More than 50 ships queued to cross the Panama Canal on a recent day—from tankers hauling propane to cargo ships packed with food. A prolonged drought has led the canal’s operator to cut the number of crossings, resulting in longer waits. The tolls that ships pay are now around 8 times more expensive than normal. A single Panama Canal crossing costs around $500,000. But the canal operator has cut the number of daily ship crossings in half (from 36 to 18) and shippers have to go through a bidding process where the highest offer (sometimes $4 million) secures a crossing.
Over 7,000 miles away, vessels that move containers through Egypt’s Suez Canal are waiting for naval escorts or avoiding the passage altogether to take a much longer voyage around South Africa. Ship operators fear that their crews could be imperiled on the journeys through the Red Sea by missile or drone attacks from a Yemen-based rebel group. Houthis have attacked more than 50 ships since November, including a cargo vessel loaded with fertilizer that sank into the Red Sea and another that resulted in three deaths.
The Suez’s problems are geopolitical and those in Panama are climate-based, but both are roiling global trade and supply chains, writes The Wall Street Journal (March 11, 2024) Cargo volumes through the Suez and Panama canals have plunged by more than a third. Hundreds of vessels have diverted to longer routes, resulting in delivery delays, higher transportation costs and economic wreckage for local communities.
Ship operators are bracing for months of uncertainty in the waterways where some 18% of global trade volumes crossed last year. It’s the first time that both are disrupted simultaneously. Daily freight rates on some routes between Asia and the U.S. surged to more than $20,000 per box, five times higher than current levels.
Businesses are starting to feel the ripples. Tesla and Volvo paused vehicle production for 2 weeks in January because of parts shortages. Some apparel companies opted for their spring fashions to be delivered by air instead of sea to ensure items arrived on time. As more businesses return to pre-Covid practices of keeping minimal inventories and rely on timely deliveries, they are more vulnerable to disruptions if bottlenecks at the two canals continue.
Classroom discussion questions:
- What options do shippers have?
- How can supply chain disruptions be avoided?
