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By Kim Catchis, Franklin Templeton, Investment Strategist, Franklin Templeton Institute
The importance of major canals to global trade cannot be underestimated.Kim Catechis of the Franklin Templeton Institute highlighted some of the challenges they face, including militant attacks and climate change.
International trade drives global economic growth, and approximately 80% of global cargo transportation is carried out by sea. Access to two of the world’s most important canals is critical to this growth. Today, they have become bottlenecks.
One is suez canalIt was built in 1869 by the French Suez Canal Company. It connects the Mediterranean and Red Seas, providing the fastest and cheapest routes between Europe and Asia. About 30% of the world’s container traffic and 12%-15% of global trade pass through this narrow body of water, with an estimated annual cargo value of more than $1 trillion.1 This equates to 19,000 ships and $9.4 billion in revenue in fiscal 2023.2
Traffic volume decreased by approximately 42% in December 2023 and January 20243 Because Houthi militants, with support from Iran, carry out missile and drone attacks on shipping. In response, U.S. and British forces are attacking Houthi missile facilities but have so far not stopped their attacks. The route from Singapore to Rotterdam via Suez is 8,500 nautical miles and takes 26 days. The route around the Cape of Good Hope takes 36 days, covers a distance of 11,800 miles, and adds $1 million in round-trip fuel costs.4
We are seeing signs that European importers are building up inventories, effectively selecting “just in case” Exceed”Just right. “ Naturally, shipping costs skyrocketed. For example, freight rates from Shanghai to Europe have increased by 256% since the beginning of December.5 Insurance premiums have also soared, adding to costs.The last time the canal was blocked was in 2021, Lloyds List estimated the blockage cost $9.6 billion6 Container transport volume per day.Energy prices are clearly at risk today as 9.2 million barrels of oil and 4.1 billion cubic feet of LNG7 flows through the canal every day.
the other is panama canal. Built by the United States in 1914, it spans the 26-meter water level difference between the Pacific and Atlantic Oceans through inland lakes and locks. Therefore, each ship requires a large amount of water to pass through the canal.
The issue here is climate change. We are seeing El Niño weather patterns more frequently,8 Leading to drought, directly affecting the canal’s traffic capacity. Typically, it transits 12,000 ships a year, carrying about 600 million tons of cargo and earning $4.97 billion in revenue. The current number of ships has been reduced to 24 ships per day, a decrease of 27%.9 The Panama Canal Authority (PCA) attributes the situation to rising temperatures in the Atlantic Ocean, combined with El Niño and a delayed rainy season. The PCA predicts that water levels in the main Gatun Lake will fall by 2% by April 2024, which will have an impact on the tonnage of ships that can use the canal due to draft.10
The Suez Canal is a dense shipping route for commercial cargo, food and oil, while Panama is the route for more than 20% of the world’s soybeans and more than 15% of corn exports. It is also the main route for U.S. liquefied natural gas (LNG) exports to Asia.11 We have already seen goods being diverted to Europe, displacing volumes from the Middle East and even causing prices to fall in the EU.
The Mississippi River is a looming problem for U.S. soybean exporters – with barge restrictions more frequent as water levels drop due to drought. Nearly 60% of U.S. grain exports (wheat, soybeans, corn) travel by barge via this route to export terminals in the Gulf of Mexico. The winner here? Potential Brazilian soybean growers ship to China via the Atlantic route around the Cape of Good Hope. Midwestern farmers had access to railroads extending westward. Or use existing rail lines to go to Mexico and then reroute to a Mexican Pacific port.
It’s too early to tell whether these bottlenecks will lead to inflation. But it would be prudent to view this as inflationary pressure that has the potential to become structural. This is because cost growth varies widely across sub-sectors, depending on the supply and demand balance in the destination market and the extent to which longer sea routes impact return empty vessel availability.
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1. Source: “Shippers remain wary of Red Sea transits as regional tensions rise. “ S&P Global Commodities Insights. January 2, 2024.
2. Source: “Suez Canal annual revenue hits $9.4 billion, chairman says.” Reuters. June 21, 2023.
3. Source: “Red Sea, Black Sea and Panama Canal: UNCTAD sounds alarm over disruption to global trade. ” United Nations Conference on Trade and Development (UNCTAD), January 26, 2024.
4. Source: “Shippers remain wary of Red Sea transits as regional tensions rise. “ S&P Global Commodities Insights. January 2, 2024.
5. Source: “Red Sea, Black Sea and Panama Canal: UNCTAD sounds alarm over disruption to global trade.” United Nations Conference on Trade and Development (UNCTAD). January 26, 2024.
6. Source: “Suez Canal remains blocked despite efforts to refloat stranded Ever Give.” Lloyd’s List. March 24, 2021.
7. Source: “Red Sea choke point critical to international oil and gas flows.” Environmental Impact Assessment. December 4, 2023.
8. Source: “Is climate change already affecting ENSO?” National Oceanic and Atmospheric Administration (NOAA). July 27, 2023.
9. Source: Panama Canal Authority (PCA). December 15, 2023. “Starting in January, the number of daily sailings on the Panama Canal will increase to 24.”
10. A ship’s draft or draught is the vertical distance between the waterline and the bottom of the hull or keel. Including rudder, propeller, etc.
11. Source: “Principal; Commodities shipped through the Panama Canal.” Panama Canal Authority (PCA), Statistics. Date viewed: February 9, 2024.
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