Shipping disruption impacts on global trade
Geopolitical tensions, canal restrictions, and longer lead time impacting shipping routes
Houthi militants have conducted several drone attacks on the Red Sea and they claimed that they will attack all ships that have any ties with Israel, including those that do business with Israeli companies or organizations.
Due to rising tensions in the Red Sea, on December 16th MSC and CMA CGM announced that they have suspended the Suez shipping route. Similar communications was released on December 15th by Maersk and Hapag Lloyd.
These four Companies, together, represent more than 50% of the global trading volume.
The decision by major shipping companies like MSC, CMA CGM, Maersk, and Hapag Lloyd to suspend the Red Sea route due to ongoing tensions and drone attacks will lead to a significant impact on global trade. As a result, alternative routes via the Cape of Good Hope from Singapore are now being used, potentially adding two to three weeks to shipping times.
This shift in routes has not only increased insurance premiums but also escalated container costs on these longer journeys, thereby causing a rise in expenses for shipping companies and affecting the overall cost of transportation for goods.
The Suez Canal plays a pivotal role in global maritime traffic, accommodating approximately 30% of all ship movements. It serves as a crucial route for transporting significant volumes of oil and liquefied natural gas (LNG).
Additionally, the canal facilitates the transportation of various commodities, including food products like palm oil and grains, consumer electronics, among others making any disruption along this vital passage impactful on global supply chains and commodities markets.
In the meanwhile the Panama canal is suffering a severe drought that is reducing water levels, consequently the Panama Canal Authority has imposed restrictions on ship size and weight for transit. Initially, the impact of these restrictions was minimal due to reduced shipping demand. However, new measures are set to further limit traffic, causing a significant slowdown in canal flow.
The maximum draft allowed for vessels transiting the canal has been lowered from 4.9 meters to 13.4 meters. As of February 2024, the expected daily transits through the canal will decrease to 18, a notable decline from the previous average of 35 per day in the first three quarters of 2023.
Anticipating these additional limitations, carriers on the Transpacific Eastbound route are redirecting some services through the Suez Canal, albeit with an extended transit time of at least seven days. Nevertheless, due to ongoing challenges in the Suez Canal, ocean carriers are also considering alternative routes around the Cape of Good Hope to maintain their shipping schedules.
Also for the semiconductor shipment landscape faces potential disruption due to the concentration of main foundry production in Asia. Both Panama and Suez canals pose new challenges to the global supply chain, which has already been tested for resilience in international transport following the impact of the Covid-19 pandemic.
Sources:
Market share of container shipping companies: https://en.wikipedia.org/wiki/List_of_largest_container_shipping_companies
Twin canal global trade risk: https://www.ft.com/content/416310ed-9ad0-4cf8-b7df-fd59ce79847b
Panama canal transit restrictions: https://www.reuters.com/markets/commodities/panama-canal-drought-delay-grain-ships-well-into-2024-2023-12-11/