Saturday, June 8, 2019

Closing the Canal: The 1967 Six Day War’s Impact on Maritime Trade

From Winton's Longer View:

Choked Off: The Six Day War’s Impact on Maritime Trade
On June 5, 1967, Israeli jets launched the opening salvo of a short, but consequential conflict that shut the Suez Canal for eight years.
Looking at how events unfolded following the blockage of this key artery of world trade underscores that geopolitical shocks can have unexpected and long-lasting effects. As shipping has grown more complex, assessing multiple long-term datasets like those Winton considers below can offer up valuable information and potential investment opportunities. Today, the Suez Canal remains a vital economic conduit. It handles a sizeable share of Asia’s merchandise exports to Europe and the United States, particularly since China has designated the waterway as a critical component in its Maritime Silk Road Initiative, investing in container hub facilities along its route.
Arterial Blockage A week before the canal’s closure in 1967, Egypt had sealed the Straits of Tiran to Israeli ships, prompting Israel to strike at Egyptian airfields. This initiated the Six Day War, which brought the Israeli Defence Force to the eastern bank of the Suez. President Nasser of Egypt immediately closed the canal, planting mines and scuttling vessels for good measure, hoping to force the international community to intervene. But with Nasser unwilling to guarantee Israeli shipping rights, Israeli soldiers stayed put and the canal remained closed for eight years. The visual graphic below depicts how shipping routes changed and adapted in the period following its shuttering:
The closure arguably had a less dramatic short-term economic effect than might have been supposed. The most instantaneous impact was on shipping rates. Oil tankers, en route from the Arabian Gulf to Europe, were forced to take the much longer route around Africa, creating a surge in demand in the time-charter market that was not immediately met by supply.

Cargo insurance premiums and operating costs also increased. As a result, freight rates quadrupled – passed on to consumers as a surcharge. The dry bulk carrier market also witnessed an upswell as grain carriers were hastily converted to carry oil.

The most remarkable change was in fact long-term in nature. The Suez Canal’s former status as the preeminent thoroughfare for crude was never regained, despite the waterway’s geographical proximity to many of the world’s largest oil-producing countries.
The 1967 Spike in Tanker Rates: One of Many
Spike In Tankers2
Source: Winton; Martin Stopford; Bloomberg
The 1956 Suez Crisis: A Wakeup Call The price hikes that followed the Suez’s closure were painful, but it could have been much worse. The experience of the 1956 Suez Crisis – when the canal was closed for six months and severely disrupted Europe’s oil supplies – had served as a wake-up call.....