FOLLOWNG on our article titled “The Economics of Oil” and our analysis on the impact of oil price shocks on inflation, we assess how the traffic jam on Suez Canal might have impacted oil prices.
Approximately 10 percent of global seaborne oil trade, plus a large volume of liquified natural gas (LNG) and petroleum, sails through the canal daily, mostly delivering petroleum products from the Middle East to refineries and distributors in Europe.
The good news is that the skyscraper-size ship (Ever Given) that was blocking the Suez Canal was freed on Monday 29 March 2021, five days after wedging itself sideways into the banks of one of the world’s busiest waterways.
The 1,312-foot, 200 000 metric tonne ship created a shipper’s nightmare and a traffic jam of more than 360 ships while costing billions in delayed shipments.
The uncertainty also forced some shippers to alter course and take the longer, alternate route around the Cape of Good Hope in Africa, adding weeks to their destinations and increasing fears of piracy.
Year on year inflation rate for the month of March 2021 as measured by the all items Consumer Price Index (CPI) slowed down to 240,55 percent versus 322 percent in February 2021.
The Suez Canal is a 120-mile-long shipping link between the Mediterranean and Red seas that carries 10 percent to 12 percent of commercial shipping and about 2,5 percent of the world’s oil.
A German insurer said delays of this nature could cost global trade US$6 billion to US$10 billion a week.
On average, nearly 50 vessels per day pass along the canal, although at times the number can be much higher — accounting for some 12 percent of world trade.
It is particularly important as an avenue for oil and liquified natural gas, enabling shipments to get from the Middle East to Europe.
There were fears that the blockage could tie up shipments of crude oil and cause prices to rise on international markets.
While reports suggest indicated that traffic is flowing again relatively quickly, the incident has shown what can go wrong when ultra-large vessels like the Ever Given must pass through the relatively tight confines of the canal.
Even before the incident, freight shipping rates had been at an unprecedented high. The Covid-19 pandemic also stranded thousands of mariners at sea, held up port operations and even led to a slowdown in the production of freight containers. This implies that most of these costs are passed on to consumers.
Meanwhile, the latest data released by the Zimbabwe National Statistics Agency (ZIMSTAT) shows that year on year inflation rate for the month of March 2021 as measured by the all items Consumer Price Index (CPI) slowed down to 240,55 percent versus 322 percent in February 2021.
The month-on-month inflation rate in March 2021 was 2,26 percent shedding 1,19 percent points on the February 2021 rate of 3,45 percent.
While it appears that there are signs of stability, particularly on the exchange rate front, a key question that has come up is whether the stability will be sustained?
The concern is that a post-Covid-19 era whereby the economy and businesses has opened means that the stampede for foreign currency from every corner of the economy remains.
There is also a heavy reliance on imports (critical raw materials, spare parts and electronic consumables).
As the demand for foreign currency increases, there will be a cost-push inflation phenomenon as economic agents incorporate the cost of procuring forex (exchange rate premiums) in their prices.
The official exchange rate also continues to lag the parallel market rates as measured by the gap of 30 percent.
Further, there is always the risk associated with unplanned government expenditures. While the 2021 National Budget indicates a shift from command to smart Agriculture, we cite that there is scope for unplanned government expenditures in 2021, particularly as we move towards an election year in 2023. Political interests will always take centre stage, and this could lead to budget overruns.
That said, factors that will support a stable exchange rate environment include (i) the anticipated maize bumper harvest that will significantly reduce the import bill and (ii) liquidity support through the IMF possible US$650 billion SDR allocation. All in all, we still maintain that risks of value destruction remain given the fragile state of the economy.
Consequently, we recommend investors to seek exposure in traditional blue chips, regional plays and export oriented companies. On our BUY list are names like Delta, Econet Wireless, Cassava, Innscor, National Foods, SeedCo International and Simbisa Brands.