarly with exports, where 50% of the trade we do in Europe and North Africa depends on the Suez Canal might see delays and scary freight cost hikes. Yet, the effects may only last a few weeks due to the involvement of international naval forces, and the shipping rates might go back to what they used to be before the Yemeni conflict.


🚢 Bottom Line - Inflationary pressure, especially in the energy department, might be a bit of a concern, one that is already showing up in the northern parts of the European region that are fighting to remain warm, coupled with the new-year demand for grains and other products being faced in the US. India isn’t insulated from this either, and the coming quarter could see some profitability and inflationary concerns if the Suez Canal pressure isn’t relieved soon

 

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