Supply Chain Decoupling? Happening Globally, Unintentionally, Again

Post Lehman Brothers crisis, Egyptian authorities looked at propping up revenue. Major revenue sources were (1) Tourism and (2) Trade through Suez Canal.

After bomb attacks at the Egyptian resort city of Sharm El-Sheikh, the Tourism industry lost its sheen. The Egyptian authorities were keen to develop trade-related activities along with Suez Canal. During this period, the free zones in UAE (JAFZA (Jebel Ali Free Zone Authority), Dubai Airport Free Zone Authority (DAFZA) managed to draw international attention due to their ease of doing business. This resulted in a lot of investments in Free Zones related to manufacturing and trading businesses. The Egyptian authorities were motivated with these developments and started exploring opportunities for increasing revenue through Suez Canal.

The expansion project called New Suez Canal was executed at a cost of  USD 8 Billion and got completed in 1 year. The project’s aim is to increase the role of Suez Canal region in international trade and to develop the adjacent cities. During the same period, major plans were drawn out to popularize Suez Canal Economic Zone – Free Trade Zone. Post this investment on infrastructure, revenue of the Suez Canal authority was expected to increase from USD 5 Billion to USD 12.50 Billion annually. The widening of canal allowed ships to transit (the canal) in both directions simultaneously. Before this, the canal was only one shipping lane wide. This expansion was expected to decrease waiting time of ships from 11 hours to 3 hours and to increase the capacity of the Suez Canal from 49 to 97 ships a day.

Much to the surprise of Egyptian authorities, revenue started falling after all these initiatives. During the same period, crude oil prices fell from peaks of $100 to $30/barrel. Global consumer demand dropped.  Shipping lines fully capitalized this unique scenario. They started taking a longer route through Cape of Good Hope (south of Cape Town, South Africa). During normal days, shipping lines rarely choose this longer route.

This approach could have caused (1) Order fulfillment delays due to longer transit (2) Fuel cost escalation due to increased burning of fuel to transit longer distance. Interestingly, buyers accepted delays due to slowdown in demand at the destination. Drop-in crude oil prices compensated for the increased fuel consumption.

Toll charged for passing through Suez Canal was $400,000. With low crude oil prices, shipping lines saved approximately $225,000 per sailing. Buyers🏼‍ saved on warehousing charges due to late arrival of containers.

History is repeating itself. Shipping lines like ONE, Evergreen, MSC, Cosco have opted for the longer route through Cape of Good Hope. Suez Canal charges vary depending on the size of the vessel, number of containers carried and the proportion of laden boxes. Based on current tariff, a fully laden 20,000 TEU container vessel may pay approximately USD 700,000 in transit fees for Asia-Europe sailing.

Nobody wants cargo due to drop in demand arising out of COVID-19 lockdown. Lot of uncertainty still prevails regarding the resumption of economic activities. Shipping lines will save millions of Dollars that will compensate for the revenue loss. Supply Chain de-coupling happening again, unintentionally.

(Decoupling is creating independence between supply &consumption) Thoughts?