Global supply chains threatened by Panama and Suez Canal double crisis

Supply chain delays and increased rates related to the Suez Canal and Panama Canal may lead shippers and forwarders to choose air cargo as an alternative. Shipping operations are currently being affected by the need to avoid the Suez Canal due to the risk of attacks in the Red Sea, and restrictions on the Panama Canal due to drought.
Pierre Van Der Stichele, Vice President of Global Cargo at charter broker Air Partner, has stated that the resulting higher costs and longer transit times for container ships could potentially increase the demand for airfreight in the long run.

Shipping companies have rerouted vessels away from the Suez Canal in Egypt due to recent attacks on container ships in the Red Sea, off the Yemen coast. These attacks were carried out by the Houthi Militia as a response to Israel’s military operations in Gaza.

Several container carriers have suspended services through the Red Sea and the adjoining Suez Canal following attacks on around 10 commercial vessels in recent weeks. As a result, companies are considering a costly and time-consuming alternative route around Africa via the Cape of Good Hope. MSC’s Palatium was among the ships attacked, with MSC reporting the incident happened on December 15 in the Red Sea, while under sub-charter to Messina Line.
As a precautionary measure to protect the lives and safety of seafarers, MSC ships will not transit the Suez Canal Eastbound and Westbound until the Red Sea passage is safe. Some services will be rerouted to go via the Cape of Good Hope instead, and this disruption will impact the sailing schedules by several days of vessels booked for Suez transit.

Other shipping companies, including CMA CGM, Maersk, Hapag-Lloyd, ONE, HMM, and potentially COSCO, also appear to be diverting or halting operations. CMA CGM has decided to reroute some of its vessels to and from the US, North Europe, and Asia or Indian Subcontinent via the Cape of Good Hope at the southern tip of Africa. All other containerships in the area that are scheduled to pass through the Red Sea have already been instructed to reach safe areas and pause their journey until further notice.

Logistics and forwarding companies are concerned about the impact of the Suez Canal blockage on shipping. According to Scan Global Logistics, the industry may face a supply chain crisis similar to the one experienced during the worst of the pandemic. The alternative route around Africa via the Cape of Good Hope will take an additional 10 days for ship voyages, leading to shipment delays and increased rate levels. Xeneta analyst Peter Sand has predicted that ocean freight prices could increase by up to 100% depending on the scale and duration of the situation. Flexport has reported that 90% of Suez Canal-bound container vessels are pausing or rerouting, which could remove roughly a quarter of the world’s total capacity, leading to inflated prices and delayed shipments. Shippers should expect significant delays, and re-routing via the Cape of Good Hope could prolong transit times by 7-10 days. The disruption is likely to affect Asia – Europe markets with similar extended sailing times and costs. Governments are now looking at measures to address the Red Sea danger, with an international task force set up to share ships and resources. Participating countries include the US, UK, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles, and Spain.

The shipping industry has faced several challenges, including restrictions on vessels passing through the Panama Canal due to reduced water levels caused by drought. The Panama Canal Authority reduced the number of ships allowed to pass through the canal from 36 to 22 per day, causing delays in the global supply chain. However, due to higher-than-expected rainfall and lake levels, the Panama Canal Authority recently decided to increase the number of daily transits to 24 starting in January, instead of a planned further reduction to 18 ships per day.

These restrictions, combined with an increase in the Canal Tariff, have raised operational costs. As a result, pricing for cargo from South Africa, Mozambique & Namibia to South America’s West Coast transiting the Panama Canal will no longer include the Panama Canal Surcharge (PCS). Effective January 1, 2024, pricing will be subject to a PCS of USD 200 / TEU.

According to Van Der Stichele, the issues at the Panama Canal could potentially cause a longer disruption as portions of the canal might dry up unless there is a significant period of rainfall anytime soon. A technical solution is planned, but it could potentially take two years to implement. This disruption would increase shipping transit time sailings significantly, raising costs. It would mostly affect the European and African markets, but not the US, as shipping lanes would still be able to dock on western US ports.

Van Der Stichele says that it is too late in the year for the impact of the Suez Canal and Panama Canal problems to affect air cargo. Air Partner has not seen an increase in air charter business yet. This is because it is too close to Christmas and any ocean freight peak season would have already sailed and reached its destination. Even if the Suez Canal or the Panama Canal had been an issue one or two months ago, it would have caused significant delays for high-value consumer goods before Christmas.

However, the situation in Panama is a growing concern for sea container shipping companies. The shipping lines are avoiding sailings through the Red Sea and the Gulf of Aden due to recent attacks on vessels. Van Der Stichele expects the cost of ocean freight to increase significantly in the long term, whether it be for consumer goods, raw materials, semi-finished goods, built vehicles, or outsized cargo. This is because ships due to use the Suez and Panama canals will add several weeks circumnavigating the continents and this has the potential of increasing demand for airfreight just as the low season is due to start.