Houthi attack in the Red Sea, world trade at risk. Ispi's comment
The current crises affecting the Suez Canal and the Panama Canal are provoking significant repercussions on global trade. He writes it Inspi which retraces the key steps of the ongoing crisis point by point. First, the Suez Canal, which handles 12% of global cargo traffic and 30% of container traffic with an annual value of approximately one trillion dollars (SRM, 2023), is suffering the impacts of the war between Hamas and Israel . Intensified attacks on merchant ships in the Bab el-Mandeb Strait and the Red Sea by Yemen's Houthi rebels, and along the coast of Somalia by pirates, are causing delays in deliveries, a decrease in available containers and cargo, and an increase in shipping rates. These increases are also reflected in rising insurance premiums.
Major shipping companies such as Maersk have announced plans to reroute ship routes around the Cape of Good Hope, adding 3,200 miles and nine days to the journey. Hapag-Lloyd, on the other hand, will introduce a shuttle service via Jeddah in Saudi Arabia. In addition to containers, the Suez Canal handles significant flows of grain and petroleum products, with 80 million tons of grain per year and 7 million barrels of crude oil per day.
On the other hand, the Panama Canal is currently facing a serious crisis due to a prolonged drought. Last October set a record as the driest month in decades in the region's catchment area. As of January 7, the channel reached historic lows in depth, recording an approximate level of 1.8 meters below normal. The restrictions implemented, the most severe since 1989, when the canal was closed during the US invasion of Panama, have significantly limited transit, leading the canal to operate at 66% of its nominal capacity. As a result, many shipping companies are forced to explore alternative, longer and more expensive routes, such as the one through the Suez Canal. The situation led to an increase in traffic in Suez in the months of October and November. Some shipowners are also evaluating alternative routes such as the one that crosses the Cape of Good Hope and, in some cases, the Strait of Magellan.
The solutions proposed to address the crisis include the possibility of creating an artificial lake to pump water into the canal and cloud seeding to stimulate precipitation in the area. However, it is important to note that such solutions, even if sustainable, would take several years to implement. In the short term, hopes are pinned on mitigating the effects of the warming of ocean waters known as El Niño, which could lead to the return of rains by March, which are essential for replenishing the lakes essential to the canal's functioning.
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The impact of these disruptions on transportation costs is significant and comes in a context where the negative impact of the pandemic was gradually being overcome. In the first week of January 2024, Drewry's composite World Container Index rose 61% to $2,670 per 40-foot container (FEU). This represents a 25% increase over the same week last year and an 88% increase over 2019's average rates, pre-pandemic. The variations in transport costs are heterogeneous, with increases of 115% from Shanghai to Rotterdam, 114% from Shanghai to Genoa and 30% towards Los Angeles. The forecast is not optimistic, with Drewry predicting further east-west spot rate increases in the coming weeks. Shipping companies are charging significant surcharges to address vessel dislocation and rising insurance costs.
These two situations, although independent, add up, risking causing a new slowdown in supply chains and fuel global inflationary pressure, which seemed to be decreasing after the record dynamics of the last year and a half. The twin crises have already impacted energy prices, with a rapid rise in natural gas and oil, impacting retail fuel costs. Europe, with its macroeconomic context and slowing growth, could be particularly vulnerable to a further increase in energy prices, presenting real risks of stagflation rebound phenomena.
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