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Trade Disruptions in Suez and Panama Canals Pose Global Threat

Industry-Related News


For the first time, the world faces simultaneous disruptions in two major global trade waterways. Transits were almost slashed by half. Attacks on shipping affecting the Suez Canal and severe drought in the Panama Canal are reshaping the world’s trade routes and posing economic and environmental challenges.

In the wake of escalating global trade disruptions, the United Nations Conference on Trade and Development (UNCTAD) has published a critical report titled “Navigating Troubled Waters.” This document provides an in-depth analysis of the maritime challenges that have emerged as significant threats to international commerce, emphasizing the seismic shifts in global trade dynamics and highlighting the vulnerabilities within international supply chains.

In both the Suez and Panama canals, transits are down by more than 40% compared to their peaks. According to UNCTAD, seaborne transport, which accounts for 80% of the world’s goods movement, is currently besieged by a series of maritime disruptions encompassing geopolitical tensions, climate-induced anomalies, and the subsequent economic repercussions.

Troubled Waters

  • Compounding Attacks on the Suez Canal and the ongoing war in Ukraine have significantly disrupted trade routes, particularly for oil and grain.
  • The Panama Canal grapples with severe droughts, reducing capacity and raising concerns about long-term resilience.
  • Suez Canal transits have plummeted by 42%, forcing alternative routes that increase costs and emissions.
  • Container freight rates surge, leading to higher consumer prices and economic strain, especially for developing nations.
  • Developing economies reliant on affected routes, like Ecuador and Kenya, face exacerbated challenges.

Panama Canal transits plummet by 49%

The Panama Canal, a vital trade link between the Atlantic and Pacific Oceans, has been grappling with severe drought, with water levels decreasing in the last two years.

According to the Canal Authority, the Canal’s Gatun reservoir experienced a daily water deficit of about three million cubic meters in 2023 due to lower than expected rainfall in Panama, compounded by a strong El Nino, coupled with outflows from Canal operations, evaporation, human consumption, and industry. As a result, the Panama Canal Authority was forced to reduce the number of daily ship transits and also implement draft restrictions limiting the amount of cargo ships can carry.

Facing alarmingly low water levels, the Panama Canal Authority has reduced daily transits from an average of 36 to 22, with plans for further reductions to 18 per day by February 2024.

Last month, Danish giant Maersk confirmed that services which had previously passed through the canal would be served by rail freighting containers across Panama. This may have been the catalyst for further consideration of the transport mode as a gateway between the Pacific and Atlantic oceans.

The Panama Canal Authority has announced plans to allocate more than $8.5 billion in capital investments towards sustainability projects over the next five years.

Suez Canal transits plummet by 42%

Given the risk of attack in the Red Sea, many ships are now avoiding the Suez Canal, opting for a longer route around the Cape of Good Hope, in South Africa. By the first half of February 2024, 586 container vessels had been rerouted, while container tonnage crossing the canal fell by 82%. This compounds the ongoing disruption in the Black Sea due to the war in Ukraine, which has resulted in shifts in the oil and grain trade routes, altering established patterns.

Vessel speed and carbon emissions increase

Ships are avoiding the Suez and the Panama Canals and seeking alternative routes. This combination translates into longer cargo travel distances, rising trade costs and insurance premiums. Furthermore, greenhouse gas emissions are also growing from having to travel greater distances and at greater speed to compensate for the detours. This could erode the environmental gains achieved through “slow steaming”, as rerouted vessels increase speeds to cover longer distances.

This is particularly evident among container ships, where a 1% increase in speed typically leads to a 2.2% rise in fuel consumption. For example, accelerating from 14 to 16 knots increases fuel use per mile by 31%.

As a result, the longer distances caused by rerouting from the Suez Canal to the Cape of Good Hope imply a 70% increase in greenhouse gas emissions for a round trip from Singapore to Northern Europe.

Freight costs up

Since November 2023, there has been a notable increase in the cost of shipping, with the average container spot freight rates experiencing an unprecedented weekly surge of US$500 in the last week of December. This uptrend has persisted, with average shipping spot rates from Shanghai more than doubling since early December (+122%), tripling towards Europe (+256%), and increasing significantly (+162%) towards the United States West coast, despite these routes bypassing the Suez Canal.

The economic implications go far beyond importers’ and exporters’ pockets. A surge in average container spot freight rates translates directly to increases in consumer prices, intensified inflationary pressures, and strained economies, particularly those of developing nations.

In addition, energy prices are surging as gas transits are discontinued and directly impacting energy supplies and prices, especially in Europe. The crisis could also potentially impact global food prices, with longer distances and higher freight rates potentially cascading into increased costs. Disruptions in grain shipments from Europe, Russia, and Ukraine pose risks to global food security, affecting consumers and lowering prices paid to producers.

Egypt’s Economy Hurt

The Suez Canal is a major source of foreign currency revenue for Egypt, contributing $9.4 billion in the fiscal year 2022/23, about 2.3% of the country’s GDP. The Red Sea crisis has reportedly triggered a 40% drop in Suez Canal revenues. The country is already deeply in debt. The local currency has plunged in value, and millions of people have been pushed into poverty, facing their worst economic crisis in decades.

A deteriorating situation in Egypt could have negative spillover effects for other countries in the region, such as Ethiopia and the Sudan.

Mexico Rail Freight Could Be Panama Canal Alternative

A Mexican plan to connect its Pacific coast with the Gulf of Mexico is gaining interest in the country, as trade officials are now beating the drum about the Tehuantepec Interoceanic Corridor project, which has been languishing on the shelf due to other priorities.

The 300 km rail project will fully connect the ports of Coatzacoalcos and Salina Cruz, which is the shortest connection between the Pacific and Gulf coast. The new rail corridor should be capable of handling around 1.4m TEU per year by 2033. This may not compete with the annual 7-8 million TEU that ordinarily moves through Panama, but will certainly assist with the impact that climate has had on the canal.

Mexico’s president – Andrés Manuel López Obrador – is understood to be a big believer in rail infrastructure, which could mean that the project gains momentum in the near future.

Bottom Line

The current global scenario paints a grim picture of the interconnectedness and fragility of our global trade systems.

The UNCTAD calls for swift adaptation by the shipping industry, coupled with robust international cooperation. “The current challenges underscore the exposure of global trade to geopolitical tensions and climate-related challenges, demanding collective efforts for sustainable solutions especially in support of countries more vulnerable to these shocks.”

Sources: Navigating Troubled Waters, Disruptions in key global shipping route

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