Logistics: The perfect storm

The simultaneous crises facing the Suez and Panama canals have pushed these vital maritime passageways to the brink of blockage. Initially, complications stemming from climate change wreaked havoc on the Panama Canal, setting off a chain reaction that reverberated through the Suez Canal. Overwhelmed by surging transit demands and hampered by logistical constraints, both canals grappled with the inability to provide essential services such as fuel, repairs, and other necessities.

As the two most critical maritime transit channels in the world faltered, international trade entered a period of turmoil in the aftermath of the pandemic. A confluence of logistical challenges and raw material shortages strained global supply chains, threatening the very lifeline of the global economy. While the smooth functioning of sea transport was crucial for jumpstarting global economic recovery post-pandemic, the emergence of additional concerns has compounded an already dramatic situation, creating a seemingly unending saga of challenges and uncertainties.

Climate change: A catastrophe

The Panama Canal, a pillar of the global economy through which nearly all world trade passes, is confronting a dire water shortage. This scarcity has resulted in an unprecedented slowing in the pace of traffic.

Meanwhile, in the Suez Canal, responsible for facilitating 10% of global trade and 30% of container shipments, ongoing Houthi attacks in the Red Sea continue to be recorded, causing major shipping and oil companies to announce the cessation of its operations.

Danger in the Suez Canal

It all began in early November when the Houthis, reportedly backed by Iran, launched an attack on the Israeli-linked merchant vessel, Galaxy Leader. While the organization only directly threatened any Israeli-affiliated ship with a similar fate, the reality is that ships of various nationalities, including European and American, navigating the Red Sea have fallen victim to missile strikes, drone attacks, and seizure attempts. Despite the Houthis' purported ties to Israel, their attacks have been indiscriminate, targeting vessels irrespective of their origins or destinations.

For instance, on December 12, the militias targeted the Norwegian oil tanker Strinda with a missile, falsely claiming it was bound for Israel when its actual destination was Italy. Just two days later, another oil tanker, this time owned by the Danish shipping company A.P. Moller Maersk, came under attack in the Bab el-Mandeb Strait. 

Since then, the frequency of these attacks has escalated, prompting the world's largest shipping companies to reconsider their routes. In essence, the political turmoil in the Middle East has exerted immense strain on global supply chains, a situation exacerbated by its occurrence during the holiday season.

“Shipping companies that transit the Suez Canal experience continuous attacks by Houthi militias.”

Companies say "goodbye"

On December 15, both Maersk and Hapag-Lloyd made announcements, and within two days, CMA CGM, alongside the Swiss giant MSC and the Chinese Yang Ming, followed suit, signaling their departure from France. Notably, the first three alone command approximately 40% of global maritime transportation.

This exodus heralds an impending significant decline in the pace of raw material and product shipments: "The distinction lies in the fact that it's not merely maritime transport caught in the crossfire of a conflict, akin to the situation in Ukraine. Rather, it's the primary target itself, directly impacting global shortages and fueling inflation through scarcity."

Not a solution: Alternatives are more costly

The latest additions to the list of companies altering their shipping routes are the oil giant BP and the Norwegian shipping firm Equinor. Opting for the Cape of Good Hope (South Africa) route, they've chosen a path that incurs both increased time and expenses. Specifically, this means an additional 10 to 12 days for many vessels, with even lengthier delays for tankers or large ships.

As previously noted, the foundation of container trade between East and West hinges on the Red Sea and the Suez Canal. But with major shipping lines now favoring routes around southern Africa, substantial delays are inevitable. Consequently, we're witnessing a significant setback to international trade, with reverberations felt across global economies. This disruption has resulted in immediate impacts such as inflation spikes, factory closures due to raw material shortages, and an uptick in unreported unemployment.

The trend continues

The impacts are already evident in the global economy. According to the SCFI Comprehensive Container Freight Rate Index, from December 8 to December 15, global maritime freight rates have surged by nearly 10%, climbing from just over $1,000 per container and delivery to almost $1,100. 

And this trend will continue for several reasons. Firstly, ships now have to traverse a 31% longer route, covering more kilometers, leading to increased costs. Additionally, the heightened waiting times incurred due to rerouting and blockades further drive up expenses.

Another issue is that the blockade and rerouting efforts will diminish the availability of ships, exacerbating the situation. Lastly, the rising cost of fuel adds another layer of financial strain. In line with these developments, Brent has already seen an 8% increase since last week.

The climate drama, Panama drama

The other most vital trade route globally, facilitating the passage of 12,000 ships annually to transport goods to over 160 nations, faces a crisis: a water shortage due to prolonged drought. As a result, a queue of ships has formed, exacerbating congestion in the canal. The situation has escalated to the extent that some shippers are resorting to paying exorbitant sums, in the millions, to bypass the queue and navigate the canal.

This crisis began five years ago when the region experienced a 20% decrease in rainfall compared to the historical average, marking it as the fifth driest year since the 1950s. In response, authorities have implemented measures to conserve water, including reducing the daily quota of ships allowed to cross the canal from 16 to 14. Additionally, restrictions have been placed on the draft and weight limits of ships navigating the canal.

Conclusion

As a result of climate change, both the Suez and Panama canals are on the verge of potential blockage simultaneously. While this presents a challenging scenario, it's not without remedy—though not in the immediate future. The solution lies in offering less stringent conditions that allow emerging countries to engage in trade with greater ease. Failure to implement these measures risks triggering global financial crises and escalating conflicts around the world.