Lessons for the World from the Suez Canal Crisis
Prof Rajaram Panda
Introduction

The Suez Canal has never lost its newsworthiness because of its strategic location and significance in the realm of maritime trade. The 193-kilometre (120 mile) long canal, one of the world’s most vital maritime arteries, was in news recently as a Japanese-owned megaship MV Ever Given, longer than four football fields and about the length of the Empire State Building, wedged diagonally across the span of the canal, en route from China to Europe was grounded in the canal, blocking the waterway in both directions for nearly a week, halting global trade through the canal, when finally the colossal container ship was set free by a salvage team on 29 March. Built in 2018, the Ever Given with a length of nearly 400 meters a quarter mile and width of 59 meters (193) feet is among the largest cargo ships in the world. It can carry some 220,000 containers at a time.1 The canal was originally engineered to handle smaller vessels but its channels have been widened and deepened several times at a cost of more than $8 billion to meet with demands of the increased maritime traffic.

Though there is no definite and conclusive evidence for the megaship’s grounding, strong winds and weather factors were cited as the main reason. However Egypt’s Suez Canal Authority (SCA) chief Lt. Gen. Osama Rabie rejected such argument, ascribing to possible technical or human errors as factors.2 Investigation is going on and the final reason for the grounding shall emerge after probe is over. Fortunately, there was no case of any fatalities, oil leak or pollution so far.

The huge traffic jam of more than 425 ships at both ends caused major delays in the delivery of oil and other products, forcing companies to re-route services from the vital shipping lane around Africa.3 This sent tremors through the world of maritime commerce. Yukito Higaki, the president of Shoei Kisen, which owns the ship, was hopeful to put the ship afloat soon and it did. Though the container vessel is set free now, it could take four to five days for the backlog is cleared and normalcy is restored. When the ship’s technical manager – Bernhard Schulte Ship management (BSM) – had revealed initial snag in the refloating attempt, companies ferrying cargo had expressed concern. Their concern has now been allayed, albeit partially as insurance issue remains to be resolved.

Though the vessel has now been set free, the damage to the companies ferrying vessels laden with cargo would be incalculable, denting the economies of both the exporting and importing countries. The encouraging fact is that the giant vessel has not suffered any mechanical or engine failure because of its grounding. Because of the uncertainty involved, global shipping giants Maersk and Germany’s Hapag-Lloyd had already explored options to re-route around the far longer route around the Cape of Good Hope in southern tip of Africa to get to Europe or the east coast of North America. The passage through Suez enables more direct shipping between Europe and Asia, eliminating the need to circumnavigate Africa. Even without re-routing now, the little less than a week delay would lead to substantial cost in insurance claims.

The blockage led to holding up of 213 vessels carrying an estimated $9.6 billion worth of cargo each day at either end of the canal linking the Mediterranean and the Red Sea. It is estimated that while westbound traffic is worth $5.1 billion daily, eastbound traffic is worth $4.5 billion.4 Many countries across the globe felt the impact. Oil from the Middle East is the main cargo from the Gulf to Western Europe while in the opposite direction, it is mostly manufactured goods and grain from Europe and North America headed to the Far East and Asia.5

This unusual development also unfolded a new strategic dimension. For example, Turkey offered to send a tugboat to help Egypt free the Panama-flagged vessel. It was seen as a move to mend ties with regional rivals. The United States also announced to extend help by deploying a team of Navy experts. Russia too made assistance offer.

How was the Vessel Freed and what next?

The breakthrough was a moment to rejoice by a flotilla of tugboats team. The salvage team successfully pulled the vessel toward the Great Bitter Lake, where it will now undergo technical inspection to assess its seaworthiness. Further decision on the vessel’s future can be judged after investigation reports were completed.6

The global impact has already started unfolding. The blockage could trigger claims by everyone affected – from shipping companies to the commodities business. Insurance companies already feared a huge payout for stalled goods and containers. Over 300 container ships, bulk carriers, oil tankers and LNG vessels are expected to make insurance claims. Taiwan’s Evergreen Line, which chartered the Ever Given, puts the cost of any loss on the ship’s owner, Japan’s Shoei Kisen Kaisha.7 For the war-wracked Syria, its fuel imports from Iran have been affected, forcing it to ration already scarce supplies. Eleven ships carrying livestock out of Romania were too impacted. Charity Animals International has warned of a potential “tragedy” affecting some 130,000 animals.8

The insurance companies would be the hardest hit in settling payment, which could take months. When insurers of the owners of the goods on board the Ever Given and other stalled ships seek claims, the insurers for cargo on board will in turn file claims against Ever Given’s owners, who in turn look at their insurers for protection. If an insurance pay-out happens, premium will also increase. It is estimated that the liability claims against the owner of Ever Given could be to the tune of $3 billion or more.

What will be impact on India? Though the likely impact could be minimal, had the blockage continued for days and weeks as was feared initially, certain industries depending on Europe and the US for critical raw materials or parts or for those industries whose turnovers are driven by exports to these countries would have been severely impacted. Since some vessels which were stuck were bound for India, once these vessels resume their journeys, there could be pressure for a while on Indian ports on the west coast as many would be seeking berthing together or in rapid succession, according to R Balasundaram, executive Vice-President, Global Insurance.9

Why is the Suez Canal so important and what has been its Past?

This strategic waterway is very important for maritime trade for many countries. It is one of the world’s busiest shipping lanes. About 12% of world trade by volume passes through the man-made channel connecting Europe and Asia. Therefore, the traffic jam caused by the 224,000-tonne Ever Given container ship disrupted the global flow of oil and gas, adversely impacting the economies of many countries.

According to the SCA, nearly 19,000 ships passed through the canal during 2020, an average of 51.5 ships per day, totalling 1.17 billion tonnes, and all squeezing the man-made channel. This is the second highest load in the history of the Suez.10 The cargo includes crude oil, refined products, finished goods like electronics and toys and even cattle. The Suez Canal is a major source of hard currency for Egypt. It earned $5.61 billion in tolls in 2020, despite global trade disruption owing to the pandemic.11

Separating the African continent from Asia, the Suez Canal provides the shortest sea link between Indian and western Pacific oceans. Its history dates back to 3,500 years but major modernisation took place in the 19th century to link the Mediterranean with the Red Sea via the river Nile. This artificial waterway has been a potential flash point for geopolitical conflict since it opened in 1869 and widened several times making it a vital international shipping passage. The Suez Canal is a crucial shortcut between Asia and Europe that saves ships from having to navigate around the southern tip of Africa.

Originally the canal was owned by French investors. When Egypt was under the control of the Ottoman Empire in the mid-19th century, construction started at the Port Said in early 1859. The excavation took 10 years and the project required an estimated 1.5 million workers. During this massive reconstruction project, Egypt is believed to have drafted every 10 months 20,000 peasants to execute the project. Many of them perished because of hard labour and diseases. The work was delayed when Egypt took up umbrage against colonial powers such as Britain and France, thereby not only delaying the project but also increase in final cost, almost double the initial estimated amount of $50 million.12

How Egypt regained control of the Canal?

Though Egypt had the legitimate right to control the canal, one colonial power – Britain – controlled the canal through the first two World Wars. But it withdrew its forces in 1956 after years of negotiations with Egypt, effectively relinquishing authority to the Egyptian government led by President Gamal Abdel Nasser.13 The same year after the British departed, Egypt nationalised the canal. Egypt also took other steps as it feared threats from Israel and its Western allies. This prompted shareholders Britain, France and Israel to militarily intervene. This resulted in closure of the canal for some time as well as in the risk of drawing in the US and the Soviet Union into the conflict.

At the time of its nationalization, Suez was 175 km long and 14m deep, and could take tankers with a capacity of about 27,000 tonnes to a depth of 10.7 metres. Since then its capacity has been expanded substantially. The Suez crisis ended after Egypt sank 40 ships. When finally the US and the Soviet Union intervened, Britain, France and Israel were forced to withdraw. The crisis ended in early 1957 when an agreement was reached supervised by the United Nations. The UN sent its first-ever peacekeeping force to the area but laid the path for the Cold War. In July 1957, Egypt established the SCA, which runs the waterways till today.

Through the maritime contestation by major colonial powers, the strategic waterway remained closed five times, the longest being the eight years from June 1967 to June 1975 when Egypt and some other Arab states fought Israel in what is known as the Arab-Israel war,14 the waterway became a frontline between Israeli and Egyptian military forces. Nasser’ successor Anwar el-Sadat finally reopened the canal in June 1975 after taking full control following the 1973 Yom Kippur War.

What cost involved in prolonged closure of the canal?

With about 10-12 per cent of global maritime commercial traffic passing through this critical waterway, the prolonged closure could be hugely expensive for the owners of ships waiting to transit the canal. While some ship owners decided to cut their losses and re-route their vessels stuck in either side of the Suez and bound for the canal around Africa’s Cape of Good Hope, the owner of the Ever Green is now facing millions of dollars in insurance claims and the cost of emergency salvage services.15 According to insurance company Lloyd estimate, it was losing about $400 million an hour in insurance cost. Egypt too risked losing a lot of money if the stuck vessel was not put afloat soon by reopening the waterway. The SCA chief estimates that Egypt lost about $12 to $14 million in revenue from the canal each day it remained closed.

India’s concern

India has reason to be concerned about the economic impact of the prolonged closure of the canal. But what is more worrying is that all the 25-member crew, though unhurt and safe as of now, in the giant vessel are from India. India had chalked out a four-point plan to deal with the situation arising from the blockage, advising ships to re-route via Cape of Good Hope. The plan included prioritisation of cargo, freight rates, advisory to ports and re-routing the ships. All the 25 crew worked closely with all parties involved to re-float the vessel. Their hard work and tireless professionalism of the Master and crew was greatly appreciated.16 But there is a caveat to this: the crew members might face legal issues, including the possibility of criminal charges. They are likely to be kept under house arrest until the investigation reports are available. The captains and some crew members may also be restrained from travelling further. It would be unfortunate if the crew members are made scapegoats.17 The Indian government must respond appropriately to rescue the Indian crews.

As bulk of cotton from India or auto parts from China is dependent on this route, this latest incident is a reminder and warning about the power of globalisation and how much the global economy and trade is interconnected.

Concerns elsewhere

The closure of the canal affected oil and gas shipments to Europe from the Mideast which rely on the canal to avoid sailing around Africa. It is estimated that whenever the canal is closed for a day, it disrupts over $9 billion worth of goods that were supposed to pass through the waterway.

In Asia, Singapore’s shipping industry felt the effects of global supply chain bottlenecks. There had been an increase in the number of commercial vessels docking and also a rise in container volume at its ports. As demand outstrips the available capacity of ships, container boxes and ports, there have been delays in shipping, adversely impacting the commercial sense of business. The blocking of the Suez Canal added to Singapore’s bottlenecks.18

Though the old sections of the canal were reopened in an effort to ease congestion, this did not solve the fundamental problem as there was only one lane on the southern end where the megaship was stuck. The blockage hit world oil market as traders anticipated delays in deliveries. The prices oil rose by 6 per cent and might have surged further had the blockage prolonged. The SCA was tasked with freeing the stricken ship by deploying eight additional vessels. If efforts to remove the giant vessel from where it was stuck and refloated faced roadblock, the next possible step could have been be to remove some of its cargo by the use of cranes. As it transpired, that was not necessary.

Lessons for the world

The giant vessel now being set free, the world ought to grapple with future such eventualities. The global supply chain industry needs to introspect about the future and prepare how to cope with similar challenges. However, if nature poses as a challenge, no human effort or technology can be of any help. Therefore, the frailty of global trade and supply chains is expected to continue.19 Since the ship was sailing under a Panamanian flag, Panama and Egypt under the control of the SCA need to negotiate their respective roles to handle the issue and appropriate responsibility wherever it is to be fixed. Under standard procedures, two Egyptian canal pilots should have boarded the ship before it entered the canal to help it navigate, though the ship’s captain had the final authority. This did not happen and could now be the sticking point. So, the problem is not over.

Endnotes
  1. “All-India crew of cargo ship wedged in Egypt’s Suez Canal safe; losses mount on”, 27 March 2021, The Indian Express, https://indianexpress.com/article/world/all-india-crew-of-cargo-ship-wedged-in-egypts-suez-canal-safe-7247557/
  2. “Strong wind not main reason for Suez ship grounding: Canal chief”, 28 March 2021, https://www.channelnewsasia.com/news/world/strong-wind-reason-suez-ship-ever-given-grounding-canal-chief-14506498?cid=emarsys-cna_20210328_0000_CNA+Morning+Brief+Sunday+%280740%29_
  3. “Megaship Blocking Suez Canal May Be Refloated Today: Owner”, 27 March 2021, https://www.ndtv.com/world-news/megaship-blocking-suez-canal-may-be-refloated-saturday-owner-2400077
  4. Ibid.
  5. “Egypt's Suez Canal: A history of the key route”, 24 March 2021, https://www.channelnewsasia.com/news/world/suez-canal-egypt-history-sea-trade-shipping-route-14479934?cid=h3_referral_inarticlelinks_24082018_cna
  6. Suez Canal traffic resumes after stranded cargo ship is set free”, 29 March 2021, https://www.channelnewsasia.com/news/world/ever-given-refloated-suez-canal-traffic-resumes-14518456?cid=emarsys-cna_20210330_0100_CNA+Morning+Brief+Mon+to+Sat+%280740%29_newsletter_
  7. George Mathew, “Suez traffic resumes: Pressure eases on insurers, but spillover risks loom”, Indian Express, 30 March 2021, https://indianexpress.com/article/business/suez-traffic-resumes-pressure-eases-on-insurers-but-spillover-risks-loom-7250758/
  8. Ibid.
  9. Quoted in George Mathew’s article in n. 7.
  10. C. Uday Bhaskar, “Suez crisis and the fragility of global trade”, Hindustan Times, 28 March 2021, https://www.hindustantimes.com/opinion/suez-crisis-and-the-fragility-of-global-trade-101616939623003.html
  11. “Explainer: Why is the Suez Canal so important?”, 24 March 2021, https://in.news.yahoo.com/explainer-why-suez-canal-important-153736636.html
  12. Rick Gladstone, “Why the Suez Canal is so important?”, New York Times, 25 March 2021, https://www.nytimes.com/2021/03/25/world/middleeast/suez-canal-container-ship.html
  13. Ibid.
  14. The Six-Day War was a brief but bloody conflict fought in June 1967 between Israel and the Arab states of Egypt, Syria and Jordan. Following years of diplomatic friction and skirmishes between Israel and its neighbours, Israel Defence Forces launched pre-emptive air strikes that crippled the air forces of Egypt and its allies. Israel then staged a successful ground offensive and seized the Sinai Peninsula and the Gaza Strip from Egypt, the West Bank and East Jerusalem from Jordan, and the Golan Heights from Syria. The brief war ended with a U.N.-brokered ceasefire, but it significantly altered the map of the Mideast and gave rise to lingering geopolitical friction. See,https://www.history.com/topics/middle-east/six-day-war
  15. Ibid.
  16. “Co praises all-Indian crew of Suez ship”, Times of India, 28 March 2021, https://timesofindia.indiatimes.com/india/co-praises-all-indian-crew-of-suez-ship/articleshow/81730230.cms
  17. Ch Sushil Rao “Suez blockage ends, but Indian crew may face legal charges”, Economic times, 30 March 2021, https://economictimes.indiatimes.com/industry/transportation/shipping-/-transport/suez-blockage-ends-but-indian-crew-may-face-legal-charges/articleshow/81752467.cms
  18. Zhaki Abdullah, “Singapore navigating shipping squeeze, container congestion amid surge in cargo demand”, 26 March 2021, https://www.channelnewsasia.com/news/singapore/shipping-congestion-delays-singapore-port-cargo-demand-14480112?cid=emarsys-cna_20210326_0000_CNA+Morning+Brief+Mon+to+Sat+%280740
  19. Vivian Yee, “Ship is freed after a costly lesson in the vulnerabilities of sea trade” The New York Times, 30 March 2021, https://www.nytimes.com/2021/03/29/world/middleeast/suez-canal-ever-given.html

(The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>


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