In today’s edition, we analyse the situation in the Suez and Panama Canals and the impact on global trade. Enjoy!
Sailing through rough waters
The problems co-occurring in the Suez Canal, through which some 12 per cent of world trade passes, and in the Panama Canal, where between 3 and 5 per cent of commercial vessels cross its waters, create the conditions for a perfect storm in global trade.
The Suez Canal – which handles 12 per cent of global cargo traffic and 30 per cent of international container traffic, with an annual value of around one trillion dollars – is suffering the repercussions of the war between Hamas and Israel, i.e. the consequences of intensified attacks on merchant ships crossing the Bab el-Mandeb Strait and the Red Sea by Yemen’s Houthi rebels, and off the coast of Somalia by pirates.
Delays in deliveries, a decrease in available containers and cargo, increased shipping rates and the passing on of higher transport costs to end consumers are ‘only’ the most direct. Transport costs through Suez are growing, also due to rising insurance premiums. Maersk and several other companies have announced plans to reroute ships around the Cape of Good Hope, i.e. for a route that adds 3,200 miles and nine days of travel. At the same time, Hapag-Lloyd will introduce a shuttle service via Jeddah in Saudi Arabia.
Not only containers but also significant flows of grain and oil products pass through the canal (80 million tonnes of grain per year, 7 million barrels of crude oil per day). The traffic of crude oil through the Suez Canal had practically doubled after the Russian invasion of Ukraine. As a consequence of the turmoil in the region, large companies transporting solid and liquid remelts are also reorganising their routes.
The Panama Canal, on the other hand, is struggling with a severe drought. Last October was the driest month in decades in the region’s catchment area. On 7 January, the canal reached one of its historical lows: about 1.8 metres below average, with tree stumps emerging above the waterline, just after what should have been the rainy season. Since last November, the number of transits has been significantly reduced, with the strictest restrictions issued since 1989, when the canal was closed due to the US invasion of Panama.
To date, the Panama Canal is operating at 66% of its nominal capacity, and until a few tens of days ago, a further cut in transit was expected. Because of this, many shipowning groups, which were unable to “pay” to “jump the queue” (in November, the auction for a slot went up to USD 4 million, and the “ordinary” price is now around 1.17 million), initially chose longer and more expensive routes, such as the one to Suez, which lengthens journey times by at least 5-6 days, leading in October and November to an increase in traffic in Suez (+4.3% over the same month of the previous year). Given the situation, however, in recent months, shipowners have also been considering the route via the Cape of Good Hope – which increases travel days between ports on the east coast of the United States and the Gulf of Mexico with Asia by around two weeks and which has seen a 70% increase in transits this year – and, some, even the Strait of Magellan.
Possible solutions are being considered, including creating an artificial lake to pump water into the channel and seeding clouds to increase rainfall in the area, solutions that, even if they were sustainable, would take years to implement. There are few short-term solutions, and the hope is that the overheating of ocean waters, known as El Niño, will subside its effects by March, allowing a return of rainfall to replenish the lakes that currently keep the canal alive.
The impact of these disruptions on freight rates is significant. All freight rates are on the rise, just when the damaging effects of the pandemic were being dispelled: in the first week of January 2024, Drewry’s composite index for containers (World Container Index) increased by 61% to USD 2,670 per 40-foot container (FEU), up 25% from the same week last year and 88% higher than the average rates in 2019 (pre-pandemic). However, the variations are heterogeneous. Freights from Shanghai to Rotterdam are up 115% (from US$1,910 to US$3,577 per FEU), rates from Shanghai to Genoa are up 114% (from US$2,222 to US$4,178 per FEU) and to Los Angeles by 30% (to US$2,726 per FEU). The outlook is not rosy, with Drewry speculating further increases in east-west spot rates in the coming weeks and shipping companies applying significant surcharges for vessel relocation and increases in insurance costs.
These two situations, which are independent but add up, risk generating a new slowdown in supply chains and a reinvigoration of global inflationary pressure, which seemed to be on the way to a reduction after the record dynamics of the last year and a half. The double crisis has already impacted energy prices, with natural gas and oil rising rapidly, affecting fuel costs. Although the crisis is global, it could again be Europe that suffers the most: given the macroeconomic environment in the Eurozone (general slowdown in growth and Germany in particular), managing a new increase in energy prices could present considerable challenges, with real risks, once again, of rebound phenomena of stagflation.
Geopolitical risk and climate change are causing the available shipping lanes to revert to the situation of more than a century ago, with shippers returning to the alternative routes (Cape of Good Hope and Strait of Magellan), which were the main trade passages between the northern and southern hemispheres before the artificial canals were made operational (Suez opened in 1869 and Panama in 1914). And this was just when the effects of the pandemic phase and port closures caused by the spread of Sars-Cov-2 were finally considered over.
The recent disruptions to the Suez and Panama canals are stark reminders of the critical need to invest in the resilience of crucial trade chokepoints. These vital waterways are linchpins in the global trade network, facilitating the movement of goods and commodities across continents. The unexpected events at these strategic points underscore the vulnerability of our interconnected supply chains and highlight the imperative to fortify them against potential shocks.
One crucial aspect of fortifying these trade chokepoints is enhancing security measures. The recent incidents underscore the potential risks associated with such vital maritime routes, necessitating comprehensive security protocols to safeguard against intentional disruptions, piracy, and other security threats. Strengthening security infrastructure protects the flow of goods and ensures the safety of maritime traffic and the personnel involved.
Moreover, climate adaptability is a pressing concern in changing environmental conditions. Rising sea levels, extreme weather events, and other climate-related challenges pose significant threats to the operational capacity of these canals. Investing in climate-resilient infrastructure and incorporating sustainable practices is paramount to ensure the continued functionality of these trade routes despite the changing climate patterns.
Port efficiency is another critical component that demands attention. Optimising the efficiency of ports connected to these canals is essential for expediting cargo handling and reducing transit times. This involves upgrading port facilities, implementing advanced cargo tracking and handling technologies, and streamlining logistical processes to enhance overall efficiency.
Furthermore, exploring and devising alternative transport routes is a prudent strategy to mitigate risks associated with overreliance on specific chokepoints. Diversifying transportation options, such as developing alternative canals, railways, or pipelines, can offer contingency solutions for disruptions at primary trade routes.
By addressing these critical aspects, economic powers can contribute to the resilience and sustainability of global trade networks, ensuring smoother and more secure cross-border commerce in the face of potential challenges.
