A Worldwide Shipping Disaster Caused by Two Canals
Approximately fifty ships, including tankers transporting propane and cargo ships laden with food, waited in line to pass through the Panama Canal on a recent day. The operator of the canal has reduced the number of crossings due to the ongoing drought, which has increased wait times. Ships now pay tolls that are around eight times higher than before.
Ships transporting goods via the Suez Canal in Egypt are either waiting for naval escorts or opting to circumvent South Africa, a considerably lengthier route, more than seven thousand miles distant. While navigating the Red Sea, ship captains worry that a rebel group based in Yemen could launch missile or drone attacks, endangering their personnel.
The climate-related issues in Panama and the geopolitical ones in the Suez are both causing havoc in international trade. More than a third of the cargo passing via the Panama and Suez canals has been cut. Delivery delays, increased transportation costs, and economic devastation for local towns have been caused by hundreds of vessels rerouting to longer routes.
In the rivers that carried around 18% of the world’s trade last year, operators of ships are preparing for months of unpredictability.
Among the hundred years that the man-made canal has been open for business, the current dry spell is the most severe. The drought, which began in the middle of 2023, is expected to end in May, according to officials.
Some ship operators in the Suez Canal have put an indefinite hold on voyages due to strikes affecting commercial ships further south. Over fifty ships have been targeted by the Houthis since November. One of these ships, carrying fertilizer, went down in the Red Sea, while another one caused the lives of three people.
An official from the Pentagon has reported that about one-third of the Houthi military assets have been destroyed in the retaliatory attacks carried out by the American-led coalition.
DORAN LPG, headquartered in Stamford, Connecticut, runs a fleet of 25 ships that transport propane and butane. “It’s the first time that both are disrupted simultaneously so you have to plan way in advance where to send your ship and you pay a hell of a lot more regardless,” commented Tim Hansen, COO of the company.
Although consumers have not yet felt the full force of the challenges, companies are beginning to sense the tremors. Parts shortages forced Tesla and Volvo to temporarily halt vehicle manufacturing in January, which lasted for up to two weeks.
To make sure their spring styles arrived on time, some clothing businesses chose to ship them by air instead of sea.
In comparison to the more pervasive constraints anticipated in 2020 and 2021, the current disruptions to supply chains are rather small.
Inflation on many consumer items occurred back then because shippers passed the increased price of ocean freight on to consumers. Freight charges on certain routes between Asia and the US increased to over $20,000 per box per day, which is approximately five times higher than what they are now.
In response to the supply chain disruptions that occurred during the epidemic, several companies have increased their inventory sizes.
Despite a ten-day increase in average sailing times due to Suez interruptions, customers have been unaffected, according to Jesper Brodin, CEO of Ingka Group, the firm responsible for running the majority of IKEA shops globally.
“The huge difference is that we have recuperated after the pandemic,” he stated in January at the World Economic Forum in Davos, Switzerland. “So it appears that our inventory at the warehouse is doing well.”
However, if delays at the two canals persist, more companies will be impacted because they are returning to pre-Covid traditions of maintaining small stockpiles and depending on prompt supplies.
According to Peter Sand, chief analyst of Xeneta, a shipping company located in Norway, “It is a watershed moment for consumers because they have been accustomed to globalization.” It is critical to protect marine supply chains because they have been receiving commodities from all around the world at any one moment.
Reduced water usage
Due to the issues, Dorian, headquartered in Connecticut, had to make two adjustments to the ship’s calculus towards the end of last year.
Ships owned by Dorian sail from the Gulf of Mexico to destinations in China, Japan, and South Korea via the Panama Canal, which offers the shortest route. While traveling east through the Suez Canal takes around 40 days, traveling west through the canal and across the Pacific takes about 25 days.
Approximately fourteen percent of all international trade passes via the canal. A fifth of the exports of certain Latin American countries are transported via the canal.
Less water is available to feed the locks, which reduces the capacity of the canal for ships to pass through. With each passage through the locks, around 50 million gallons of water are discharged into the ocean. The water is being refilled from a reservoir that is now at capacity.
In a typical day, the canal operator permits about 36 ships to transit the canal. The number was reduced to 24 in November, and it was intended to be dropped even more to 18 in February, but water levels were stabilized thanks to rainfall.
Dorian dispatched ten ships to the Suez Canal to prevent any cargo delays of several weeks. The Houthi attacks put a halt to those excursions at the beginning of December. There will be lengthier wait times and greater fees when ships are once again being routed through the Panama Canal.
With the exception of a small number of boxship operators, who constitute the canal’s most valuable customers, a single crossing of the Panama Canal costs approximately half a million dollars. Bidding processes are in place to ensure that companies like Dorian get crossings. Hansen stated, “We know others that paid close to $4 million more,” referring to the additional $2 million that was paid. Dorian then charged its clients more for those services.
January ship traffic through the Panama Canal was 36% lower than the same month last year.
To improve access to water reserves, the canal’s operator plans to spend almost $1 billion on engineering and construction projects, subject to government clearance. It may take years to finish the job.
Local companies are feeling the effects of the drought, and the canal feeds water to 2.5 million people, or about half of the country’s population.
Sabina Torres operates Tienda 98, a general store, from a dock on Lake Alajuela, a freshwater system that supplies the Panama Canal.
The lake has retreated from the dock due to the drought. From 7 to 9 a.m., water is only provided on an alternate day. These days, 46-year-old Torres hurries to fill up containers with water for consumption, laundry, and toilet flushing.
She usually gets her products via boat, but lately, that option has become less viable. For the purpose of transporting goods from the boats, Torres invested in an ATV and engaged extra laborers to traverse the rocky terrain.
The store that Torres runs, which caters mostly to locals, brings in around $1,500 every month. In the months of December and January, that dropped to $8,000. She now makes sure she has enough of everything by purchasing more in advance. She emphasized that they were in a hurry to acquire necessary supplies.
Faced with threats
Shippers are seeing pricing increases all throughout the globe. In January, the daily boxship prices along routes from Asia to the Americas more than quadrupled compared to the previous year, according to statistics from Braemar, a UK brokerage. Travel from Asia to Europe saw a 67% increase in rates.
United Nations statistics shows that when compared to the same period last year, trade volumes passing through the Suez Canal decreased by over 40% in December and January. Hundreds of ships a day use the canal to transport goods from Asia to the Mediterranean and Northern Europe, and the world’s largest oil tankers utilize it to transport oil from the Middle East.
Despite the attacks on the rebel group by the U.S.-led naval coalition, significant ocean freight ships such as Maersk and Hapag-Lloyd have not returned to the Red Sea.
Former Maersk CEO Vincent Clerc stated, “To go back, we will need to meet a very high threshold to ensure our crews and ships are not in risk.” The business used to do 15–17 Suez crossings every week. It is unclear whether the assaults on the Houthis would alleviate the situation, and there has been an escalation thus far.
Clerc stated that in order to return to the Suez, assurances from security officials about the safe passage of ships in the region would be necessary.
Nikolaev Balan has sailed the Suez and Red Seas multiple times as the chief officer of a tanker owned by Europeans. His ship was in the Red Sea on January 11 when the United States launched its first raid on Houthi targets in Yemen.
As we reported being targeted, we noticed a drone flying just a few meters from the ship’s bow. He added that the radio had warned everyone to evacuate because the Americans were planning an attack. “We retreated, and coming back into that area is not in our plans.”
For the last several weeks, 42-year-old Egyptian supply boat operator Eman Ayad has not made much money transferring goods around the Suez Canal.
Along with a half-dozen other boat owners, Ayad provides towing services and supplies including food, lubricants, and replacement components to the canal zone on a regular basis. Approximately $800 is made per month from the boat’s services.
The yacht, which he received as an inheritance from his father about ten years ago, is the only source of income for his family. He claimed that he and his wife and three young children are getting by on savings.
“I will be forced to sell the tugboat in order to settle my debts if this continues for another month,” Ayad warned. He is contemplating moving to the United States, where he has family who may be able to assist him in finding work in the event that business from Suez does not return quickly.
However, not every ship is avoiding the Suez. To protect themselves from potential threats, operators that use the channel to reach the wider region via the Arabian Sea and the Gulf of Aden often use armed guards. The cost of a Red Sea journey with four guards per vessel can reach $40,000, according to shipowners and operators.
Suez Canal Authority Chairman Osama Rabie announced that toll revenue from ships crossing the Suez decreased to $428 million in January, down from $804 million in the same month last year, a decline of nearly half. One of Egypt’s primary sources of foreign currency, alongside tourism, is the Suez Canal.
Due in part to an increase in the per-ship toll, the decline in authorized crossings has had no effect on total revenue at the Panama Canal. With tolls increasing from over $3 billion in 2022 to $3.3 billion in 2023, the canal was awash with cash.
We strive to accommodate the maximum number of crossings, however the operators are expressing their dissatisfaction. A very merciless weather has been experienced, according to Ricaurte Vásquez Morales, the superintendent of the canal.
When it comes to crossing fees, canal authorities aren’t expecting a boom to last. The canal seeks cordial connections with its clients and ship operators prefer a stable toll regime, according to Vásquez Morales.
Based on March rainfall levels, the canal authority will assess the number of authorized daily crossings in April. He estimated a $200 million drop in sales for the company this year due to the drought.
