Suez Canal: Supply chain mess

There are two shortcuts to moving goods around the world, the Suez and the Panama Canal. Drought has more than halved the traffic able to sail through the Panama Canal that connects the Atlantic and Pacific Oceans. That was bad enough, but the alternative shortcut around the world has all but shut down.

This is a serious matter since maritime transport accounts for 80% of global trade. Under normal circumstances, the Panama Canal would account for about 3% of that global trade and 46% of container traffic moving from Northeast Asia to the East Coast of the U.S. On average, more than 13,000 vessels passed through the Panama Canal per year until last year.

Climate change, and now the El Nino climate pattern, has sabotaged Panama’s ability to keep the system of water locks and infrastructure functioning properly. What is worse, Panama’s dry season began last month and will run into April 2024. That is draining even more water from the locks. As such, the prolonged waiting times and capacity limitations that have plagued the man-made 40-mile canal will not be alleviated anytime soon.

This has already delayed American exports of grains bound for East Asia. In the case of Japan, U.S. corn exports account for more than 65% of that country’s needs and 71% of its soybean imports. It is only a matter of time before these delays begin impacting the Japanese consumer. The Panama bottlenecks have also increased costs. Shippers have bid up the price for a transport slot through the canal as waiting times lengthen. A slot can now cost anywhere from $1.4 million to $2 million. That effectively raises the price of transporting grain to Japan from the U.S. by 50%. Charter rates have also increased by about 30% as well.

Given this background, is it any wonder that shippers had decided to opt for the Suez Canal, instead, even though it adds about 18 days to the trip? And that is where the shippers found themselves between a rock and a hard place.

The Israeli/Hamas war started in October of 2023. It did not take long for those aligned with Hamas to begin retaliating against Israel and its allies. Over the border, missiles and drones failed to avoid Israel’s air defense system. In late November 2023, the Houthi rebels found an easier target. Armed attacks against defenseless container ships in the Red Sea were launched by the Houthi Militia. To date, the Iran-backed militia that controls northern Yemen is targeting all shipping, some with not even a remote connection to Israel.

For those who are unaware, the Red Sea is a narrow strip of water, west of Sudan and Saudi Arabia and Yemen to the east. At the northern end of the sea sits the Suez Canal. At the southern end lies a strait, called the Gate of Tears, which borders Yemen. It is where the Houthis have been targeting many of the tankers and container ships with increasing ferocity.

This waterway is a crucial piece of the world’s supply chain. Up to 15% of the world’s shipping sails through the Suez Canal. It is the most direct ocean route between Asia and Europe.

And now it has become part of what appears to be the tip of a widening conflict in the MiddleEast.

In the maritime industry, shipping companies can buy war risk insurance. Almost overnight, the premium on this kind of insurance went from 0.02% to 0.7% of the total value of the ship and its cargo. Container ships can easily carry hundreds of millions of dollars’ worth of cargo, so insurance fees alone are now in the millions. Shippers are now passing on those extra costs by charging higher fees for transporting cargo in that area. Average costs to ship containers have doubled in the last two months.

As more and more attacks occurred, shipping companies began rerouting vessels to avoid the area altogether. For those vessels who were already on a detour from using the Panama Canal, costs are continuing to mount. The new alternative route has ships going around the Horn of Africa, and then back into the Mediterranean. That route can tack on an extra 14-15 days to a trip already delayed by avoiding the Panama Canal.

The costs of extra fuel, labor, and penalties for late deliveries must now be added to already sky-high shipping fees. Europe and Asia are feeling the brunt of this extra cost. But in the end, I suspect that given the interconnectedness of global supply lines, it should be only a question of time before the U.S. is also whacked from this new threat to global supply chains.

Bill Schmick is a founding partner of Onota Partners Inc. in the Berkshires. None of his commentary is or should be considered investment advice. Email him at bill@-schmicksretiredinvestor.com.

Latest News

Webutuck school budget gets airing

AMENIA — The Board of Education of the North East (Webutuck) Central School District held a public hearing on the 2024-25 budget on Monday, May 6.

The hearing, held in the high school’s library, drew a small crowd that included five students who also were part of a presentation on a school program on climate and culture.

Keep ReadingShow less
Afghan artists find new homes in Connecticut

The Good Gallery, located next to The Kent Art Association on South Main Street, is known for its custom framing, thanks to proprietor Tim Good. As of May, the gallery section has greatly expanded beyond the framing shop, adding more space and easier navigation for viewing larger exhibitions of work. On Saturday, May 4, Good premiered the opening of “Through the Ashes and Smoke,” featuring the work of two Afghan artists and masters of their crafts, calligrapher Alibaba Awrang and ceramicist Matin Malikzada.

This is a particularly prestigious pairing considering the international acclaim their work has received, but it also highlights current international affairs — both Awrang and Malikzada are now recently based in Connecticut as refugees from Afghanistan. As Good explained, Matin has been assisted through the New Milford Refugee Resettlement (NMRR), and Alibaba through the Washington Refugee Resettlement Project. NMRR started in 2016 as a community-led non-profit supported by private donations from area residents that assist refugees and asylum-seeking families with aid with rent and household needs.

Keep ReadingShow less
Students share work at Troutbeck Symposium

Students presented to packed crowds at Troutbeck.

Natalia Zukerman

The third annual Troutbeck Symposium began this year on Wednesday, May 1 with a historical marker dedication ceremony to commemorate the Amenia Conferences of 1916 and 1933, two pivotal gatherings leading up to the Civil Rights movement.

Those early meetings were hosted by the NAACP under W.E.B. Du Bois’s leadership and with the support of hosts Joel and Amy Spingarn, who bought the Troutbeck estate in the early 1900s.

Keep ReadingShow less
The Creators:
Gabe McMackin's ingredients for success

The team at the restaurant at the Pink House in West Cornwall, Connecticut. Manager Michael Regan, left, Chef Gabe McMackin, center, and Chef Cedric Durand, right.

Jennifer Almquist

The Creators series is about people with vision who have done the hard work to bring their dreams to life.

Michelin-award winning chef Gabe McMackin grew up in Woodbury, Connecticut next to a nature preserve and a sheep farm. Educated at the Washington Montessori School, Taft ‘94, and Skidmore College, McMackin notes that it was washing dishes as a teenager at local Hopkins Inn that galvanized his passion for food and hospitality into a career.

Keep ReadingShow less