Suez Canal blockage exposes vulnerabilities of global trade flows

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The Ever Given container ship is pictured in Suez Canal in this Maxar Technologies satellite image taken on March 26, 2021. (REUTERS)
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Tugboats and dredgers are working to free the Ever Given container ship blocking Egypt's Suez Canal. (AFP)
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Two tugboats are seen near the Ever Given, which has become wedged across the Suez Canal and blocking traffic in the vital waterway from another vessel. (Suez Canal Authority via AP)
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A backhoe digs out the keel of the Ever Given argo ship that is wedged across the Suez Canal and blocking traffic in the vital waterway. (Suez Canal Authority via AP)
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Updated 29 March 2021

Suez Canal blockage exposes vulnerabilities of global trade flows

  • Delays in dislodging the giant Ever Given cargo ship have compounded pandemic-driven problems for international supply chains
  • The Suez Canal blockage raises questions about cargo vessel size, waterway capacity and the benefits of localized production 

BERNE, Switzerland: International waterways matter, few more than the Suez Canal. More than 1 billion tons of cargo passed through the Egyptian waterway in 2019, according to the canal authority, which equates to roughly four times the tonnage passing through the Panama Canal.

Europe, in particular, depends on the canal for its supply of energy, commodities, consumer goods and components from Asia and the Middle East. So, when the giant cargo ship Ever Given ran aground on Tuesday, clogging this vital artery of world trade, anxiety quickly set in. 

When it became evident that the vessel could be wedged in place until Wednesday of next week, the ripple effect was felt far and wide — well beyond the offices of the ship’s owners and operators and their insurance companies.

The Ever Given is owned by Japan’s Shoei Kisen Kaisha and operated by Taiwanese firm Evergreen. Goods valuing around $10 billion pass through the canal every day, but the Ever Given alone is estimated to carry a load worth $1 billion, according to IHS Markit. 

The canal has been in continuous operation since it was first inaugurated in 1869, with only the briefest interruptions between 1957 and 1958 when Egypt’s then-President Gamal Abdel Nasser nationalized the waterway and later between 1967 and 1973 due to the two Arab-Israeli wars. 

For the most part, the canal has operated without a hitch for the past 50 years or more. And if anything, its importance has grown in tandem with globalization, cementing the links between the Orient and the Occident. 

Therefore it comes as no surprise that this impasse poses far greater issues than simply dislodging a stricken ship. The temporary closure of the Suez Canal highlights several problems pertaining to ship size, as well as the vulnerability of international waterways, global supply chains and imports. 

Between 1980 and 2019, global trade volume grew 10-fold to $19.5 trillion. This growth came hand-in-hand with the ever-growing size of maritime vessels to meet mounting demand. Indeed, the dimensions of the Ever Given are truly enormous, at 1,444 feet in length (roughly the height of the Empire State Building), 194 feet in width and weighing in at more than 400 million pounds.

While waterways like Suez and Panama have undergone several major expansions and are dredged on a regular basis — the last Suez expansion was completed in 2015 — accommodating these giant vessels bears inherent dangers. Tuesday’s incident is a case in point. 

The question “How big is too big?” has vexed authorities, shipyards, vessel owners and operators alike. The question is also relevant for the insurance industry, which will have to pick up the bill for the Ever Given and any incidents in the future.

Another issue is how reliable “just-in-time” supply chains actually are. This question goes well beyond marine security. In just the past four years, trade wars between the US and China have left severe cracks in global supply chains. 

Reshoring, when companies return goods to their country of origin, has become increasingly common, as manufacturers look to protect their investments in the face of geopolitical tensions and unreliable supply chains.

If anything, the coronavirus (COVID-19) pandemic has exacerbated that trend. Last year, countries were scrambling over a limited supply of personal protection equipment (PPE). Now they are locked in a battle over access to vaccines.

These heightened political tensions demonstrate a need for more critical goods to be produced domestically, or at least on the same continent. By way of example, Pat Gelsinger, the CEO of Intel, recently announced the tech giant will soon establish more factories in the US and Europe to reduce its reliance on external microchip supply chains from Asia.

INNUMBERS

12% Proportion of global trade which passes through Suez.

$9.6bn Value of goods that pass through canal every day.

19,000 Ships that passed through the canal in 2020.

Just-in-time supply chains are like high-precision acrobatics, where the entire performance fails if even one component arrives with the slightest delay. As such, they are incredibly vulnerable, like the Ever Given incident shows. Delayed components can put a company’s entire manufacturing process in danger.

Even with experts on hand, dislodging the Ever Given and clearing the waterway could take up to a week. This is bad news for companies waiting for their cargo. At roughly $10 billion a day in foregone or delayed business, time is money. 

Some ships have been rerouted around the Cape of Good Hope, adding another 6,000 miles around Africa to their journey and up to $400,000 in fuel costs depending on the size of the ship. No wonder shipowners and operators have been biding their time at either end of the Suez to see how things pan out.

And the problems do not stop there. The pandemic has already upended the logistics of shipping containers, leading to a scarcity of metal boxes. The cost of a 40-foot container has quadrupled within the past 12 months.

Inflationary pressures do not just pertain to the cost of shipping. The closure of the Suez Canal, if it persists too long, may have ramifications for oil markets as well. 

Fortunately, the Suez Canal has lost its importance as a shipping lane for oil from the Gulf. For one, Asia has become the most important customer for Gulf oil producers. While some 3.8 million barrels per day (bpd) passed through Suez in the early 2000s, that volume has since fallen to 2.1 million bpd. 

Oil markets nevertheless rose on Tuesday and have oscillated since, ending at $64.66/barrel by early evening CET Friday. Although an extended blockage will likely affect crude supplies to Europe, demand is currently depressed owing to COVID-19 restrictions and lockdowns on the continent. 

There is also the fallback option of the Sumed pipeline from the Red Sea to the Mediterranean, which has a capacity of 2.5 million bpd and is largely unused at present due to OPEC+ production cuts.

All in all, the blockage of the Suez Canal has laid bare the vulnerabilities of international shipping lanes and the fragility of supply chains. While the blockage will likely be resolved soon, it raises pertinent questions about the size of vessels and how these giant ships can be accommodated by what are essentially 19th and 20th century, man-made waterways. 

The incident will have a short-term inflationary impact, particularly for Europe and the already overheated sea container market. The longer it takes to hoist the Ever Given from the sandbanks in the Suez, the bigger the impact it will have on supply chains and sea container markets. 

And as freight has become a truly global business, the inflationary impact of container delays will be felt worldwide. 

Although this is a major incident for maritime shipping, matters could have been far worse. As the Ever Given is Japanese-owned and Taiwanese-operated, events are unfolding in the Suez without the region’s usual geopolitical undercurrents that linger under the surface.

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Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources

 


Saudi mining portal received 4,073 license applications since launch

Updated 25 September 2021

Saudi mining portal received 4,073 license applications since launch

  • The Kingdom plans to launch a comprehensive geological survey to map the country’s mining potential

RIYADH: Saudi Arabia’s Ministry of Industry and Mineral Resources has received 4,073 applications through its online portal since it was launched earlier this year, it said in a statement on Saturday.

The ministry has issued 1,092 licenses to investors seeking opportunities in the Kingdom’s mining sector, and is processing a further 1,446, it said.

The sector is witnessing a rapid transformation and attracting investors from around the globe since the launch of a new mining law earlier this year.

According to geological surveys dating back 80 years, the Kingdom has an estimated reserve of untapped mining potential valued at $1.3 trillion.

Saudi Arabia’s mining industry has already attracted some major foreign investors. American industrial corporation Alcoa has a 25.1 percent stake in two companies, Ma’aden Bauxite and Alumina and Ma’aden Aluminum, as part of $10.8 billion joint venture with the Saudi Arabian Mining Co., Ma’aden, located in Ras Al-Khair Industrial City in the Eastern Province.

The Kingdom plans to launch a comprehensive geological survey to map the country’s mining potential.

The five-year program will conduct geophysical and geochemical surveys and create detailed mapping of more than 700,000 sq. km of the mineral-rich Arabian Shield area in Saudi Arabia.

The Vision 2030 reform plan identified the mining sector as a potential third pillar of the Kingdom’s industrial growth, alongside petroleum and petrochemicals. The country is investing SR14 billion to develop the sector.

About $45 billion in private and public sector investments have gone into the mining sector over the past decade, mainly in phosphate and aluminum production.

The Kingdom also plans to auction two major mining licenses in 2022 for commodities including gold, copper and zinc, as the Kingdom aims to triple the mining sector’s contribution to the national gross domestic product to SR240 billion ($64 billion) and double the number of jobs to 470,000 by 2030.


Egypt extends natural gas exploration auctions to end of September

Updated 25 September 2021

Egypt extends natural gas exploration auctions to end of September

  • Nine new exploration licence awards announced

CAIRO: Nine international natural gas exploration auctions that were announced in March have been extended until the end of September, said the Magdy Galal, chairman of the Egyptian Natural Gas Holding Company.

Galal also announced that nine new natural gas exploration agreements have been signed with international companies, bringing the total number to 44. The new exploration licenses will lead to investment of nearly $1 billion with signature grants amounting to $24 million, he said during the company’s general assembly headed by the Minister of Petroleum.

Last year witnessed eight new discoveries of natural gas, two discoveries in the Mediterranean and six in the Western Desert, adding an estimated 600 billion cubic feet of new reserves.

Four projects were implemented for the development and production of gas from the discovered fields with investments of more than $4 billion, and 15 new wells were placed on the gas production map, with an average daily production of 1.4 billion cubic feet of gas and more than 25,000 barrels of condensate.

The total average production of natural gas amounted to more than 6.8 billion cubic feet, covering the entire needs of the local market. The average daily local consumption of natural gas amounted to more than 6 billion cubic feet.

The electricity sector consumed the most gas, accounting for more than 60 percent of production, followed by the industrial sector with more than 22 percent and the petrochemical and gas derivatives industry with about 11 percent. Domestic home and vehicle use took and 6 percent.

Exports of natural gas were made to Jordan through pipelines, and liquefied natural gas has been exported to global markets with a total of 71 shipments from the Idku and Damietta facilities.

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China crypto crackdown reveals scale of digital yuan ambitions

Updated 25 September 2021

China crypto crackdown reveals scale of digital yuan ambitions

  • All crypto trading and mining deemed illegal in China
  • China's central bank digital currency could launch as soon as 2022

LONDON: If there’s one thing the Chinese Communist Party likes it is control.

A raft of edicts from President Xi Jinping this year have asserted the government’s control over ever larger swathes of the Chinese economy and the everyday life of Chinese people.

The financial cost of these measures is difficult to accurately gauge, but billions of dollars have been wiped off the value of tech companies, including Alibaba, Didi and Tencent, following a squeeze on their activities, including limits on how long children can spend playing online games.

There have been considerable financial costs too from China’s crypto crackdown, which intensified yesterday with a blanket ban on all crypto transactions and mining. Ten agencies, including the central bank, financial, securities and foreign exchange regulators, vowed to work together to root out “illegal” cryptocurrency activity, the first time the Beijing-based regulators have joined forces to explicitly ban all cryptocurrency-related activity.

That represents a major escalation from May this year, when China banned financial institutions and payment companies from providing services related to cryptocurrency transactions. It had issued similar bans in 2013 and 2017.

Despite an initial drop in the value of cryptocurrencies on Friday, they stabilized on Saturday and most analysts don’t see the measures having a long-term effect on the value of crypto assets.

“For the institutional crypto industry, it won’t change much as those who could leave already left and those who couldn’t have either closed or gone under the radar,” said George Zarya, CEO at digital asset prime brokerage and exchange BEQUANT. “The retail market most likely has gone under the radar and will continue to support market volumes.”

The biggest financial cost is to Chinese businesses involved in trading and mining cryptocurrencies.

Virtual currency mining had been big business in China before May, accounting for more than half the world’s crypto supply, but miners have been moving overseas.

“[China] will now lose around $6 billion worth of annual mining revenue, all of which will flow to the remaining global mining regions,” said Christopher Bendiksen, head of research at digital asset manager CoinShares, citing Kazakhstan, Russia and the United States as beneficiaries.

Crypto exchanges OKEx and Huobi, which originated in China but are now based overseas, are likely to be the worst affected since they still have some China users, analysts said. Tokens associated with the two exchanges plunged over 20 percent on Friday.

Despite all this disruption and loss of wealth, there is a major upside for China.

The Chinese government has repeatedly raised concerns that cryptocurrency speculation could disrupt the country’s economic and financial order, one of Beijing’s top priorities.

Most of all, cryptocurrencies are a threat to China’s sovereign digital yuan, which is at an advanced pilot stage. The People’s Bank of China, the country’s central bank, plans an official launch of the digital yuan as soon as 2022, following testing at the Winter Olympics.

Widespread use of the digital yuan would give Chinese policy makers greater visibility into how money flows around China’s economy.

This would help them track any illicit flows of funds, such as money laundering or terrorist financing, and it would also allow them to experiment by targeting monetary policy interventions on specific economic classes, regions or other groups.

However, by killing off independent cryptocurrencies, China closes off a huge area of financial innovation and risks reducing the dynamism of its economy in the future.


Under US sanctions, Iran and Venezuela strike oil export deal — Reuters

Updated 25 September 2021

Under US sanctions, Iran and Venezuela strike oil export deal — Reuters

  • Venezuela has agreed to swap its heavy oil for Iranian condensate that it can use to improve the quality of its tar-like crude

CARACAS/HOUSTON/WASHINGTON: Venezuela has agreed to a key contract to swap its heavy oil for Iranian condensate that it can use to improve the quality of its tar-like crude, with the first cargoes due this week, five people close to the deal said.
As the South American country seeks to boost its flagging oil exports in the face of US sanctions, according to the sources, the deal between state-run firms Petroleos de Venezuela (PDVSA) and National Iranian Oil Company (NIOC) deepens the cooperation between two of Washington’s foes.
One of the people said the swap agreement is planned to last for six months in its first phase, but could be extended. Reuters could not immediately determine other details of the mwpact.
The oil ministries of Venezuela and Iran, and state-run PDVSA and NIOC did not reply to requests for comment.
The deal could be a breach of US sanctions on both nations, according to a Treasury Department email to Reuters which cited US government orders that establish the punitive measures.
US sanctions programs not only forbid Americans from doing business with the oil sectors of Iran and Venezuela, but also threaten to impose “secondary sanctions” against any non-US person or entity that carries out transactions with either countries’ oil companies.
Secondary sanctions can carry a range of penalties against those targeted, including cutting off access to the US financial system, fines or the freezing of US assets.
Any “transactions with NIOC by non-US persons are generally subject to secondary sanctions,” the Treasury Department said in response to a question about the deal. It also said it “retains authority to impose sanctions on any person that is determined to operate in the oil sector of the Venezuelan economy,” but did not specifically address whether the current deal is a sanctions breach.
US sanctions are often applied at the discretion of the administration in power. Former US President Donald Trump’s government seized Iranian fuel cargoes https://www.reuters.com/article/us-usa-iran-cargo-idUSKCN25A2AH at sea bound for Venezuela for alleged sanction busting last year, but his successor Joe Biden has made no similar moves.
In Washington, a source familiar with the matter said the swap arrangement between Venezuela and Iran has been on the radar screens of US government officials as a likely sanctions violation in recent months and they want to see how far it will go in practical terms.
US officials are concerned, the source said, that Iranian diluent shipments could help provide President Nicolas Maduro with more of a financial lifeline as he negotiates with the Venezuelan opposition toward elections.
Sanctions on both nations have crimped their oil sales in recent years, spurring NIOC to support Venezuela — including through shipping services and fuel swaps — in allocating exports to Asia.
In a meeting at the UN General Assembly in New York on Wednesday, the foreign ministers of Venezuela and Iran publicly stated their commitment to stronger bilateral trade, despite US attempts to block it.
Trump’s tightening of sanctions contributed last year to a 38 percent fall in Venezuela’s oil exports — the backbone of its economy — to their lowest level in 77 years and curtailed sources of fuel imports, worsening gasoline shortages in the nation of some 30 million people.
A US Treasury spokesperson said the department was “concerned” about reports of oil deals between Venezuela and Iran, but had not verified details.
“We will continue to enforce both our Iran and Venezuela-related sanctions,” the spokesperson said. Treasury “has demonstrated its willingness” to blacklist entities who support Iranian attempts to evade US sanctions and who “further enable their destabilizing behavior around the world,” the official added.
The swap contract would provide PDVSA with a steady supply of condensate, which it needs to dilute output of extra heavy oil from the Orinoco Belt, its largest producing region, the people said. The bituminous crude requires mixing before it can be transported and exported.
In return, Iran will receive shipments of Venezuelan heavy oil that it can market in Asia, said the people, who declined to be identified as they were not authorized to speak publicly.

CARGOES THIS WEEK
PDVSA has boosted oil swaps to minimize cash payments since the US Treasury Department in 2019 blocked the company from using US dollars. Washington has also sanctioned foreign companies for receiving or shipping Venezuelan oil.
Since last year, PDVSA has imported two cargoes of Iranian condensate in one-off swap deals to meet specific needs for diluents, and it has also exchanged Venezuelan jet fuel for Iranian gasoline.
The new contract would help PDVSA secure a source of diluents, stabilizing exports of the Orinoco’s crude blends, while allowing its own lighter oil to be refined in Venezuela to produce badly needed motor fuel, three of the people said.
The first 1.9 million barrel cargo of Venezuela’s Merey heavy crude under the new swap set sail earlier this week from PDVSA’s Jose port on the very large crude carrier (VLCC) Felicity, owned and operated by National Iranian Tanker Co. (NITC), according to the three people and monitoring service TankerTrackers.com.
NITC, a unit of NIOC, did not reply to a request for comment.
The vessel was not included in PDVSA’s monthly port schedules for September, which lists planned imports and exports. However, TankerTrackers.com identified it while at Jose this month.
The Venezuelan crude shipment is a partial payment for a cargo of 2 million barrels of Iranian condensate that arrived in Venezuela on Thursday, according to the three sources and one of PDVSA’s port schedules.

LITTLE ENFORCEMENT
Last year, the previous Trump administration seized over 1 million barrels of Iranian fuel bound for Venezuela and blacklisted five tanker captains, as part of a “maximum pressure” strategy, but the United States has not interdicted recent Iranian supplies to Venezuela.
The US State Department declined to comment on the deal. A Treasury spokesperson did not respond to a Reuters question on how concerned the government might be that Iran-Venezuela deals would allow PDVSA to step up exports.
US government officials have insisted they do not plan to ease sanctions on Venezuela unless Maduro takes definitive steps toward free and fair elections.
Trump’s curbs on established companies doing business with PDVSA prompted the socialist-ruled nation to turn to swaps with Iran and other countries, while trading with a series of little-known customers.
PDVSA’s new customers and swaps have allowed it to keep exports stable around 650,000 barrels per day (bpd) this year, after they zigzagged in 2020.
However, a worsening shortage of diluents has recently limited oil exports, placing the Orinoco Belt production in an “emergency,” according to PDVSA documents from August and September related to its output status that were reviewed by Reuters.
PDVSA plans to mix the Iranian condensate with extra heavy oil to produce diluted crude oil, a grade demanded by Asian refiners that it has struggled to export since late 2019 when suppliers halted diluent shipments due to sanctions, the three sources said.


UAE announces ministerial changes including finance, environment

Updated 25 September 2021

UAE announces ministerial changes including finance, environment

  • Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum has been appointed finance minister and deputy prime minister

RIYADH: United Arab Emirates Prime Minister and Dubai ruler Sheikh Mohammed bin Rashid Al Maktoum announced ministerial changes on Saturday, including new finance and environment ministers.
Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum has been appointed finance minister and deputy prime minister and Maryam Al Muhairi becomes the minister of climate change and environment.
Sheikh Mohammed announced the changes on Twitter, along with several structural changes.