How Global Trade Was Shocked by Crises in the Red Sea and Panama Canal

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Falcone Global Solutions, LLC June 11, 2024

As the Houthis began attacking maritime vessels in the Red Sea, Panama was experiencing one of the worst droughts it had seen in over a century. These unexpected events sent the world into crisis, impacting trade routes through two of the most vital maritime chokepoints in the world – the Suez and Panama Canal. This sent shockwaves through the entire global supply chain, leading to mass diversions, rate spikes, and overturning all industry outlooks.

Read on for our analysis of these crises and how they have evolved, and be sure to follow us on LinkedIn, Facebook, and X to stay informed as events continue to unfold.

The Suez Canal and the Red Sea Crisis

The escalation of Houthi attacks on maritime vessels led to a crisis in the Red Sea and the Suez Canal. Shipping lines quickly rerouted their vessels around the southern tip of Africa in response to the threat, significantly increasing the length and duration of voyages. Rerouting from the Suez Canal to the Cape of Good Hope added thousands of miles and several days to vessels’ journeys, depending on speed; for example, ships diverted from Singapore to Rotterdam added over 3,000 miles and approximately 10 days to their voyages. Attacks as recent as this week have continued to validate the trepidation of ocean carriers.

As the Red Sea crisis persists, large-scale repercussions have followed. The rerouting of vessels around Africa absorbed almost all of the excess global shipping capacity. Simultaneously, export demand from China and import demand in the U.S. rose throughout the spring of this year. Equipment imbalances have also become a significant issue. Some ports are becoming increasingly congested, while others, particularly in China, face a shortage of empty containers. Ocean freight rates, which initially spiked at the onset of the crisis, have surged even higher in recent weeks due to strong demand, limited space, blanked sailings, and the early start of peak shipping season. However, the situation could change drastically in the latter parts of this year.

Falcone Global Solutions, LLC June 11, 2024
Container ship traffic around Africa

The Bab al-Mandab Pressure Valve

Record new vessel capacity is slated to come online throughout the year, with over 3.1 million TEUs scheduled for delivery in 2024 – a development that could alleviate rate pressures as more shipping space becomes available. Once the Houthis stop their attacks and vessels resume normal transits through the Bab al-Mandab Straight to the Suez Canal, rates could collapse due to over-capacity and a return to the more direct routes through the Suez. Congestion at the canal itself and ports around the globe could result as the entire system readjusts to normal lane usage. For now, however, Falcone Global Solutions continues using steamship lines that avoid the Red Sea.

The Panama Canal Drought

Throughout most of 2023, a historic drought severely limited daily transits through the Panama Canal, disrupting shipping lanes, especially from Asia to the U.S. East Coast. At the height of the drought, daily transits dropped from the typical 35-36 to around 20, with some days seeing even fewer. This water scarcity was exacerbated by the fact that both Panama City’s drinking water and the canal’s operational water are sourced from Gatun Lake. The canal’s water, used to raise and lower ships through its locks, is ultimately dumped into the ocean and cannot be reused, putting further pressure on the lake’s reserves during times of drought.

With the canal’s reliability compromised, shippers rerouted cargo bound for the U.S. East Coast through alternative gateways on the U.S. West Coast. The Port of Los Angeles saw a year-over-year increase of almost 30% in container volumes moved in Q1 2024, while the Port of Long Beach saw a 16% increase in the same period. Additional costs from thousands of miles of inland transit, combined with delays from waiting for Panama slots or rerouting around Cape Horn in Chile, caused rate levels on Transpacific eastbound routes to remain elevated for months. Looking ahead, however, the situation at the Panama Canal is looking brighter (or stormier).

Falcone Global Solutions, LLC June 11, 2024
Ships waiting to transit the Panama Canal

Storm Clouds Over Panama

The arrival of Panama’s rainy season has brought much-needed relief to the drought-stricken Panama Canal. More rainfall has allowed canal authorities to increase the daily transit capacity of the canal, with June seeing a rebound to 32 vessels traversing the locks each day. The reinstatement of higher transit volumes should help ease the backlogs that have built up over the past several months.

Looking Forward

The Red Sea crisis and the Panama Canal drought have impacted the global supply chain in ways not seen since the pandemic four years ago. Although current ocean rates are sky-high and still rising, the clearing of these two chokepoints combined with record new vessel capacity could lead to a significant drop in rates as the year progresses. Nobody knows when vessels will be able to safely return to the Red Sea, but shippers and carriers are ready for when they can.

 

To stay informed as these situations evolve, follow our continued coverage across LinkedIn, Facebook, and X.

Falcone Global Solutions, LLC is a Licensed, Bonded and Insured NVOCC,  Motor Carrier Broker, and Customs Broker that has helped hundreds of shippers and importers navigate the turbulence of international shipping for almost two decades. If you have any further questions or are looking for a trusted logistics partner, contact us today for more information.