Houthi Strikes, The Closure Of The Gate Of Grief And The Sea Of Economic Consequences
Unpacking The Implications of Limited Flows Of Trade Through the Red Sea And Panama Canal
As containership traffic through the Bab-el-Mandeb strait (rather aptly the Gate of Tears or Gate of Grief in Arabic) into the Red Sea slows to a trickle of what it was prior to the ongoing Houthi attacks on civilian shipping, questions are once again being asked about potential supply chain issues and how the stoppage of container traffic through the Bab-el-Mandeb Strait could impact global goods inflation.
On the other side of the world, there is another factor that could further complicate matters, the water level of Gatun Lake aka the artificial lake in the middle of the Panama Canal. As of the latest data from the canal’s authorities, the current volume of monthly throughput of vessels is 14.9% below the lows of recent years which were seen during the height of the pandemic. But that is something we’ll get into much greater detail later in the article.
While the disruption of container traffic into the Red Sea and through the Suez Canal could be over in relatively short order and end up little more than a footnote in the history books, if it continues it could force a major reorganization of maritime trade and play a significant role in defining how inflation fares in 2024.
The Scale Of The Red Sea Disruption
According to data from supply chain management and logistics firm Flexport, 552 containerships accounting for around 7.6 million TEUs (twenty foot container equivalent units) of capacity were actively diverting or will divert away from their traditional route through the Suez Canal. This accounts for almost 25% of global container shipping by capacity.
In December, ratings agency Fitch estimated that the rerouting of Europe bound shipping from Asia could increase transit times by 50% and reduce effective global container shipping capacity by 10-15%.
In a recent analysis shipping news journal Lloyds List made an important distinction. While there are still some containerships transiting the Red Sea and Suez Canal, the unimpacted traffic is generally smaller vessels with a capacity under 5,000 TEU. While some shipping lines are still running larger containerships through the area, it is fraction of what it was prior to the Houthi attacks on civilian shipping.
The Short Term Impact
While all nations will eventually come to feel the impact of the issues in the Red Sea through higher shipping costs and potential supply chain issues. In the short term some nations are significantly more exposed than others.
According to research from the Italian Geographical Society Bulletin and Florence University, the largest impact of reduced north bound passages through the Red Sea is nations with ports on the Mediterranean which account for 54.2% of container flows as of 2019.
The second most impacted is North West Europe, which accounts for 32.6% of container flows. The last nation to make the breakdown is the United States, which accounts for 8.3% of north bound container flows.
While there are other nations whose trade passes through the canal, these three categories cover over 95% of all north bound trade through the canal.
While the full impact of these route changes the broader issue will not be felt for quite some time, there are reports of outsized prices being demanded to secure passage on sailings set to kick off in the second half of January. Some carriers are announcing premium levels of over $10,000 USD per 40ft container to secure passage from Asia to the U.S West Coast.
Are We There Yet?
Attempting to quantify exactly how long containership voyages will be delayed is a challenging one. The overwhelming majority of Suez transiting vessels will call at multiple ports in the course of their broader voyage.
S&P recently reported that direct voyages from the container hub of Singapore to Rotterdam, Europe’s busiest container port would take 40% longer assuming all else remained equal.
However, for most container ships bound for Europe and North America through the Suez Canal do not begin their journeys in Singapore, they begin in China. In 2021, more than 262 million containers passed through Chinese ports ex-Hong Kong, more than the next 9 busiest nations combined.
For this reason, the world’s busiest port of Shanghai was chosen to benchmark the potential change in voyage distances. While its far from perfect, it arguably gives a slightly more ballpark view on the increase in overall voyage times when compared with using Singapore as the benchmark.
The hardest hit ports are those in the Mediterranean, with voyage times to the Italian port of Trieste up by 68.8% and the Greek port of Piraeus (Athens) up by 81.7%.
In terms of the three busiest container ports in Europe, Rotterdam, Antwerp and Hamburg, voyage times are up by 31.5%, 31.5% and 30.8% respectively. To put trade flows through the Red Sea into these ports into perspective, roughly half the container throughput at the German port of Hamburg in 2023 will be from trade with Asia (an estimated 4 million TEU).
At the other end of the spectrum are the busiest East Coast ports of the United States. Voyage times from Shanghai via the Cape of Good Hope vs the Suez Canal are up by 17.0% for New York, 13.2% for Savannah and 8.9% for Houston.
However, its here that things take on an extra level of difficulty and complexity. For direct trade between China and the East Coast United States, the ideal route is through the Panama Canal. But with canal passages currently being limited, some shipping companies resorted to the longer Suez Canal route.
Compared with the ideal route through the Panama Canal, passage from Shanghai around the Cape of Good Hope to major East Coast ports is significantly longer. The journey to New York takes 36.7% longer, Savannah 42.9% longer and Houston 49.7% longer.
While this exercise gives us an idea within several ballparks of how much extra shipping capacity could be required to make up for longer voyages, shipping via the Suez Canal rarely takes a route directly from China to their final destinations in Europe and the United States. Instead, numerous port calls are undertaken throughout the voyage.
On a very rough estimate based on weighted actual container throughput and voyage extension times, conservatively over 30% more capacity is now required to service the same routes container traffic through the Red Sea now operate on. This is significantly less than the Fitch estimate that 50% more capacity was required to service the Asia to Europe/Mediterranean routes.
The Direct Short Term Impact
In terms of the direct immediate impact on U.S bound trade, it’s significant, but needs to be seen in the broader context of overall Asia - U.S trade flows. In 2022, the 10 busiest East Coast container ports handled 29.3 million TEU (twenty foot container equivalent units).
In a recent article, Reuters estimated that up to 30% of cargo that arrives on the U.S East Coast transits the Red Sea and Suez Canal. Based on the top 10 busiest East Coast container ports, this comes to a little under 8.8 million TEU being impacted on an annual basis. To put that figure into perspective its 46% of the level of annual container throughput seen at the ports of Los Angeles and Long Beach combined.
A potentially significant imposition in a vacuum, but the U.S also has other options. Cargo can be shipped from Asia to West Coast ports then taken by road and/or rail to its intended destination.
The CEO of global supply chain intelligence firm Freightwaves, Craig Fuller recently noted on Twitter that data was increasingly pointing toward a recovery in U.S trucking freight demand.
While there are a multitude of reasons put forward for this recovery, with importers shifting cargos to West Coast ports, this is arguably a factor in contributing to the additional demand.
At the other end of the spectrum, Europe is significantly more exposed. For example, the Port Of Hamburg, which is the 3rd busiest container port on the continent, has an annualized throughput of around 4 million TEU’s of trade with Asia. This is a little under half the total level of container trade the port saw during 2022.
The Diversion Has Issues Of Its Own
While diverting shipping away from the Red Sea and around the Cape Of Good Hope appears to be a rather simple solution that presents the rather obvious problem of significantly longer transit times, there are other factors that complicate matters further.
As things stand, the port infrastructure of Southern Africa are in no way prepared for the enormous influx of traffic that it is currently experiencing. While shipping lines are ordering containerships to take on greater fuel loads in the large ports of Asia in the hope that they will make it to their destination, bad weather and rough seas could see ships consuming significantly more fuel. Various shipping lines have put forward the ports of Durban (South Africa), Mombasa (Kenya), Walvis Bay (Namibia) and Port Louis (Mauritius), as some of the main options.
"Even the state that Durban is in now, it is still the most advanced and largest port in Africa, so ships rerouting around the continent have very limited choices for berthing for replenishment,"
- Alessio Lencioni, a logistics and supply chain consultant interviewed by Reuters
While efforts are being made to ship more fuel to the ports diverted ships are seen as likely to make calls at, it remains an challenging short term problem to develop the port infrastructure of Southern Africa to handle the additional traffic.
And this brings us to a rather ironic and potentially pivotal factor. The Houthi attacks on civilian shipping could come to an end in a relative instant, whether due to some backroom deal with Iran, a cessation of hostilities in Gaza or something else entirely.
So there is very little incentive to begin to expend the resources required to adequately ensure that all ships passing the Cape Of Good Hope get everything they need. If the effort was made, it could swiftly become a white elephant, an incredibly expensive undertaking with no real purpose, as the crisis in the Red Sea becomes a footnote in the history books.
But if the Houthi’s and their Iranian backers decide that the current status quo is serving their interests, they could just as easily move the goal posts and continue their attacks using some other form of justification.
Western Military Action
Since the 12th of January, the U.S and Britain have conducted more than half a dozen rounds of air and missile strikes on Houthi targets in Yemen. While the intent was to facilitate the return of shipping to the Red Sea, so far it has had the opposite effect, with more shipping lines pulling their ships from the Suez Canal route.
Last week Bloomberg reported that LNG suppliers including Qatar, Russia and the United States were now having at their LNG carriers avoid the waterway. Bloomberg went on to note that at the time ship tracking data did not currently show any LNG vessels heading for the area.
The Houthi’s have a wide range of drones and missiles, from the Qasef-1 which isn’t much bigger than a conference table, all the way up to more sophisticated anti-ship missiles, with ranges up to 800km.
With weapons that can be launched from the back of an unsuspecting looking truck, potentially from near or in civilian areas, fully destroying the capabilities of a force accustomed to fighting a Saudi led multinational coalition armed with U.S intelligence and Western weapons is a challenging task.
Trouble In Panama
On the other side of the world in Panama, a lack of normal seasonal rainfall amid a protracted drought, has left yet another maritime trade chokepoint transiting significantly fewer vessels than usual.
Currently water levels at Gatun lake (the artificial lake in the canal which provides water for transits) is at its lowest level for this time of year since comparable records began in 1965.
In November, the number of transits through the canal dropped to 26.1 per day, a figure even lower than the 28.2 transits per day seen at the height of the impact of the pandemic in June 2020. During 2022, an average of 35.5 vessels transited the canal each day.
It was previously forecast that the number of transits would continue to fall to a low of 20 per day in January and 16 per day in February. But after some lucky unseasonable rainfall, that has since been raised to 24 for January.
Unless further significant unseasonable rainfall occurs, long term historic data for rainfall in the area suggests there won’t be any improvement in the level of the lake until April. This has been reflected in the Panama Canal Authorities projections for water levels in the lake, which predict continued falls across the first quarter.
If normal rainfall patterns resume later in the year, amidst the predicted conclusion of the El Nino period which is projected to end between April and June, the issue could become significantly less serious or potentially fade away entirely. However, the big question is whether or not we could see another year of sub-par rainfall at the canal.
A repeat of the conditions of 2023, which saw some months have their lowest levels of rainfall since 1950, could force restrictions on the number of vessels to transit the canal continue or in a downside scenario be tightened further.
This is where things could get a bit more challenging for U.S East Coast importers. With the ideal direct route for their imports from Asia laying through the Panama Canal, limited transits could see them either paying more for shipping in order to guarantee passage through the canal, accepting delays or shifting their cargos to West Coast ports and paying for overland transit costs.
Putting It All Together
Its entirely possible that the issues in the Red Sea could be resolved at the stroke of a pen in a backroom deal brokered by Beijing or as a part of a peace agreement in Gaza. While on the other side of the globe mother nature could unleash a torrent of rain and resolve the Panama Canal issue in relatively short order.
At this point a resumption of containership trade through the Red Sea in a relatively timely manner is the consensus base case. But with 2024 an election year and an ongoing crisis presenting an opportunity for some of America’s rivals who don’t face the same degree of downsides, its worth keeping in mind the potential consequences of the disruption continuing.
The Houthi’s justification for the attacks on civilian shipping is that its in support of the Palestinian people and to degrade Israel’s ability to fight the ongoing war. While in time Israeli combat operations will eventually draw to a close in Gaza, the Houthi’s could easily shift their justification for ongoing attacks to the “occupation of Gaza” or some form of abstract without a clear possibility for a conclusion.
Ironically given the possibility of the issues in the Red Sea being resolved in short order, there isn’t much incentive to prepare for a disruption that continues for the long run. This could come to complicate matters significantly down the road as the port infrastructure of Africa struggles to adapt to the additional demand.
Ultimately in the long run, supply chains and maritime logistics will eventually adapt even if the disruption continues. Whether its through an expansion of global shipping capacity, a reduction in demand or a combination of factors.
The short term is another story. If the disruption continues, its only a matter of time until significant delays and eventually supply chain issues start to crop up in numbers. While the direct inflationary impact of shipping costs may remain limited due to the proportion of overall shipping which is done on longer term contract rates not higher spot prices we see in the headlines, there are other inflationary risks.
So far global disinflation has been heavily driven by goods prices, with several nations seeing outright deflation in some goods components of their respective CPI’s. A renewed inflationary impulse in goods prices, whether from shipping costs or supply chain issues could significantly shift the broader inflation trajectory.
While the ongoing disruption is a much smaller shock than the stimulus and lockdown driven event seen during the pandemic, even a relatively limited inflationary impulse from goods could make it all the more challenging to get inflation back into the the target range of central banks.
Earlier this month Oxford Economics estimated that:
“If the Red Sea were to remain closed to shipping for several months, however, and shipping freight costs stayed around twice the level of mid-December, this could add 0.7ppts to annual CPI inflation rates by the end of 2024.”
How long the disruption to traffic through the Red Sea will continue remains to be seen. But if the Houthi’s and their Iranian backers choose to continue the attacks on civilian shipping, we may get to find out exactly how inflationary or not this disruption to global maritime trade could be over the course of 2024.
Eventually the expansion of global shipping capacity and the evolution of supply chains will render these issues moot, but in the mean time they could present a moderate increase in inflationary pressures at the worst possible time for global central banks and political policymakers.
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Yes, the increased bunker demand was what I was getting at, as that is a potential macro-economic factor larger than the shipping impact, imho...although both could put a floor under goods inflation.
Like other commentators, you focus on the extended voyage times, and what some call a 'one-off' inflation effect through delay. longer voyages will cost more as the days afloat increase - but what about the fuel consumed in the journey?
this is bound to increase also.