Disruptions to Normal Shipping Patterns are Causing Another Spike in Ocean Freight Rates
Since late in 2023, we have seen ocean shipping rates start to increase again, with the global average container rate as of January 11, 2024 at more than $3,000 per 40 foot container, the highest level since October 2022 and more than double the pre-pandemic rates of late 2019. The cause of this recent spike is significant disruptions along two key trade routes, through the Panama Canal for freight being carried between the U.S. East Coast and Asia, and in the Red Sea and Suez Canal, hampering trade between Europe and East Africa and South Asia.
The disruption to ship traffic in the Panama Canal has been going on since late summer of 2023, when authorities reduced the number of ships allowed on a daily basis through the canal from 36 to 32, an 11 percent reduction. By early next month, that number will be further reduced to no more than 18 per day. Shippers currently also face further restrictions on larger vessels needing more substantial drafts of water within the canal to safely navigate through–the maximum draft allowed was reduced by about 12 percent last fall, meaning the very largest container ships would either have to unload part of their cargo before passing through the canal or find another route.
The sole reason for this disruption of Panama Canal traffic, which normally handles about six percent of global ocean shipping per year, is an extended drought in Central America, bringing water levels in the canal to their lowest levels since the facility opened 109 years ago. The fall of the year is normally the rainy season for this tropical region, but the area is currently suffering one of the driest years in Panama’s recorded history. The severity of the drought across North and Central America this past year was attributed in large part to record high temperatures in the region, which exacerbated the drought conditions by increasing evapotranspiration.
The constraints on shipments through the Panama Canal are raising shipping costs in two ways: 1) some shippers are unloading portions of their cargo and moving them by train instead across the Isthmus of Panama, such as the Danish shipping conglomerate A.P. Moller Maersk recently announced plans to do, and 2) either waiting to transit through the canal or taking alternative routes can lengthen the time of travel, burning additional fuel and requiring more man-hours by ship crews, also raising costs.
The disruption to ship traffic in the Suez Canal and Red Sea is occurring due to attacks on commercial vessels by Houthi separatist factions in Yemen, which they are waging as their response to Israel’s attack on Hamas forces in the Gaza Strip. Israel’s action came in response to the Hamas brutal incursion into Israel on October 7, 2023, which resulted in an estimated 1,200 deaths and more than 200 people being abducted into Gaza as hostages. The Houthis are using a variety of munitions, including one-way drones, and anti-ship missiles, as well as occasionally helicopters and speed boats to attempt to board and capture ships.
Although only a handful of the attacks have successfully struck their targets, with many of the missiles and drones having been shot down by U.S. and other western naval forces in the region, many commercial shipping lines are now deliberately re-routing their ships to avoid the danger zone. This route normally carries 40 percent of ocean freight traffic between Asia and Europe, including energy products such as oil and diesel fuel, agricultural products such as grains and oilseeds, as well as fertilizer.
According to a January 16 report from IMF Portwatch, transits of all vessels through the Suez Canal have decreased by 37 percent on a year over year basis. More importantly for global agricultural trade, ships loaded with wheat moving through the same route fell by 40 percent in the first half of the month of January compared to last year’s level, according to a report released by the World Trade Organization.
Last week, after extensive diplomatic efforts in the region failed to have an impact on the rate of Houthi attacks, naval and air assets from the United States and the United Kingdom, with non-operational support from several other countries, launched a wave of missile attacks on 16 separate locations with Houthi military facilities within Yemen both to try to deter future attacks and to degrade the groups’ capacity to launch them if they continue. A subsequent analysis of the bombing damage released by the U.S. Department of Defense found that the bombs and missiles struck several different targets at each location. According to DOD’s release, those targets “included command and control nodes, munitions depots, launching systems, production facilities and air defense radar systems used by the Houthis to carry out attacks against vessels operating in international waters.”
On January 17, analysts at the International Food Policy Research Institute (IFPRI) posted a blog that dug further into the agricultural impact of this transportation bottleneck. They reported that an estimated 14 percent of the world’s grains and 3.5 percent of the world’s soybeans traded globally are routed through the Suez/Red Sea, but shipments from certain major agricultural exporting nations, such as, EU member countries, Russia and Ukraine, are being hit harder than this average would suggest. Diverting shipments from this route to go around the Cape of Good Hope in South Africa roughly doubles the shipping distance from Europe to Mombasa, Kenya, a major port on the east coast of Africa. As with the Panama Canal disruptions described above, this will increase transportation costs and the landed cost of these products to many destinations, many of which are developing countries.
