Tuesday, 15th June, 2021
Tuesday, 15th June, 2021
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Crisis on the Suez Canal

On Tuesday, March 23, the giant container ship Ever Given, operated by the company Evergreen ran aground in the southern part of the Suez Canal, north bound to the Netherlands from China.  The ship turned sideways and now completely blocks the canal.   400 Meters long, carrying 20,000 containers it is one of the world’s largest container ships.  The owners announced that it had been blown off course by heavy winds, that would be an “act of God” and lift responsibility for damages and losses from the owners.  One can say that understanding the forces on a ship moving though a waterway whose dimensions are similar to those of the ship is an extremely complex problem in hydrodynamics, and is long been studied by ship engineers.

The impact of the Covid-19 pandemic on the world economy in second quarter of 2020 had reduced the volume of international trade flows very sharply.   Recovery began slowly in the third quarter and then accelerated in the fourth quarter of 2020 and the first quarter of 2021.  It is now widely believed that the United States economy will show rapid growth in 2021. The Chinese economy is already recovering rapidly, With such expectations retailers in the United States began to place large orders; the European economies would not be far behind.

Demands for shipping space rose and the costs of shipment went up rapidly at the same time.  The share prices of many shipping companies also began to rise in the various world stock markets.

The Suez Canal plays a key role in international shipping and 10-15 per cent of world trade [by volume] passes through the canal. About 50 ships clear the canal every day; of which about 25 per cent are container ships and 15 per cent oil and chemical tankers and 35 per cent bulk carriers. Stopping flow through the canal for a few days will play havoc stranding goods, confronting operators with terrible choices as to whether to send the ships around Africa, a trip that takes 7-9 days longer.  There is fear of piracy with all these ships stranded at the canal and even more if the ships are diverted along the East African coast where the pirates are very active.  Some shipping lines have been in contact with the US Navy seeking protection from the pirates. Already oil prices are rising although that is a temporary phenomenon.   Several large container and LNG carriers are already reported to have changed direction and sail around Africa.

No one knows how long opening the canal will take.  From various comments in the press we would say the average expectation is 8 more days starting from Saturday March 27 for a total of 11 days.   The estimated cost is $9 billion per day suggesting the hit on the world economy would be $100 billion and that does not count all the costs.

Problems for Bangladesh 1: RMG Sector

Freight charges for general cargos both incoming and outgoing will see a temporary increase on top of costs that were already rising. There may be an increase in the spot price of heavy fuel oil, diesel and LNG.  Soybean prices will rise as will the transport costs.

Disruption in shipping may cause difficulties for projects with scheduled construction plans.  All such disruptions will be temporary and cause annoyance.  The real problems are for the apparel sector and the pharmaceutical sector.   These problems arise from the disruption in the apparel and textile supply chains and the chaos we can expect in air cargo movements and costs.

The first problem is the payments for apparel company loans for imports of fabrics and other accessories that come under the back to back L/C procedures and the borrowing from the Export Development Fund.  BGMEA can readily identify cargos that are underway and scheduled to pass through the Suez Canal.  This is a task that should be undertaken immediately with Bangladesh Bank and Customs.

If the shipping disruption causes difficulty in paying the back to back L/C then Bangladesh Bank can instruct the paying bank to open a loan for the apparel company, pay off the L/C and refinance through the Bangladesh Bank at zero interest to be passed on the apparel company at 0.5 per cent.  This should include the purchases of yarn by the knitting factories. from local textile factories.  The commercial bank must verify that the paper work is done correctly and all of these L/Cs must be paid on time.  Each such transaction is matched to the cargos on the way whose delivery times are impacted by the shipping crisis.  Bangladesh Bank can extend the loan from the EDF at zero interest for the additional time due to the disruption.  The length of these loans would be determined by an estimate of the delay in delivery of the garments.  Once that period is passed the interest of the loan would return to 9 per cent.  This effectively protects the RMG factory from the longer shipping time.

The buyers may demand additional time to pay for the garments [there is no reason why they should but they will!!].  We think BB should deal with this encouraging the banks to lend money for the value of the order [less the cost of inputs covered in the previous paragraph] for the period of shipping delay at 8 per cent. The banks discount this with BB at 3 per cent.  This puts the earnings in the hands of the factories on the payment schedule that would have occurred in the absence of the accident.  The commercial bank spread is above their normal level so the banks should be happy to do this.

The last point is one that the BB can do immediately:  The back log in export subsidies for apparel exports should be cleared up in the next month and then the delay should never exceed two months.   Payments to be made on the export documents and corrected when the payments come in.  The industry needs a boost in the current situation and this is an easy way to do it.  It is a scandal that BB should delay these payments as long as they do.

 

The government should increase the subsidy to 4 per cent for exports made during the next three months.  We believe that if BB tackles this seriously they can prevent corruption.

Problems for Bangladesh 2: Air Cargo

We have written repeatedly about the problems in management of air cargo.   The Government has dragged its feet and accomplished little in improving the situation.  Now there is a looming crisis that may do immense harm to the economy.   Who is going to take the blame for this?

Due to the Suez Canal accident the bookings for air cargo are rising.  Some shippers expect to use air cargo for important time sensitive items.  Air cargo prices are shooting up in Asia.  Some RMG companies will be asked by the buyer to use air freight.  Will there be enough air cargo space? Space is reduced as the commercial passenger flights are much lower. Will the current export facilities be sufficient to handle the demand?  More inputs may also be shipped by air cargo.  In industries such as pharmaceuticals the costs will rise, and air cargo space may be insufficient.  We anticipate that industries that use air cargo extensively or will use it to correct for the disruption of ocean transport will find their costs increased and perhaps will not be able to even get service.

In this emergency the air cargo exports should shift to management through “off docks”.  Government should establish a speedy contract procedure for the next year to untangle the exports and imports through air cargo.  We will not here repeat the actions that are needed.

Immediate actions are needed to ensure that a significant increase in air cargo can be managed over the next six months.

Conclusions:

The Suez Canal blockage is going to cause serious problems for the apparel sector and for the pharma industry.  We have suggested a number of financial actions that will assist the apparel sector in getting through this blow.  The general point is that the society should pay the costs of disaster such as this and not the particular company on which it falls.

The government has neglected the air cargo sector and now faces the kind of disaster that we have feared.  It would do tremendous good if the crisis that is now beginning is used to achieve a major improvement in air cargo handling.

 

Ershad Ahmed is a advisory editor of the Daily Economist,logistics specialist and Amcham presiden. Forrest Cookson is an economis and former president of Amcham.

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