Red Sea attacks, Panama Canal drought: How trouble at two shipping choke points could impact global trade
Context- The recent drone attack on the chemical tanker MV Chem Pluto, while en route to India via the Red Sea trade route, has escalated tensions among Indian oil and commodity traders. The attack, which occurred approximately 200 nautical miles off Gujarat’s coast, is one of many carried out by Yemen’s Houthi rebels. These rebels, engaged in a civil war with the Yemeni government, claim their attacks are in response to Israel’s military actions in Gaza.
The US-led maritime security coalition has promptly implemented countermeasures, highlighting the trade route’s global significance. However, the Red Sea isn’t the only area of concern. The Suez and Panama Canals, two vital trade chokepoints, pose a threat to over a third of worldwide trade. This threat is particularly concerning given the current slowdown in Western demand and China’s property crisis, which prompted the World Trade Organization to cut its goods trade forecast by up to 50%.
What do the ongoing Red Sea and Panama Canal crises mean for world trade?
- Maritime transport disruptions pose a significant risk to the global economy, given that they facilitate over 80% of worldwide goods trade. This percentage is even higher for developing nations like India.
- Two key shipping routes are currently experiencing blockages. The Bab-el-Mandeb Strait, which connects Asia to Europe via the Suez Canal in the Red Sea region, and the century-old Panama Canal, which links the Atlantic and Pacific Oceans.
- These routes are among the world’s busiest, and any blockage forces shipping lines to use lengthier alternative routes, leading to increased freight rates.
- For example, the disruption in the Red Sea route could inflate the prices of Indian agricultural products by 10 to 20%, as shipments would need to be rerouted through the Cape of Good Hope.
- This price surge coincides with the West’s increasing interest rates to control inflation, which could exacerbate demand concerns for both global and Indian exporters.
Why is trade via the Panama Canal slowing?
- Shipping through the Panama Canal has seen a decline of over 50% due to droughts affecting the 51-mile stretch. The water shortage is compelling ships traveling from Asia to the US to use the Suez Canal instead, adding six days to their journey compared to the Panama Canal.
- Panama is experiencing its driest rainy season in years, leading to concerns about extended canal blockages. As per S&P Global, LNG vessels are opting for costly auctions to hasten their Panama Canal transit instead of taking longer alternative routes.
- In an auction held in early November, a vessel paid close to $4 million for an available slot. The number of Very Large Gas Carriers passing through the Panama Canal is expected to decrease by nearly half by February 2024. There are worries that these transits might cease entirely by January, as stated further by S&P Global.
Why are oil flows to India immune to attack in the Red Sea?
- Major global shipping companies like Maersk are avoiding the Red Sea transit, leading to a more than 50% decrease in global oil and petroleum product flows through the maritime channel in December compared to regular levels.
- Despite this, India’s oil imports from Russia remain unaffected. Given Russia’s perceived alliance with Iran and the belief that Tehran backs the Houthi rebels, Russian tankers have been able to pass through.
- However, the price of Brent crude, a benchmark for international oil prices, has risen over 5% since the attacks and is currently around $80 per barrel.
- Goldman Sachs recently reported that it doesn’t anticipate the Red Sea disruptions to significantly influence international oil prices, as global oil production is unlikely to be directly impacted.
How have the Red Sea attacks impacted freight rates?
- Since the onset of attacks in the Bab-el-Mandeb Strait earlier this month, global shipping companies have started applying war risk surcharges in addition to regular freight rates.
- Indian exporters have expressed concerns that if the current security issues in the Red Sea trade route persist, freight rates for Indian shipments to Europe and Africa could rise by as much as 25-30%.
- This situation is worrisome, given that the European Union is one of India’s largest export markets. The declining demand from this region has already affected India’s labour-intensive sectors, such as textiles, and gems and jewellery exports.
- Maersk, a leading shipping company, announced on Sunday its plans to restart shipping operations in the Red Sea following the deployment of a US-led coalition to address security issues in the area. However, the company also stated that it might revert to rerouting ship traffic based on the evolution of safety conditions.
