How two choke points could turn into a perfect storm for global trade

Two crucial choke points – the Suez Canal and the Panama Canal – threaten to disrupt over a third of global trade. This comes in the backdrop of already slowing demand in the West and a property crisis in China that led the World Trade Organization (WTO) to lower its goods trade forecast by as much as 50 per cent.

Here is why global goods trade could be in for a rocky start to 2024.

What do the ongoing Red Sea and Panama Canal crises mean for world trade?

A disruption in maritime transport is a crucial concern for the world economy, as over 80 per cent of the global goods trade is carried by sea. The share of trade via sea is much higher for developing countries such as India.

Currently, two important shipping routes are facing blockages. While the Bab-el-Mandeb Strait that leads to the Suez Canal in the Red Sea region connects Asia and parts of North East and East Africa to Europe, the 100-year-old Panama Canal connects the Atlantic and Pacific Oceans. Both these routes are among the busiest in the world and a blockage results in forcing global shipping lines to take longer alternate routes, pushing up freight rates.

The disruption at the Red Sea route, for instance, is estimated to push the prices of Indian agricultural products by 10 to 20 per cent, as shipments would be routed around Africa via the Cape of Good Hope.

This comes at a time when much of the West is witnessing higher interest rates to curb inflation. Higher prices could further fuel demand concerns for global and Indian exporters.

Why is trade via the Panama Canal slowing?

Shipping via the Panama Canal has dropped by over 50 per cent due to drought conditions at the 51-mile stretch. Due to the shortage of water, ships moving from Asia to the US are being forced to use the Suez Canal, which takes six more days compared to the Panama Canal. Moreover, Panama is facing its driest rainy season in decades, raising fears of prolonged canal bottlenecks. According to S&P Global, rather than taking longer voyages through alternative routes, LNG vessels are participating in pricey auctions to expedite their transit through the Panama Canal.

One vessel paid nearly $4 million for an open slot in an auction in early November. The number of Very Large Gas Carriers transiting the Panama Canal is projected to almost halve by February 2024, and there are concerns that those transits will reduce to zero come January, S&P Global further said.

Why are Russian oil flows to India considered immune to attack in the Red Sea?

With global shipping majors such as Maersk avoiding transit through the Red Sea, global oil and petroleum product flows through the maritime channel have declined by over 50 per cent in December from their regular levels.

However, India has so far not faced a disruption in its Russian oil imports. Russia is perceived as Iran’s ally and as the Houthi rebels are widely believed to be backed by Tehran, its tankers have been passing through.

While the price of benchmark Brent crude had jumped to $80-per-barrel mark due to the attacks, it has corrected to around $77..
In a recent report, Goldman Sachs said that it does not expect the disruptions in the Red Sea to significantly impact international oil prices as global oil production is unlikely to be directly affected.

How have the attacks impacted freight rates?

Ever since the attacks along the Bab-el-Mandeb Strait began, global shipping firms have begun imposing war risk surcharges over and above the normal freight rates. Indian exporters said that freight rates for Indian shipments headed to Europe and Africa could surge as much as 25-30 per cent if the ongoing security concern along the Red Sea trade route continues.

This is troubling, as the European Union is one of India’s second-largest export destinations. Slowing demand from the region has impacted India’s labour-intensive sectors, such as textiles, gems and jewellery exports.

Shipping giant Maersk last week said it is preparing to resume shipping operations in the Red Sea after the US-led coalition was deployed in the area to address security concerns. However, the company was forced to announce fresh suspensions on December 31st, indicating a possibility of more such disruption in the Red Sea trade route.