Drought and Attacks Disrupt World's Key Maritime Routes, Costs Soar

The global transport system faces an increasing threat of paralysis. Both the Red Sea and Panama, for completely different reasons, present challenges. The two most vital canals for maritime transport are becoming progressively harder for companies to access. It's unprecedented for such significant restrictions to occur at both locales concurrently.

The Wall Street Journal reports that over 50 ships recently queued for passage through the Panama Canal. The cargoes vary widely, from propane cylinders to food products.

A prolonged drought has beset the region, forcing the canal operator to limit crossings, which has significantly lengthened wait times and raised fees by up to eight times. Officials fear the situation could deteriorate further, noting that the volume of cargo moving through both the Suez and Panama canals has already dropped by more than one-third. They hope the worst drought in the canal's history will ease by May.

On the other side of the globe, container ships in the Egyptian Suez Canal face similar problems, albeit for different reasons. Threatened by Yemeni rebels, some opt for navy-assisted passage while others choose a significantly longer route around the Cape of Good Hope.

The concerns are justified, as Houthi rebels have attacked over 50 ships since November, including a cargo ship carrying fertilizer, which sank, killing three in a drone strike.

While the disruption at both canals has not yet affected consumers directly, this is gradually changing. Some companies have begun to limit production due to supply shortages. We've seen during the pandemic how disrupted supply chains drove up the prices of various products, including cars. Clothing companies, too, are being affected, with some now air-freighting goods from Asia rather than shipping them by sea.

"The situation is unique," says a maritime transport company representative.

"For the first time, simultaneous navigation disruptions in both canals are forcing us to plan far ahead," the head of an LPG transport company told The Wall Street Journal.

The silver lining is that companies learned from the pandemics' supply chain chaos to keep larger stocks on hand. Disruptions in the Suez Canal added about 10 days to the average voyage, so the lack of goods in stores isn't yet visible.

However, the problems are being felt through higher prices. The cost to cross the Panama Canal now approaches half a million dollars, and in some instances, it might be several times higher. A worsening of conflicts in the Red Sea and the ongoing drought could drive costs even higher.

Trade volumes through the Suez fell more than 40 percent in December and January compared to the previous year, according to UN data. Major container carriers like Maersk and Hapag-Lloyd have yet to return to the Red Sea despite the ongoing attacks, as analyzed by The Wall Street Journal.

Maritime transport is essential to the global trading system, with its strategic narrow passages that shorten travel and reduce costs.

Three are of utmost importance. The Panama Canal connects the Atlantic and Pacific Oceans, allowing ships to bypass the longer Cape Horn route. It accommodates about 14 percent of U.S. maritime trade and a quarter of some Latin American countries' exports.

The Suez Canal links the Mediterranean Sea to the Indian Ocean, drastically reducing travel time between Asia and Europe, with the only alternative being to circumnavigate Africa.

The Strait of Hormuz, through which 20 percent of the world's oil flows, is critically important. Much of its route runs through Iran's territorial waters. In a potential Middle East conflict scenario where Israel retaliates against Palestinian terrorist attacks with a strike on Iran, oil prices could surge to $250 per barrel, Bank of America warns.