Systemic risks in global supply chain: Suez Canal

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In the globalised economy we have come to take the long supply chain from the Far East to Europe for granted. Considerations such as lead times and quality assurance dominate decisions over Far East sourcing. However, such a long supply chain is inherently vulnerable. When making such a major decision, it is critical that buyers understand systemic risks which could cause catastrophic business outcomes.

Continuing Unrest

Earlier this month, Egyptian military sources reported a failed attack by armed men on a Chinese-owned container ship passing through the Suez canal. The same week, key figures in Egypt called for US military traffic to be barred from using the canal in light of potential US military action against Syria.

The events in the latter country have overshadowed the on-going turmoil in Egypt, in which the Interior Minister recently narrowly escaped an attempt on his life. Two alarming scenarios- a more successful attack or a hardline position by an Egyptian government- point to the same possible outcome: the closure of the Suez canal to commercial traffic.

Alternatives

Already, with the ever-increasing size of container ships, the narrowing of margins during the financial crisis and the rise of 21st century piracy, shipping lines have been turning to the ages-old route around the Cape of Good Hope. Some enterprising shippers have even been making the most of climate change to transit via the Arctic Ocean, a route which is in fact shorter than the Suez.

A prolonged closure- such as that which followed the Six Day War and lasted until 1975- would see world shipping routes adjust to these alternatives. Apart from an increase in lead
times, at least outside the northern summer months, the long term impact to supply chains should be limited, and this could be partially mitigated by faster steaming on this route. However, in the short term, the results could be extremely severe.

No Recourse

A sudden closure of the canal would force large numbers of vessels to make a diversion of thousands of miles from their course. Worse, dozens of ships use the canal every day and could be left stranded in transit. Should such an event occur, receivers would be left with little or no recourse, as it would certainly fall under Force Majeure.

Air freight could substitute for high value items, but would still represent a major on-cost and, with every single importer affected, capacity would quickly be oversubscribed, as would alternative providers in Europe. An incident in the next few months could destroy the ability of businesses to cope with seasonal volumes. By contrast, any products which are sourced closer to home but compete with Far East imports would see a major boost in sales.

There is little that buyers could do in such a scenario, and little that could be done ahead of time to mitigate the risk. However, it remains a very real possibility, and one which should be considered when making cost/benefit analysis of Far East sourcing until such a time as the situation in Egypt has stabilised.

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