Suez blockage highlights Asia’s vulnerability to disruptions
Choke points in global trade are once again in the spotlight
Vice Chairman, Energy – Asia Pacific
Vice Chairman, Energy – Asia Pacific
Gavin oversees our Asia Pacific research helping companies identify and build their international growth strategies.
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Asia’s economies are intimately linked to global maritime trade. Cargo vessels sailing from the ports of Northeast Asia’s export giants supply the consumers of North America and Europe, while much of Asia’s energy and natural resources arrive by sea. According to the UNCTAD, over 40% of global seaborne exports are loaded in Asia, while the region accounts for around 60% of all imports. Yet despite the huge value of maritime trade, the smooth and timely flow of goods remains dependent on a small number of narrow, highly congested and strategically vulnerable pinch points, most notably the Suez and Panama canals and straits such as Hormuz and Malacca.
The grounding of the 400-metre, 224,000-tonne Ever Given cargo vessel in the Suez Canal last Tuesday inevitably sparked concern across the global economy and, while the vessel is now afloat and traffic has resumed, will have once again reminded Asian countries of the risks such trade arteries continue to present. With the canal's west-bound daily traffic valued at over US$5 billion, and east-bound at around US$4.5 billion, the numbers speak for themselves. But how has the blockage impacted energy supplies into Asia? Will there be wider economic fallout? And what might this mean for alternative transport routes in the future? To understand more I spoke with WoodMac analysts across our economics and commodities teams in APAC.
The economic impact on Asia and potential upside for rail
The immediate impact of the blockage at Suez will be felt more by China and India than by ASEAN countries and Japan. Trade with Europe accounts for 20% and 17% of the total trade volume of China and India respectively. At the same time trade with Europe accounts for only around 10% of the total trade of ASEAN counties and Japan.
Even with the Ever Given now afloat, the blockage lasted for almost a week and will take at least another week to clear the backlog, resulting in the loss of around two weeks on delivery schedules. This poses a risk to supply chains given that this time period is close to the inventory days for some manufacturers and will have a ripple effect on many others. I expect to see this reflected in trade data for April and May and it could lead to a lower than expected Q2 GDP for some Asia countries.
The blockage will have the greatest impact on industrial goods and consumer products between Europe and Asia. Exports from Asian countries are mostly upstream of the global supply chain, supporting numerous manufacturing sectors in Europe. This risks disruption and potentially reduced output across these sectors, including automobile manufacturing in Europe.
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Key takeaway: Following the law of unintended consequences, I think the blockage could benefit the expansion of the China-Europe railway. More than 2,000 trains carried freight from China to Europe in January and February this year alone and China is enthusiastic to see this grow as a part of the Belt and Road Initiative. Despite a 57% increase in rail freight from China to Europe in 2020 compared to 2019, the China-Europe railway carried only the equivalent of 0.5% of the maritime trade.
Yanting Zhou, Senior Economist Asia Pacific
Suez less critical to crude oil imports, but supports Asia’s product exports
Asia relies on the Suez Canal for just 3-5% of crude oil imports, mainly from Europe and the Caspian, so the immediate concern has been more around the impact on prices rather than volumes. I expect the near-term impact on absolute crude prices will be minimal, with a reshuffling of crude trade flows to support the demand on both side of the canal. Asian buyers can manage disruptions by taking more crude oil from the Middle East via Strait of Hormuz. At the same time, I expect European refiners to replace some Middle Eastern crude with more Atlantic basin supplies. Crude price differentials have adjusted to support this dynamics, with Dubai crude increasing versus Brent.
The story is somewhat different for oil products. Asia is structurally short of naphtha for petrochemical feedstock and fuel oil for shipping. We estimate that about 10-20% of Asian imports of these products transit the Suez Canal and so the blockage has created some tightening in the market for these products in Asia.
But it’s not all one-way traffic. Typically, 10-20% of Asia’s exports of middle-distillates (diesel and jet fuel) reach western markets via the Suez Canal. Product stocks for these fuels were already running high in Asia and any further delay in clearing these exports into the Atlantic Basin will put a downward pressure on the middle-distillates prices in Asia.
Key takeaway: Despite the short-term impact of the blockage I do not expect refiners or shippers to structurally change their choices and operations based on this event. Buyers in Asia remain more concerned around potential disruption to other lanes such as the Straits of Hormuz and Malacca rather than the Suez Canal. This event also underscores the importance of having strategic petroleum reserves (SPR) in Asia given the region’s crude oil import dependency is more than 80%.
Sushant Gupta, Research Director, APAC Oils Research
Blockage again highlights risks to LNG transit into Asia
The Suez Canal accounts for around 8% of global LNG trade. Prior to the blockage, March saw a handful of cargoes each day in both directions. Wood Mackenzie’s VesselTracker shows one LNG vessel, the Golar Tundra, loaded at Egypt’s Idku on 21 March and transiting to Asia, as "trapped” within the canal. At the Southern entrance, the Rasheeda is awaiting to transit with a shipment from Qatar. We identify at least eight further LNG tankers, both laden and ballast, and currently in the Mediterranean Sea, that could have been expected to transit through the canal in the two days immediately after the blockage.
The impact of this disruption on the LNG market is gradually becoming clear. And although only a relatively limited number of LNG cargoes were in the close vicinity of the Suez Canal when the incident started, more will have booked slots to transit the canal, leading to bottlenecks even as the situation resolves. However, the timing of this incident is fortuitous in that it will have less impact on prices than that of the Panama since we’re entering the shoulder season for the LNG market.
Key takeaway: Issues at both the Panama and Suez canals have already impacted the supply of LNG into Asia in the first few months of 2021. And while for US volumes in particular this has been an issue, there is clearly little alternative option for volumes coming out of the Atlantic and into Asia than via either canal. Could other suppliers stand to benefit? Perhaps, with Australian LNG likely to be emphasising its relative lack of shipping vulnerability into Asia.
Rob Sims, Global Head of Short-Term LNG Research
APAC Energy Buzz is a weekly blog by Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.