Impact of Suez Canal Blockage on Auto Industry

The legendary Suez Canal nested in Egypt has been the heart of every world trade over the last century. Acting as a bridge between Africa, Europe, and Asia, the significance of this canal as a world trade route is imminent. So what happens when the shortest maritime route from Europe to Asia gets blocked by a massive 400 m container ship?

The answer lies in massive numbers, all of which are of negative impact on global trade.

For starters, 12% of global trade passes through the Suez canal each day, which accounts for a whopping total of $9.6 billion each day! Revenues of almost 14 to 15 million USD are taking a hit each day the canal remains closed. Countless businesses, ranging from domestic transport providers to retailers, supermarkets, and manufacturers are at risk of losing millions of dollars. Sadly, the already struggling automotive industry also takes a massive blow from the shutting-down of this important trade route.

The onset of the Suez canal blockage

The Suez canal blockage is already draining the life force out of a struggling automotive industry. Delay in the transportation of crucial supplies could mean Mayday for automakers drowning in debt. The automotive industry is already facing complications due to a shortage of semiconductor materials, seating foam, and a variety of petroleum-based products. If the Ever Given container ship couldn’t be refloated in time, it would create a major scarcity of automotive raw products in the US. Not just this, even deliveries of best-selling cars like the 2021 Toyota Prius would have got delayed, since a lot of major components are imported from Asia.

Mr. Dziczek, vice president of the Center for Automotive Research in Michigan said “It only takes a shortage of part to mess things up”. His statement indeed rings a warning bell to the automotive industry, which is heavily reliant on the Suez canal. The canal acts as a trade route for the transportation of raw materials, parts, and finished cars, which are a major part of the automotive economy.

Europe’s Car Dealer magazine reported as of Friday morning, on the 26th of March that at least two large auto cargo vessels, the Morning Star and the Hoegh London were stuck in the midst of the Suez canal because of the grounding of the Ever Given. The magazine also said that numerous major cargo vessels are approaching the Suez canal. These vessels could be forced to anchor if the crisis continues or may have to take the longer sea route all around Africa. These vessels might traverse through an extra 10 days of sea time if they were to take the longer route.

Impact on the oil industry

The famous shipping journal Lloyd’s List estimates a total of 1.9 million barrels of oil that pass through the Suez canal each day. This figure is 7% of all seaborne oil. If the canal is cleared soon enough, there won’t be any major repercussions to the global oil industry. Energy demand is still low during this pandemic period, hence the oil industry is looking good for a short while. However, if the crisis lasts for months, we may expect major bottlenecks down the road.

Europe-bound petroleum products such as gasoline and jet fuel may encounter a further delay in delivery. The price of benchmark international crude oil spiked just recently because of the trade blockade. This may raise the prices of regular gasoline, diesel, and petrol, as customers will have to shell out more cash for a regular refill.

Upcoming challenges for automakers

The auto industry is going through a critical period because of the Coronavirus outbreak. Factories all around the world were closed for a long period of time. Retail inventories are facing a shortage crisis which was never seen before. J.D. Power recently released an estimate that there are 1 million fewer vehicles in dealer lots than the usual normal figure during this time of the year.

Automakers have strived continuously to replenish their depleting inventories during this outbreak. With the blockage of the Suez canal, automakers now face an even bigger challenge on hand. The worsening shortages of key car components like semiconductors could be detrimental to their production process. Automakers could be forced to close down or slow their production at their assembly lines. Now there is another shortage looming over the automakers, that is petroleum-based goods such as seating foams.

Since all the auto industries operate on a just-in-time basis, any delay in transportation of goods could cause grave problems. Automakers may have to halt their whole production lines even because of any minor disruptions in the supply chains. That means even a slight delay in delivery could mean the production lines in Europe will grind to a halt. Those were the exact words of Tom Barnard, editor at Electrifying.com.

The shutdown of the Suez canal affects the automotive industry in the long term. That means the U.S. dealerships of European giants like Volkswagen, Volvo, BMW, Mercedes-Benz, and many others could face a grave shortage crisis if their plants were shut down.

Similarly, other American automakers would also face a deficiency of European-made parts and components like the electronic stability control systems made by Bosch. To rub salt to the wounds, shipping problems in the U.S including a slowdown at the ports of Los Angeles and Long Beach could further cripple the automotive industry. Principal automotive analyst for Cox Automotive, Michelle Krebs expressed the same concerns.

How automakers responded to this crisis

A Kia spokesman admitted that the brand was aware of the likely delays in delivery of cars bound to the UK. However, he also defended his company’s stance by saying that all its stock levels are at a sufficient level for now. Mazda and Toyota are looking good for now.

Suzuki also stated that it had an adequate amount of supplies for now. European automakers may be hit the worst because of this looming crisis. While none of the German automakers have released a statement yet, there is no denying that they may be considering implementing their crisis plans.

What lies ahead for automakers

The blockage of the Suez canal severely dampens the automotive trade relations between Europe and the Far East. The American automobile industry is also at substantial risk as well. The fate of the automotive industry lies in the hands of the Ever Given container ship, as every automaker holds their breath to witness the resuming of operations in the Suez canal again.

At this moment, it is hard to predict when the skyscraper-sized cargo carrier will refloat again. However, the longer it takes, the more the global automotive industry is at risk of severe disruption.

This article does not neccessarily reflect the opinions of the editors or the management of EconoTimes