These issues not only underscore the canals’ vulnerabilities but also their crucial role in maintaining the rhythm of global trade. We also explore the strategies traders are employing to navigate these challenges and the outlook for 2024, offering insights into the future of these vital trade routes.

The importance of the Suez and Panama canals on global trade

The Suez Canal, opened in November 1869, is a 193km waterway connecting the Mediterranean Sea and the Red Sea. It provides a direct route for shipping between Europe and Asia, bypassing the need to navigate around Africa.

Approximately 12% of global trade, representing 30% of all global container traffic and over USD $1 trillion worth of goods per annum, passes through the Suez Canal.

This includes energy, commodities, consumer goods, and componentry from Asia and the Middle East to Europe.

The Panama Canal, opened in 1914, is another vital link in global maritime transportation, connecting the Atlantic and Pacific Oceans. It allows ships to avoid the lengthy and hazardous voyage around Cape Horn at the southern tip of South America.

The canal plays a crucial role in global supply chains, supporting the movement of various commodities, including dry bulk, container, chemical tankers, and more.

Both canals have had significant impacts on global trade patterns and the economic geography of many countries. They have facilitated faster delivery of goods, but their importance also highlights the vulnerability of global supply chains, as blockages or disruptions in these canals can have far-reaching effects on global trade.

What the drought has meant for the Panama Canal

Drought has led to decreased water levels in the Panama Canal. Water is crucial for its operation as water is used to raise and lower ships. This has forced officials to reduce the number of vessels they allow through the canal, creating expensive complications for shipping companies.

The decreased water level in the canal is due to a reduction in rainfall in Panama, leading to one of the driest years in the country’s history. The water levels in the Gatun Lake, which feeds the canal, have reduced significantly compared to usual levels during this period. This has led to a severe drought, with water levels in the canal at their lowest in decades.

The drought has also led to delays in transit times, impacting the ability of large cargo ships to quickly traverse the Panama Canal. The Panama Canal Authority has had to implement new operational measures to minimize the impact of the drought. These measures include reducing the number of available reservation slots, which is likely to hinder trade levels, particularly for the U.S. East Coast.

The drought has also forced the Panama Canal Authority to reduce the number of daily transits and the maximum weight of ships. This has led to a significant reduction in vessel traffic, affecting the flow of trade. Shipping containers are piling up along the Panama Canal, triggering a wave of supply chain disruptions. This has led to additional container surcharges imposed by ocean carriers on shippers.

Conflict in the Red Sea – and its implications for Suez Canal attacks

The current conflict in the Red Sea involves Houthi rebel attacks on maritime vessels, which has escalated military tensions in the region. The Houthis, who control a portion of Yemen’s Red Sea coastline, have launched missiles and drones against ships, asserting that their actions are retaliatory against Israel’s military operations.

These attacks have disrupted international shipping and led to a multinational maritime security force, including the U.S. and U.K., to protect ships passing through the Red Sea. The implications for the Suez Canal are significant, as it is one of the world’s most crucial maritime chokepoints, facilitating a substantial portion of global trade.

Any disruption in the Red Sea could impact the flow of traffic through the Suez Canal, potentially causing delays and economic repercussions due to the canal’s strategic importance in connecting the Mediterranean Sea to the Red Sea, and thereby Europe to Asia.

The conflict has attracted international attention, with various nations responding to the threat against shipping in the Red Sea. The U.S. and U.K. have conducted airstrikes against Houthi targets in response to the attacks, and there is concern that the conflict could widen, affecting not just regional but global stability and trade.

Understanding the aggregate effect

The aggregate effect of restrictions on both the Panama Canal and the Suez Canal can be profound for global trade.

These two canals are essential shortcuts for maritime shipping, with the Panama Canal facilitating about 6% of global trade and the Suez Canal handling around 12%.

When operations at these canals are restricted, it can lead to significant delays, increased shipping costs, and disruptions in supply chains.

For instance, the Panama Canal drought meant that ports in Panama, Nicaragua, Ecuador, Peru, El Salvador, and Jamaica have seen 10% to 25% of their total maritime trade flows affected. The Suez Canal’s disruption could add about 10 days to the duration of trips, forcing ships to reroute around the Cape of Good Hope, adding about 3,000-3,500 nautical miles to journeys.

These disruptions can also lead to increased prices for goods. The Panama Canal disruption has resulted in generalized price increases for agricultural commodities and food industry produce in Europe. The Suez Canal disruption could lead to surging prices on goods like oil and gas.

Moreover, these disruptions can force shipping companies to seek alternative routes or modes of transportation, which can further increase costs and lead to delays. Some shipping companies have started redirecting shipments from Asia away from Panama and through the Suez Canal due to the Panama Canal’s drought.

However, with the ongoing conflict in the Red Sea, these companies may have to reroute their vessels around Africa, adding at least a week to the journey.

5 strategies importers and exporters can action to avoid disruption

Goods and commodity traders can employ several strategies to compensate for disruptions in the Panama and Suez Canals:

• Diversification of supply chains: One option is to diversify supply chains to reduce dependence on a single route. This could involve using alternative shipping routes, such as the Cape of Good Hope, or exploring other modes of transportation like rail or air freight.
• Stockpiling and strategic reserves: Traders can maintain larger inventories or strategic reserves of key commodities to buffer against supply chain disruptions. This strategy, however, increases storage costs and may not be feasible for perishable goods.
• Insurance and hedging: Insurance can cover losses from supply chain disruptions. Traders can also use financial instruments, such as futures and options, to hedge against price volatility caused by disruptions.
• Investment in technology: Considering investing in technology to improve supply chain visibility and resilience. For example, supply chain control towers, which use artificial intelligence, can provide timely alerts about possible delays, allowing companies to adjust their strategies quickly.
• Trade shifts: Traders can shift their trade towards regions or countries that have increased their exports due to the disruptions. For instance, traditional trading partners like the United States, Canada, Australia, and New Zealand have heavily increased their exports towards the EU27.

While disruptions in the Panama and Suez Canals pose significant challenges, traders have a range of strategies at their disposal to mitigate the impacts.

The choice of strategy will depend on the specific circumstances of each trader, including their risk tolerance, financial resources, and the nature of the commodities they trade.

The Panama and Suez Canal outlook for  2024

In the Panama Canal, daily vessel passages, expected to reduce to 18, have instead increased to 24, and delays have been minimal. Despite this, water levels remain below average, and the long-term outlook for the canal is concerning.

Meanwhile, the Red Sea crisis has seen increased security issues, with attacks by Yemen’s Houthi forces on commercial vessels causing most container lines to reroute around Africa and the Cape of Good Hope.

It is arguably the Suez Canal that poses the biggest ongoing threat to global trade flows. The lack of security in the Red Sea has led to a halt in transits, and any potential military action to increase security will risk escalating the regional conflict.

Users of freight shipping are advised to monitor the port outlook as 2024 is set to see problematic conditions for at least the first quarter. Resolving the issues in both the Panama and Suez Canals is crucial for the industry, but there are no quick or easy solutions to the challenges currently faced.

The post How international trade will be impacted by Suez and Panama Canal disruptions in 2024 appeared first on Trade Ready.

On Monday, March 29th, ships stuck behind the colossal Ever Given vessel in the Suez Canal heard the echo of blaring boat horns and triumphant chanting. These were the sounds of celebration and hope, for the Ever Given, a 400m-long, 200,000-tonne (or 1,312-foot, 220,000 ton) ship carrying 18,300 containers, finally showed signs of movement. The ship had been wedged between the canal shores since Tuesday, March 23rd, causing a delay in an estimated $9.6 billion USD of trade goods per day, and an estimated $95 million in toll revenue for the canal, according to data firm Refinitiv—all in just under one week.

Image by kees torn – EVER GIVEN, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=89201715

A tenacious and exhausted team had been working to unblock the canal and managed to free the ship’s stern on Sunday. The next morning, they liberated its mammoth bow deeply embedded into the canal’s eastern bank. This set in motion the final stages for the ship’s full re-floatation and, later, the canal’s reopening at 6 pm local time.

All the manpower in the area wasn’t enough to complete the task, however. Truly, the strong rising and falling full-moon tides played a significant role in the operation—giving crews and other personnel a small window of time in which to take advantage of the gravitational gift, along with the team of tugboats that had presumably pulled and pushed one of the heaviest loads they’ve ever moved, with the Ever Given being one of the world’s largest and longest container ships.

At first, what seemed to be a comical social media meme quickly turned to panic as the crisis revealed a much-overlooked reality within the international trade community: Most businesses and consumers take the world’s shipping routes for granted, vastly underestimating their fragility and vulnerability to accidents and delays—weaknesses that can breakdown supply chains in the blink of an eye.

With the Ever Given now freed and traffic in the canal slowly moving again, it’s a good time to reflect on the lessons learned from the 6-day ordeal, giving international trade and business professionals much to think about in the aftermath. Here are some of the most prominent international trade lessons from the Suez Canal obstruction:

1. Contingency and risk mitigation planning make crises manageable

It’s cliché, but always expect the unexpected. The most prudent businesses perform thorough commercial risk assessments that cover all areas prone to hazard, allowing them to identify weaknesses in their business strategy (such as international shipping risks).

This allows them to create contingency plans that involve having the proper financial resources, inventory, supplies and supply-chain alternatives in times of crisis or delay.

Many risk mitigation and contingency strategies include proactive contract negotiations at the start of trading relationships that clearly define accountability for unforeseen shipping delays, as seen in the image below:

FITTskills Lite: Analyzing and Mitigating Commercial Risk, copyright © 2017,2019,2020 FITT

Interested in this topic? Get our FREE FITTskills Lite Download here:

2. Know your Incoterms® and who is responsible for shipping delays in your contracts and negotiations.

Incoterms® are integral for creating bullet-proof contracts that clearly define who pays for shipping charges and when. Businesses engaging in international trade use The International Chamber of Commerce Incoterms^® rules in contracts to clearly communicate the obligations, costs and risks associated with the transportation and delivery of goods, providing clarity for sellers and buyers.

Businesses who know their Incoterms® well, carefully use them to ensure there are no areas of risk or uncertainty between the seller and buyer in the contract—and specifically, with shipping, no questionability as to whom is responsible for shipments and costs in the various stages of transport. They are essential for avoiding costly disputes between both parties.

Incoterms® also make it easier for the buyer and sellers to

• outline their individual obligations in the trade transaction
• determine when risk moves from the seller to the buyer under each specific rule
• define the buyer and seller costs and responsibilities.

Last year, Incoterms 2020® was released with updates and changes from their previous version. Those seeking to create advantageous contracts should make sure their knowledge or credentials are up-to-date, especially in light of recent events.

3. Option just-in-case supply chains

In recent years, “just-in-time” supply chains—supply chains that transport items to factories on an as-needed basis for manufacturing—have been popular. But with the glaring effects of the Suez Canal playing out in real-time, experts are predicting that some companies will move toward “just-in-case” supply chains that focus less on predicting the right amount of demand and goods in the moment, and more on having goods in stock and ready at all times—just in case delays occur.

“We are moving towards a just-in-case supply chain, not just-in-time,” noted Søren Skou, CEO of shipping firm Moller-Maersk, in an interview with The Financial Times on Monday, adding “It’s great when it [just-in-time supply chains] works, but when it doesn’t you lose sales. There’s no just-in-time cost savings that can outweigh the negative of losing sales.”

4. Think about more than one supplier

It’s not uncommon for international businesses to have more than one supplier because of scenarios like the Suez Canal incident. Even before the blockage, many businesses around the world were already in the midst of diversifying their supply chains and suppliers because of COVID-19-related shipping delays and restrictions.

The Suez Canal obstruction only served to amplify this need even more, serving as a sober reminder of the importance of planning for anything and everything that can go wrong when it comes to international shipping and international trade.

In a Forbes article, Mark Dohnalek, President and CEO of Pivot International, a global manufacturing, engineering, technology, product development company, also suggested another way for companies to avoid unpleasant surprises: “… have multiple sourcing options in place, as we learned during the pandemic. Another element of this recommendation would be to do business with one preferred vendor that has multiple operations across many regions of the world. This will avoid the massive impact a single location event would have on their business. This is by far the key toward mitigating exposure to these types of events in the future.”

*Main image contains modified Copernicus Sentinel data [2021], processed by Pierre Markuse – Container Ship ‘Ever Given’ stuck in the Suez Canal, Egypt – March 24th, 2021, CC BY 2.0. https://commons.wikimedia.org/w/index.php?curid=102400564

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