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Supply chain wobbles are back. Just as the effects of pandemic-era backlogs and port closures have unwound, two continental shipping passages, the Suez and Panama canals, are suffering from obstructions to trade traffic. Unlike the past few festive seasons, there is less concern about any delays spoiling Christmas. Most toy and food stocks have already been built up ahead of the latest blockages. The problems have however introduced a new risk for the global economy in 2024.
Around 12 per cent of global trade passes through the Red Sea, which is bookended by the Suez Canal to the north and the Bab-el-Mandeb strait — known as the Gate of Tears — to the south. Since mid-November more than 10 transiting vessels have been attacked by Yemen’s Iran-aligned Houthi militants. Many shipping companies have responded by postponing journeys through the region — a crucial passage between Asia and Europe. Oil company BP announced on Monday that it had paused shipments through the strait, citing a “deteriorating security situation”.
Since the region is an important freight channel for oil, liquefied natural gas and consumer goods, resulting shortages and bottlenecks could push up inflation. Transport costs are rising too. Insurance premiums for some ships traversing the region are increasing. Maersk also announced it would reroute ships around the Cape of Good Hope. If more followed, global trading costs would push higher. The route around Africa adds an additional 3,200 miles and nine extra days of travel on a typical journey between Asia and Europe, notes Clarksons, a shipping services provider. Oil and gas prices have not risen significantly so far.
Problems in the Suez also risk combining with shocks elsewhere. Across the world, the Panama Canal is suffering from low water levels linked to drought. The channel between the Pacific and Atlantic Ocean is operating at only 55 per cent of its normal capacity, according to Capital Economics. Transits have been restricted for the coming months, and prices have gone up. The canal normally carries 5 per cent of seaborne trade, particularly US fuels and grains bound for Asia.
The knock-on implications for global inflation depend on how long both blockages persist, and whether other shocks pile on top. The New York Fed’s indicator of supply chain pressures has perked up, albeit from a low point. The aggregate impact is also unclear. For instance, European gas prices have actually fallen recently on the prospect that Asia-bound American LNG via the Panama Canal may be redirected to Europe.
To contain the economic fallout, it is essential to get naval protection to the Red Sea quickly. A US-led international coalition to provide security for freight is gaining momentum. Meanwhile water levels in the Panama Canal have improved slightly. But neither development should make businesses or policymakers complacent that the issues are resolved.
Some companies have already diversified their supply routes following the pandemic. This shock underscores the need for options. But the Suez and Panama Canal routes have few viable alternatives. They accounted for over half of the container shipping by volume scheduled between Asia and North America in the third quarter, according to estimates from trade analysis group MDS Transmodal. This means authorities must invest in the resilience of key trading chokepoints, both in terms of their security and climate adaptability, and by improving port efficiency and alternative transport routes.
The pandemic and war in Ukraine may have been one-off events. But the shocks to the Panama and Suez canals are a reminder that with climate change and growing geopolitical risk, supply chain instability is here to stay.
