Source: Gelonghui
As the conflict between Palestine and Israel intensifies, the tension in the Red Sea and nearby seas has also intensified.
Recently, the Houthis in Yemen began to launch frequent attacks on commercial ships in the Red Sea and caused substantial damage to some merchant ships. In order to take refuge, more and more shipping companies are announcing the suspension of all container ships sailing in the Red Sea and nearby waters, or avoiding the Red Sea bypass to Africa's Cape of Good Hope.
It is worth mentioning that the Panama Canal, another important route in the world, has also had to drop drastically in traffic in recent months due to the drought.
Both major canals were suddenly “damaged”. As Christmas is approaching in the West, not only will it impact Western economy and trade, but even the global supply chain may be affected.
This is reminiscent of the “Suez Canal blockage incident” that occurred in March 2021. Under the joint catalysis of a series of subsequent factors, it eventually triggered a “butterfly effect” that swept through the global inflation crisis.
It is also worth paying attention to whether a new global supply chain crisis will be triggered by the two major shipping throats being blocked this time around.
01 Red Sea Waterway Crisis
The Suez Canal - Red Sea route, which protects the main traffic routes in Asia, Africa, and Europe, connects the Red Sea to the Mediterranean Sea, and is one of the busiest waterways in the world.
According to the data, about 12% of global trade, including 30% of global containers, about 10% of crude oil, and 12% of refined oil trade, is transported through the Suez Canal and then flows through the Red Sea and the Mande Strait.
The Strait of Mande lies between the Horn of Africa and the Middle East. It connects the Red Sea to the Gulf of Aden and the Arabian Sea, which flows into the Indian Ocean.
Therefore, for long-distance cargo ships that want to follow the Suez Canal route, the Mande Strait, which is only 20 kilometers wide, is a necessary route.
However, as the conflict between Palestine and Israel continued, the Houthi attacks caused many “shipowners” to press the pause button in the Red Sea.
Since the outbreak of a new round of conflict between Palestine and Israel, the Houthis in Yemen have repeatedly claimed to launch attacks on targets in Israel, and the Houthis have used missiles and drones to attack targets in the Red Sea many times.
Beginning in mid-November, the Houthis in Yemen even issued a statement saying that they would expand maritime attacks against Israel and prevent all ships bound for Israeli ports from sailing in the Arabian Sea and Red Sea. All ships flying the Israeli flag, ships operated by Israeli companies, or ships owned by Israeli companies will be targeted by them.
On November 19, the Houthis announced the seizure of the cargo ship “Galaxy Leader” linked to Israel in the Red Sea. In early December, the Houthis used missiles and drones to attack the merchant ship “Solidarity Explorer” and “No. 9” sailing in the Strait of Mande.
On December 11, the group launched a missile attack on an oil tanker flying the Norwegian flag, claiming that the tanker was carrying “oil bound for Israel.”
As the situation worsened, more and more merchant ships began to be affected.
On the 14th, the Houthis claimed to have launched a drone attack on a container ship owned by Maersk (Maersk), the second largest container shipping company in the world. Fortunately, the ship was not hit.
According to reports, Maersk (Maersk) accounts for 14.8% of global freighter trade volume.
Immediately after that, the container ship MSC PALATIUM III of the world's largest shipping company, Mediterranean Shipping Company (MSC), was also attacked on Friday while crossing the Red Sea. Afterwards, an oversized container ship owned by Hapag-Lloyd was attacked by drones or missiles while passing through the southern Red Sea, causing a fire on the deck and a container falling into the water.
Houthi spokesman Mohammed Abdul Salam reiterated on the 16th that the Houthis will continue to block the navigation of “Israeli ships” in the Red Sea and the Arabian Sea until Israel stops military operations against the Gaza Strip.
Affected by this, the four major shipping giants, including Hapag-Lloyd International, Denmark's Maersk Shipping Group, Mediterranean Shipping Company, and France's Dafei Shipping Group, have begun to announce one after another that their freighters will temporarily avoid the Suez Canal route that needs to pass through the Red Sea to ensure the safety of their crew, ships, and customer cargo.
As for the resumption of routes, it will be at least until after the 18th. As for when the actual resumption of flights, it will be until it is confirmed that the Red Sea route has resumed safety.
These four giants have a combined share of the global shipping market as high as 40%!
This has led to a marked decline in commercial traffic on the Suez-Red Sea route recently.
According to data released by the Panama Canal Authority (ACP), as the probability of an attack on Red Sea vessels increases, 30% of the container fleet may need to be diverted. The number of ships passing through the canal in November was 783, down 22% from October. It is expected that the number of scheduled traffic for December and January 2024 will be further reduced.
But at the same time, freight prices have also surged sharply.
Because merchant ships want to avoid the Red Sea bypass to Africa's Cape of Good Hope, not only will the time increase by at least ten days, but fuel costs will soar dramatically due to an increase in flight range of more than 40% alone.
In fact, since the outbreak of the Arab-Israeli conflict, freight rates for a large number of goods arriving in Israel from eastern Asia have continued to rise.
According to data from Freightos, container freight rates from China to the port of Ashdod increased by 9-14% in the last two weeks of October, and the increase in November even accelerated.
On December 15, the export price from Shanghai Port to the European basic port market was 1,029 US dollars/TEU, up 11.2% from the previous period; the freight rate to the Mediterranean basic port market was 1,569 US dollars/TEU, up 13.1% from the previous period.
In particular, booking prices for the Red Sea route have risen even more sharply. In the week of December 15, the Ningbo Export Container Freight Index (NCFI) Red Sea Route Index (NCFI) soared 27.7% month-on-month to 1393.71 points.
Some agencies estimate that due to this Houthi attack, shipping costs to and from Europe may increase by as much as 100%.
Although there is a huge gap between this magnitude and the surge in freight prices caused by the “Suez Canal blockage incident” in March 2021, given the current format, a surge in freight prices for some time to come will be a probable event.
02 The Panama Canal has a rare drought, and traffic volume has plummeted
The 65-kilometer Panama Canal connects the Atlantic Ocean and the Pacific Ocean. It is one of the key shipping hubs for trade between North and South America and Asia and Europe. It is linked to about 5% of global trade volume. More than 14,000 ships will pass through the Panama Canal in 2022.
However, at present, the Panama Canal is suffering from an unprecedented dry climate since records began in 1950. As a result, the freshwater supply required for the operation of the locks is seriously insufficient, and the canal's capacity to pass is drastically reduced. Tons of tankers and gas carriers from the Gulf of Mexico are waiting in long lines for navigation.
According to reports, the Panama Canal Authority (PCA) has adopted travel restrictions since the fall of this year, continuously extending restrictions on the maximum depth of draught water for ships and the number of ships transiting daily. The number of passing ships has been reduced from 36 to 38 per day in the past to 22, and will be further reduced to 18 by February next year.
According to data from the trade analysis organization MarineTraffic, in the first week of December this year, more than 167 ships crossed the canal, compared to 238 in the same period last year. The average waiting time for ships to pass was also extended from 4.3 days in early November to 11.7 days.
According to some experts, the Panama Canal will not be able to resume capacity until the mid-rainy season begins in 2024. Some cargo ships have to wait up to 20 days to pass through the canal and pay for expensive delays.
In order to cope with the backlog of ships, the Panama Canal Authority had to adopt the method of “auctioning qualifications” to allow some shipowners to pass through the canal ahead of schedule.
According to reports, in November of this year, Nippon Oil obtained priority access for an oil tanker at a high price of 3.98 million US dollars, setting a record for the highest auction. And this cost does not include hundreds of thousands of regular shipping costs.
But more companies have no choice but to give up passing through the Panama Canal and instead take a detour through the Strait of Magellan.
As with commercial ships that avoid the Red Sea route, this choice also means at least ten more days of additional time, as well as more significant freight costs.
The data shows that since July of this year, the Baltic Sea freight index for the Panama route has continued to soar. By December, the freight rate had once soared to 2,400 US dollars, more than double that of the middle of the year.
03 How big will the impact be?
The Suez Canal and the Panama Canal are the two most important shipping arteries in the world.
According to data from trade analysis organization MDS Transmodal, in the third quarter of this year, only more than half of trade ships between Asia and North America needed to cross the Panama Canal or Suez Canal.
In addition to crude oil and natural gas energy, most of the goods traded in the Suez Canal are terminal products such as electronics, clothing, and toys.
However, in the Panama Canal, apart from the fact that about 26% of the transportation business involves commodities such as liquefied petroleum gas and liquefied natural gas every year, a large part of the goods come from North and South America, such as corn and soybeans from the US, Brazilian beef, Chilean red wine and copper mines, Ecuadorian bananas, and agricultural products such as fruit, meat, fish, and shrimp from other South American countries.
In particular, the United States is most clearly affected by the Panama Canal drought. The US is the largest user of the Panama Canal, accounting for more than 70% of cargo traffic. In 2022, 26% of US soybeans and 17% of corn were exported to the Asian market through the Panama Canal.
Now is the peak season for US crop exports. The Panama Canal is congested, and US agricultural products have to take a long detour, leading to a marked increase in export costs.
At the same time, it is the winter season in the northern hemisphere. China has ushered in the coldest winter this year, and Europe won't be good to go anywhere. At the same time, it is also a critical time for Christmas preparations. It is also the busiest year-end sales season of the year, but up to now, these two major aviation movements have been affected by travel restrictions.
Although a detour may eventually resolve the issue, it will take longer, leaving short-term commodity demand unmet.
On December 9, the British Import and Export Institute made it clear that the transportation of a large number of goods faces the risk of being delayed and will not arrive in time for Christmas this year.
This is not only a problem where prices may rise again as a result; during such a cold winter season, if the energy supply is short-term, the problems caused may be even more serious.
04 Summary
Prices soared once in Europe last year due to canal blockage. As a result, electricity costs in many regions have soared several times, and food prices such as meat and vegetables have continued to soar, leading to the worst inflation crisis in history.
Today, the movement of the world's two major airlines is being restricted at the same time. Although it will not cause exaggerated inflation similar to last year, the impact may also be significant.
This has brought some uncertainty to the inflation issue that has just been suppressed in Europe and the US.
Editor/Somer