Analysis: Water under the ship

Niveen Wahish , Tuesday 30 Mar 2021

Now that the stranded Ever Given container ship has been refloated in the Suez Canal, how will the incident affect the shipping industry and who will pick up the bill

Water under the ship
Water under the ship

Everyone breathed a sigh of relief upon seeing the mammoth Ever Given ship dislodged from the Suez Canal this week, freeing up the waterway that it had blocked for six days and putting an end to millions of dollars in losses to multiple stakeholders.

With transit stopped for six days, the losses in revenue for the Suez Canal Authority (SCA) and Egypt are in excess of $95 million, said research by Refinitiv, one of the world’s largest providers of financial markets data, on Monday. Suez Canal revenues came in at $5.7 billion in fiscal year 2019-20.

Because of the relatively quick solution, the incident is not likely to have a long-term effect on the shipping industry, Roar Adland, a professor at the Norwegian School of Economics, told Al-Ahram Weekly.

For the part of the shipping industry that is dependent on the Suez Canal, such as the container segment and certain commodity trades, the longer route around the Cape of Good Hope (CoGH) is not efficient with regard to costs or time, he said.

According to the Refinitiv report, ships going around the CoGH have to factor in an additional 10 days of transit time and the fuel that will be consumed during the voyage. For a large container vessel, super tanker, or bulk carrier, this will be an additional cost in excess of $400,000, the report said.

While shipping companies may not reroute their vessels in the wake of the incident, Adland said, the container-shipping companies might think twice about further increases in vessel sizes.

The average size of a vessel is now five times bigger than it was 20 years ago, according to Velta International Freight Management, which specialises in shipping, warehousing and distribution solutions. The operation of the larger vessels is more cost effective, Velta said, adding that with larger capacities companies are able to utilise slow-steaming, making their fleets more energy efficient and environmentally friendly with lower C02 emissions.

But it also noted that because of the huge size of these ships, some shipping routes are impassable, and some port quays are not deep enough. The SCA has over the years worked on expanding the canal, and it is now able to receive 61.2 per cent of the world’s tanker fleet, 92.7 per cent of the bulk carrier fleet, and 100 per cent of container ships.

Adland does not believe these large vessels will reroute either, unless the SCA puts limitations on their passage such as restrictions on sailing speeds, the need for tugs, or any increases in transit fees, which he believes to be unlikely.

To avoid a recurrence of such incidents, Adland suggests putting stricter operational limits in place, such as reducing allowable speeds or vessel sizes during bad weather.

The temporary halt to transit through the Suez Canal and the delay of around 400 ships held back by the Ever Given was a hard blow to global trade, which had already been hit hard by the Covid-19 pandemic.

Reuters reported that the container ship blocking the Suez Canal could cost global trade $6 billion to $10 billion a week, according to a study by German insurer Allianz. The report showed that each week of immobilisation shaved some 0.2 to 0.4 percentage points off annual trade growth. In October 2020, the World Trade Organisation (WTO) had forecast a 9.2 per cent decline in the volume of world merchandise trade for 2020, followed by a 7.2 per cent rise in 2021.

The main Covid-19 effect has been in the container segment, with global trade flows becoming more asymmetric and surges in demand following the gradual normalisation of economic conditions, Adland said, adding that this had caused large increases in the cost of transportation for containers.

“This incident further reduces the availability of containers and vessel capacity, either because ships are delayed while waiting outside the canal or because they are rerouted around the COGH, thus lengthening the voyage by at least one week.” He said this had exacerbated the tight market situation during the blockage and would do for some weeks thereafter.

The cost to the insurance business is another aspect of the incident. Mohamed Mahran, vice-chairman of Allianz Egypt, is expecting an array of claims to be made. These include insurance to the ship itself, which includes the hull and machinery.

Mahran said this was likely to be valued at $100-140 million, but the exact amount would depend on the extent of the damage. Claims could also be made for damage to surrounding property. The dredging machinery could have damaged the banks of the canal, and there should be compensation for this, he said.

The SCA will claim for this damage from the ship owners or operators, whichever is responsible, he said. The Protection and Indemnity Club (P&I Club), the policy ship owners purchase to protect themselves against liability claims from crew, passengers, and third parties, will probably cover these claims, Mahran said.

Besides the indemnities, there will also be penalties because of the damage caused, he added. The salvage operations have a massive cost that will be claimed by the owners, and the P&I club will probably cover that too, he said.

Claims could also be made by the hundreds of vessels queuing to cross the canal during the crisis, Mahran added. “That has a cost because of the timing of deliveries. Delays mean fines,” he commented, adding that there is also “the cost of lost opportunities. Being stuck means they cannot make more trips.”

Despite the expectedly high claims, Mahran is not worried for the industry, however. “Marine insurance is the oldest form of insurance and is a very well-established line of business. It is almost identical across the globe with matching policies everywhere,” he said.

Although the claims from this incident are expected to be large, the insurance business is capable of meeting such obligations and will not suffer drastically, he said.

The incident would thus not have a negative impact on the insurance industry, Mahran said, but would raise awareness and shed light on its prominent role. Global trade of $19 trillion is more likely than not to be insured, he pointed out, and “without insurance, such a huge volume of trade could not take place.”


*A version of this article appears in print in the 1 April, 2021 edition of Al-Ahram Weekly


Short link: