How important are shipping chokepoints to today's economy and climate?

Long known as the barometer of world trade, shipping connects people and goods, from locations of supply to demand. Given the derived demand nature of shipping, activities can range from moving finished goods, raw materials, energy sources to people, livestock and vehicles.

In today’s interconnected world, geopolitics, economics and world trade are far more intertwined than ever before. This essay will explore why and how this is the case, bringing in examples of routes and channels of strategic importance, and highlighting some recent developments that have affected the supply chain sector, bringing to home some of the potential consequences in our daily lives.

A key attraction that drew me to this industry was its connectivity and global nature. From an asset perspective, there are multiple dimensions to consider: for example, a ship can be owned by a Malaysian shipowner, managed by a Hong Kong based company, flagged with the Singapore registry, classified by a United States classification society, financed by a Norwegian bank and insured by a British firm. All this while cargo moves from origin to destination, and here too, cargo ownership can change en route across parties as titles change. With container shipping, the complexity is compounded, as there are multiple cargo parcels or containers onboard - with the largest ships today being able to carry up to 24,000 TEU (twenty foot equivalent units).?

As cargo ships traverse global shipping routes, there are specific areas that are deemed strategically important. These could be important as they facilitate access to certain markets/commodities (for example, the St Lawrence Seaway that connects the Great Lakes in the US, the Bosphorus Strait that connects grain exports from the Black Sea), or by sheer navigational complexity (e.g. The English Channel and Cape of Good Hope with rough currents and waves), or even environmental regulations (e.g. Emission Control Areas, ECAs, that have sulfur emission levels regulated at those ports).?

Aside from such factors, some of the vital waterways that connect shipping routes, funnel maritime traffic through congested waters. The Straits of Malacca and Singapore are 2 such gateways. 30% of global maritime traffic pass through these channels, which come up to 94,000 ships a year. These channels are strategic because they connect the Indian Ocean with the South China Sea, and as a result, are the connecting bridges between demand and supply centers of China and MIddle East and Europe. Because they also house deep water ports such as Port Klang, Port of Tanjung Pelepas and Port of Singapore, port operators leverage on their strategic locations to operate feeder services for containers while energy providers and chemical traders leverage on the ability to refine and store cargo. These channels are also important from a security standpoint - given the congested nature of those waters, piracy is a risk in such regions, and governments have hence stepped up on surveillance to deter such unlawful activity.

The Panama Canal is another important shipping gateway that connects ships traversing across the Pacific and the Atlantic Oceans, enabling them to avoid the lengthy, hazardous route around the southernmost tip of South America via Strait of Magellan. As the region around the Panama Canal is raised relative to sea level, the canal operates via a series of locks that allow vessels to move across the channel. In recent times, however, there have been operational concerns around transits via the Panama Canal - a recent drought, exacerbated by an ongoing El Nino effect, has reduced the volume of water available to run the locks. This in turn, has restricted the number of vessels passing through by 40%., which impacts the transit time for cargo transiting this area.

The Suez Canal is another significant chokepoint, as it connects cargo moving from Asia to Europe, the world’s largest trade lane. This canal made headlines during March 2021 when a large container vessel ran aground and caused one of the largest supply chain disruptions in recent times. Furthermore, this happened during a pandemic period, when consumers globally relied on e-commerce platforms and supply chains to get their goods transported. As the vessel was grounded for 6 days, port congestion followed soon after, supply chains globally were stretched and cargo arrival in many sectors was delayed. The notion of supply chain resilience as a strategic imperative thus came up quite strongly, and a number of solutions were explored, from nearshoring to risk mitigation via multiple sources.

In November 2023, violence sparked between Israel and Hamas, which caused a backlash that brought Iran into the fray. This resulted in Yemen-based Houthi rebels, who are backed by Iran, to fire missiles at Israel and to attack ships off Yemen’s coast in the Red Sea. The rebels initially claimed to be targeting specific US or UK ships, however there is evidence that a wider range of ships have been victim to these attacks. Furthermore, given the complexities of the global nature of shipping, it’s truly difficult to ascertain specific ships or ownership structures.?

What this meant for ships transiting via this specific chokepoint, is that shipping via the Suez Canal has become more dangerous, and various ships have now diverted to transit around South Africa, which was the case before the Suez Canal was opened in 1869.

With typical economic forces, shipping routes have been optimally planned. However, the Red Sea disruption comes with a number of consequences - for one, transit time. This extended route adds between 10 to 14 days, which means that cargo that is loaded before the Suez Canal (e.g. in China) would require additional time onboard. This causes delay at arrival ports, again impacting supply chain resilience, which impacts companies across industries: from manufacturing, to FMCG and retailers. Further to add, these delays means that the ports, which have been expecting a steady flow of vessels discharging, are now encountering a disruption in their schedules. In particular, some ports now encounter more traffic and bunker sales due to this rerouting, for example Port Louis, Gibraltar and ports in the Canary Islands and South Africa. However, they may not have the port capacity to handle this volume of increased shipping acidity.

From a safety perspective, the lives of seafarers that are onboard these vessels are put at risk. A large ship is run by between 15-25 seafarers, and even in the midst of the pandemic, these professionals have continued to ensure that ships continue to run and that world trade continues amidst personal difficulty of being away from their families over extended periods of time. The Red Sea situation then becomes a concerning trend for their safety, and as such, many carriers have re-routed cargo over Africa, or worked with local military as escorts as the ships transit through the Red Sea.

With ships now having to divert their cargo, the extended transit time means that more vessels are needed per trip from Asia to Europe. For instance, the 102-day trip for a vessel to complete a loop from Asia to North Europe and back now requires 16 vessels given the Cape of Good Hope re-routing instead of the usual 12. This soaks up some of the overcapacity situation the industry has been struggling with, in which there are too many vessels supplied vs the demand for cargo ships. In 2024, the global fleet is expected to grow by 8% with new vessels that are built and delivered, while demand growth is expected at 3%. Some industry estimates have indicated that the round-Africa routing to absorb up to 5% of current global fleet capacity. While this re-routing hence shows a short term indication of demand equilibrium, this comes with increased market uncertainty and higher freight rates. According to Drewry’s World Container Index that measures composite freight levels, the index shows a rate of $3,659 per 40ft container, which is 158% more than the average 2019 (pre-pandemic) rate of $1,420. Some carriers have also added in additional charges of between USD 200-300/TEU given this disruption. What this means for consumers of shipping, which is almost everyone as 90% of goods are moved by sea, is that the cost of moving goods becomes more expensive, and we could expect inflationary pressures to affect us in our day-to-day lives.

However, at some point, it must be considered that the cargo diversions might not go on forever as the Red Sea situation de-escalates. At which point, there would be a flood of excess capacity of vessels on water, which would impact freight rates negatively. Hence industry discipline to manage the orderbook sustainably and not be overambitious in ordering more and larger ships would be a prudent notion.

Another consequence that the diversions have is on the environmental footprint. Shipping has been known to be the least carbon intensive transport per unit moved, especially compared with aviation, trucking and even rail. With these diversions, there is more time spent at sea per unit cargo, which means a higher emissions level despite the same amount of trade happening. In addition, as rerouted vessels increase speeds to cover the longer distance, the environmental gains in ‘slow steaming’ are wiped out. Industry studies have warned of greenhouse gas emissions that might increase north of 40%.

Aside from these recent disruptions, shipping continues to be a complex industry. As it orchestrates and facilitates world trade, the industry continues to drive the impetus to decarbonise, and seize opportunities with digitalisation. As such, this global industry continues to make waves with innovation and uncover new ways of solving the age-old business of global commerce. I’m personally looking forward to being part of this sector as it navigates structural challenges faced, and embraces an exciting future.

Abridged version of article posted here, by the Malaysian Reserve: https://themalaysianreserve.com/2024/03/11/shipping-chokepoints/