Panama and Suez Canal double crisis threatens global supply chains

Persisting Suez Canal and Panama Canal-related supply chain delays and increased rates may see shippers and forwarders opting for air cargo.

Shipping operations are currently being compromised by the need to avoid the Suez Canal due to the risk of attacks in the Red Sea, and restrictions on the Panama Canal following drought.

Pierre Van Der Stichele, vice president of global cargo at charter broker Air Partner, said that resulting higher costs and increased transit times for container ships “has the potential of increasing demand for airfreight” in the long term.

What’s happening?

Shipping companies have rerouted vessels away from the Suez Canal in Egypt following attacks on container ships in the Red Sea, off the Yemen coast.

These attacks have been carried out by the Houthi Militia in response to Israel’s military operations in Gaza.

Scan Global Logistics said in a market update on December 18 that several container carriers had suspended services through the Red Sea and the adjoining Suez Canal following attacks on “around 10 commercial vessels” in recent weeks.

And Flexport said: “As of Monday, December 18, all major ocean carriers besides OOCL and COSCO have announced they’ll pause all vessels bound for the Suez Canal via the Red Sea and Bab-el-Mandeb Strait.”

Companies are now considering a costly and time-consuming alternative route around Africa via the Cape of Good Hope.

MSC’s Palatium was amongst the ships attacked, with MSC reporting the incident happened on December 15 in the Red Sea, while under sub charter to Messina Line.

The shipping company said in a December 16 advisory: “Due to this incident and to protect the lives and safety of our seafarers, until the Red Sea passage is safe, MSC ships will not transit the Suez Canal Eastbound and Westbound. Already now, some services will be rerouted to go via the Cape of Good Hope instead.

“This disruption will impact the sailing schedules by several days of vessels booked for Suez transit.”

Meanwhile, CMA CGM said that it would reroute some of its vessels as a safety measure in an operational update on December 18.

“Accordingly, CMA CGM has decided, in accordance with the clause 10 of its bill of lading, to reroute some of its vessels currently sailing to and from US, to and from North Europe and to and from Asia or Indian Subcontinent via the Cape of Good Hope at the southern tip of Africa.

“All other CMA CGM 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.”

In addition to MSC and CMA CGM, Norman Global Logistics said in an update on December 18 that Maersk, Hapag-Lloyd, ONE, HMM, and potentially COSCO, also appear to be diverting or halting operations.

What’s the impact?

Logistics and forwarding companies have painted a bleak picture for the impact on shipping.

Scan Global Logistics said the situation means that the industry “could be faced with a milder version of the supply chain crisis seen during the worst of the pandemic”.

The alternative route around Africa via the Cape of Good Hope will add 10 days to ship voyages, said the company.

“In addition to shipment delays, it is also likely that shippers will be faced with increased rate levels as a result of the latest development.”

And Scan Global noted that according to Xeneta analyst Peter Sand: “Depending on the scale and duration, we could see ocean freight prices increase by up to 100%”.

Flexport stated that 90% of Suez Canal-bound container vessels are pausing or rerouting, which could remove about a quarter of the globe’s total capacity, inflate prices, and delay shipments.

Shippers should expect significant delays, Flexport said.

“It’s currently estimated that re-routing via the Cape of Good Hope will prolong transit times by 7-10 days, but it depends on where the vessel is when the re-routing decision has been made.

“Depending on the vessel’s location, some may experience an even longer delay of 2-4 weeks if they’ve had to detour from the Red Sea.”

Looking at how the situation might evolve, Van Der Stichele, said: “The Suez Canal disruption will most likely affect Asia – Europe markets with similar extended sailing time and costs. The Suez Canal may benefit through added security through the protection of Navy ships ensuring safe passage by preventing any attacks to take place, in a more uniform manner.

“Nonetheless War Risk Insurance premiums have already increased as the risk would still exist whilst minimized through Navy escorts, adding to the cost of transport generally passed onto the customers.”

Governments are now looking at measures they can take to address the Red Sea danger. An international task force has been set up that will share ships and other resources.

Participating countries include the US, UK, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles and Spain.

Panama problem

As well as the Suez Canal disruption, the shipping industry has had to navigate restrictions on vessels passing through the Panama Canal set by the Panama Canal Authority due to reduced water levels due to drought.

The number of ships allowed to pass through the route each day is currently down to 22 from the usual 36 ships per day, which has also caused delays within the global supply chain.

However, while the restrictions were set to become stricter with ships to be limited to 18 by February next year, rainfall and lake levels have been higher than expected, meaning the Panama Canal Authority recently decided it will increase the number of daily transits to 24 starting in January.

Restrictions on the number of vessels allowed combined with the increase of the Canal Tariff implemented earlier this year have raised MSC’s operations costs, said the company.

“As a result, pricing for cargo from South Africa, Mozambique & Namibia to South America West Coast transiting the Panama Canal will no longer be inclusive of Panama Canal Surcharge (PCS). Effective 1 January 2024, pricing will be subject to a PCS of USD 200 / TEU.”

Van Der Stichele commented: “The issues at the Panama Canal have the potential for a longer disruption due to portions of the canal drying up unless there is a significant period of rainfall anytime soon.

“A technical solution is planned but potentially two years away. Shipping transit time sailings would increase significantly as well as the cost and will mostly affect the European, African markets but not the US as shipping lanes will still be able to dock on western US ports.”

How could airfreight benefit?

The Suez Canal and Panama Canal problems have come about too late in the year for the impact to flow through to air cargo, according to Van Der Stichele.

Air Partner hasn’t seen an increase in air charter business as of yet.

“We haven’t seen any additional requests yet as we are too close to Christmas. However, the current situation in Panama is of growing concern for sea container shipping companies with the added pressure of shipping lines avoiding sailings through the Red Sea and the Gulf of Aden due to recent attacks on vessels.

“Any Ocean freight peak season would have already sailed and reached its destination whether it be through the Panama Canal, or the Suez Canal or through the longest diversion routes around the continents. Should these have been an issue one or two months ago, it would have been the perfect storm as high-value consumerism goods would have faced serious delays prior to Christmas.”

However, while airfreight may not be set to gain significant business in the near future, air cargo demand may rise in the long term.

Van Der Stichele explains: “The affects on the market comes when the peak season is ready with wind down and will not affect the markets from one day to another, but I expect the cost of Ocean freight to increase significantly, whether it be for consumer goods, raw materials, semi-finished goods, built vehicles and outsized cargo, to the point that added sailing time in both instances (ships due to use the Suez and Panama canals), adding several weeks circumnavigating the continents has the potential of increasing demand for airfreight just as the low season is due to start which would be welcomed by the air cargo industry.”