At the heart of international commerce lie the Suez and Panama Canals, two engineering marvels that have reshaped global trade routes and economies. In this article we examine recent disruptions that have impacted global trade. The drought in the Panama Canal, and the geopolitical tensions in the Red Sea affecting the Suez Canal.
These issues not only underscore the canals’ vulnerabilities but also their crucial role in maintaining the rhythm of global trade. We also explore the strategies traders are employing to navigate these challenges and the outlook for 2024, offering insights into the future of these vital trade routes.
The importance of the Suez and Panama canals on global trade
The Suez Canal, opened in November 1869, is a 193km waterway connecting the Mediterranean Sea and the Red Sea. It provides a direct route for shipping between Europe and Asia, bypassing the need to navigate around Africa.
Approximately 12% of global trade, representing 30% of all global container traffic and over USD $1 trillion worth of goods per annum, passes through the Suez Canal.
This includes energy, commodities, consumer goods, and componentry from Asia and the Middle East to Europe.
The Panama Canal, opened in 1914, is another vital link in global maritime transportation, connecting the Atlantic and Pacific Oceans. It allows ships to avoid the lengthy and hazardous voyage around Cape Horn at the southern tip of South America.
The canal plays a crucial role in global supply chains, supporting the movement of various commodities, including dry bulk, container, chemical tankers, and more.
Both canals have had significant impacts on global trade patterns and the economic geography of many countries. They have facilitated faster delivery of goods, but their importance also highlights the vulnerability of global supply chains, as blockages or disruptions in these canals can have far-reaching effects on global trade.
What the drought has meant for the Panama Canal
Drought has led to decreased water levels in the Panama Canal. Water is crucial for its operation as water is used to raise and lower ships. This has forced officials to reduce the number of vessels they allow through the canal, creating expensive complications for shipping companies.
The decreased water level in the canal is due to a reduction in rainfall in Panama, leading to one of the driest years in the country’s history. The water levels in the Gatun Lake, which feeds the canal, have reduced significantly compared to usual levels during this period. This has led to a severe drought, with water levels in the canal at their lowest in decades.
The drought has also led to delays in transit times, impacting the ability of large cargo ships to quickly traverse the Panama Canal. The Panama Canal Authority has had to implement new operational measures to minimize the impact of the drought. These measures include reducing the number of available reservation slots, which is likely to hinder trade levels, particularly for the U.S. East Coast.
The drought has also forced the Panama Canal Authority to reduce the number of daily transits and the maximum weight of ships. This has led to a significant reduction in vessel traffic, affecting the flow of trade. Shipping containers are piling up along the Panama Canal, triggering a wave of supply chain disruptions. This has led to additional container surcharges imposed by ocean carriers on shippers.
Conflict in the Red Sea – and its implications for Suez Canal attacks
The current conflict in the Red Sea involves Houthi rebel attacks on maritime vessels, which has escalated military tensions in the region. The Houthis, who control a portion of Yemen’s Red Sea coastline, have launched missiles and drones against ships, asserting that their actions are retaliatory against Israel’s military operations.
These attacks have disrupted international shipping and led to a multinational maritime security force, including the U.S. and U.K., to protect ships passing through the Red Sea. The implications for the Suez Canal are significant, as it is one of the world’s most crucial maritime chokepoints, facilitating a substantial portion of global trade.
Any disruption in the Red Sea could impact the flow of traffic through the Suez Canal, potentially causing delays and economic repercussions due to the canal’s strategic importance in connecting the Mediterranean Sea to the Red Sea, and thereby Europe to Asia.
The conflict has attracted international attention, with various nations responding to the threat against shipping in the Red Sea. The U.S. and U.K. have conducted airstrikes against Houthi targets in response to the attacks, and there is concern that the conflict could widen, affecting not just regional but global stability and trade.
Understanding the aggregate effect
The aggregate effect of restrictions on both the Panama Canal and the Suez Canal can be profound for global trade.
These two canals are essential shortcuts for maritime shipping, with the Panama Canal facilitating about 6% of global trade and the Suez Canal handling around 12%.
When operations at these canals are restricted, it can lead to significant delays, increased shipping costs, and disruptions in supply chains.
For instance, the Panama Canal drought meant that ports in Panama, Nicaragua, Ecuador, Peru, El Salvador, and Jamaica have seen 10% to 25% of their total maritime trade flows affected. The Suez Canal’s disruption could add about 10 days to the duration of trips, forcing ships to reroute around the Cape of Good Hope, adding about 3,000-3,500 nautical miles to journeys.
These disruptions can also lead to increased prices for goods. The Panama Canal disruption has resulted in generalized price increases for agricultural commodities and food industry produce in Europe. The Suez Canal disruption could lead to surging prices on goods like oil and gas.
Moreover, these disruptions can force shipping companies to seek alternative routes or modes of transportation, which can further increase costs and lead to delays. Some shipping companies have started redirecting shipments from Asia away from Panama and through the Suez Canal due to the Panama Canal’s drought.
However, with the ongoing conflict in the Red Sea, these companies may have to reroute their vessels around Africa, adding at least a week to the journey.
5 strategies importers and exporters can action to avoid disruption
Goods and commodity traders can employ several strategies to compensate for disruptions in the Panama and Suez Canals:
- Diversification of supply chains: One option is to diversify supply chains to reduce dependence on a single route. This could involve using alternative shipping routes, such as the Cape of Good Hope, or exploring other modes of transportation like rail or air freight.
- Stockpiling and strategic reserves: Traders can maintain larger inventories or strategic reserves of key commodities to buffer against supply chain disruptions. This strategy, however, increases storage costs and may not be feasible for perishable goods.
- Insurance and hedging: Insurance can cover losses from supply chain disruptions. Traders can also use financial instruments, such as futures and options, to hedge against price volatility caused by disruptions.
- Investment in technology: Considering investing in technology to improve supply chain visibility and resilience. For example, supply chain control towers, which use artificial intelligence, can provide timely alerts about possible delays, allowing companies to adjust their strategies quickly.
- Trade shifts: Traders can shift their trade towards regions or countries that have increased their exports due to the disruptions. For instance, traditional trading partners like the United States, Canada, Australia, and New Zealand have heavily increased their exports towards the EU27.
While disruptions in the Panama and Suez Canals pose significant challenges, traders have a range of strategies at their disposal to mitigate the impacts.
The choice of strategy will depend on the specific circumstances of each trader, including their risk tolerance, financial resources, and the nature of the commodities they trade.
The Panama and Suez Canal outlook for 2024
In the Panama Canal, daily vessel passages, expected to reduce to 18, have instead increased to 24, and delays have been minimal. Despite this, water levels remain below average, and the long-term outlook for the canal is concerning.
Meanwhile, the Red Sea crisis has seen increased security issues, with attacks by Yemen’s Houthi forces on commercial vessels causing most container lines to reroute around Africa and the Cape of Good Hope.
It is arguably the Suez Canal that poses the biggest ongoing threat to global trade flows. The lack of security in the Red Sea has led to a halt in transits, and any potential military action to increase security will risk escalating the regional conflict.
Users of freight shipping are advised to monitor the port outlook as 2024 is set to see problematic conditions for at least the first quarter. Resolving the issues in both the Panama and Suez Canals is crucial for the industry, but there are no quick or easy solutions to the challenges currently faced.