Why the Suez Canal Blockage Will Increase the Price of Coffee
Concerns are growing about the lengthened blocking of the Suez Canal waterway in Egypt. Apparently, not only will the prices of fuel and oil rise, but the price of coffee is at risk as well. An enormous ship got stuck and blocked the Suez Canal for almost a week. Specifically, from 23. to 29 of March. Even worse, the Suez Canal is the planet’s most important waterway, as well as the shorter water path between Asia and Europe.
Unfortunately, it seems that these concerns may be valid. Here’s why the Suez Canal blockage will increase the price of coffee in Europe, and especially the UK.
The damage from the incident
The Ever Given merchandise transporting ship got stuck on the 23rd of March. Unfortunately, on the key coffee trade route between Asia and Europe. Around 12% of the worldwide trade passes through the Suez Canal. Even more, this water route is known for its role in the trade of agricultural merchandise, like coffee.
Just in 2021, around 50 ships passed through it per day. It took seven days to dislodge the ship. In the meantime, the traffic around the canal has multiplied several times. Over 400 got stuck by the time the authorities were able to resume traffic through the Suez Canal. About 200 of them in the Red Sea, less than that in the Mediterranean. Even 50 of them got stuck in Bitter Lakes. The total trade damage is estimated to be around $9.58 billion.
The blockage of the Suez Canal
Some of the former marine captains say that going through the Suez Canal is a complicated and highly risky procedure. The wind gust will impact the containers on the ships, making them into a kind of “sails.” This impacts the course of the ship. When it comes to huge ships like Ever Given, it’s hard to counteract them when the ship goes in the wrong course.
Unfortunately, this has happened with the Ever Given. On March 29th, the ship was somewhat re-floated and the authorities moved 80% of it in the correct path. However, its bow was stuck a couple of hours more until Egyptian, Italian, and Dutch ships moved it with the tow in the direction of the Great Bitter Lake.
The authorities checked the Suez Canal again for damage, and after passing a security check, everything was back to normal. Well, except for the Ever Given. The Egyptian government impounded the ship on April 13th, because the ship refused to pay an alleged $915 million in fines the authorities demanded. This includes the $300 million in “losing reputation.”
The effect on coffee prices from the incident
According to the reports, some ships were carrying Robusta coffee. For instance, Nescafe is one of its users. There has already been trouble with getting Robusta coffee on the continent, according to coffee roasters. Vietnam is the Robusta coffee globe’s biggest producer, and there was already a shortage of shipping containers that have slowed the global food trade.
Both of these delays have increased the price of Robusta coffee by 2.8%. A couple of days before, the difference between May and July futures on Robusta coffee has increased by 30%.
Roasters have been concerned about supply issues since the pandemic began. Especially around human struggles regarding it. Like with so many disruptions to date, the blocking of the Suez Canal is to likely cause significant but temporary delays in a specific part of our coffee supply, including East Africa producers such as Ethiopia.
This is because most of the coffee beans from Asia and East Africa — also two important producers of top Robusta coffee — come to Europe from the Suez. In fact, we could experience the price increase of gas and oil, travel, and even clothing directly caused by canal issues. Especially as individuals begin to return to work and take vacations for spring break.
Speaking to ScoopEmpire, Alex Mastin the CEO of Homegrounds told us that nearly all coffee subscription services are going to increase prices in 2021. This is a direct result of the impact on global supplies, as well as global warming affecting coffee producing nations such as Brazil.
We need better supply chains
Experts describe the Suez Canal disruption as something they call a physical, or supply chain “black spot” since there’s a significant concentration of transport risk in one particular area. This came only a year after another supply chain concentration risk — the coronavirus pandemic.
It begs the question of how many more of such disruptions we can experience before we see the ripple effect in the economy. We simply can’t operate in the same way anymore. Solution-wise, businesses should explore how to predict these problems before they occur. In other words:
- Map out multiple-level supply chains
- Identify needed alternatives
- Set up agility mindset and methodology
The problems in the supply chains we’ve experienced with coronavirus and the Suez Canal….are the direct result of how the supply chain was designed. Just in time and more than fragile. It’s not only logistical supply chain problems — we need to add the tech to the formula to avoid similar things happening in the future. And just as the availability of goods began improving, the blocking of the Suez Canal brought more problems.
Will roasters be able to support two or three weeks of delay?
Likely not, according to Raphaelle Hemmerlin, the director of logistics at Swiss coffee roaster Sucafina SA. The problem is, there’s no buffer stock that coffee roasters normally have. However, it seems that this isn’t worrying coffee sellers just yet.
Some of the EU’s coffee traders tried to get supplies from East Africa in order to bridge the shortage of Robusta beans from Vietnam. Because of this, coffee traders have experienced more demand for mild-tasting Arabica beans from East African nations, as well as those from Uganda.
The issue is, these beans also come through the Suez Canal. Those who store them in the EU’s warehouses charge a significant markup when it comes to physical markets. During the peak of the container shortage, traders demanded $450 per metric ton above the exchange price for Vietnamese’s Robusta coffee they held in the EU. This is three times the normal charge.
It seems that the inventory in the EU is quite tight. And experts like those from JL Coffee Consulting predict a spot market will occur. Yes, inventory in Vietnam is good. But what is that worth if you can’t send it to the UK?
Is it time for Brazilika?
The one nation that has benefited from both the blocking of the Suez Canal and the container shortage that came last year was Brazil. Brazil is the second-biggest producer of Robusta coffee. The country exported a staggering five million bags of that coffee in 2020 alone. This is a 25% increase from the earlier year, according to experts from Cecafe.
The majority of these coffee beans end up in exchange-certified warehouses, rather than with roasters. This is because replacing Vietnamese coffee with Brazilika can likely modify the taste of the end product for customers. East African beans are still a better substitute.
Can roasters make a different recipe? Unfortunately, it isn’t so simple.
Tradelines such as Moller-Maersk and Hapag-Lloyd said they were thinking about making ships travel around Africa to avoid the Suez Canal blockade, but this isn’t as easy as it seems. The cost of diverting is too large. Even if that occurs, they still need to clear the whole queue of ships, which only adds more issues to the whole supply chain.
