THE attacks on merchant ships in the Bab-el-Mandeb strait and the resulting effective near-closure of the Suez Canal have grabbed the headlines in the past few days.

It has not taken long for the effects of the crisis in the Red Sea to have an effect on global logistics. Carmakers Tesla and Volvo have reportedly suspended some production in Europe, blaming a shortage of components.

Three years ago the world found out how quickly supply chains can be dislocated when the grounding of the Ever Given closed the Suez Canal for just six days.

Moreover, the strangling of the Suez Canal comes at a time when the other major waterway for global trade, the Panama Canal, is also experiencing big problems.

For container ships bound for Rotterdam from Shanghai the fastest route is via the Suez Canal typically taking about 22 days. It now appears most container ships sailing from Asia to Europe are sailing round the Cape of Good Hope which takes about an additional seven days steaming, at 20 knots.

Theoretically, it is slightly faster to go across the Pacific and through the Suez Canal, but the advantage is offset by hefty canal tolls.

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Also, a lack of water is very significantly restricting the volume of traffic able to transit.

Shipping analysts S&P Global Market Intelligence notes in a report out this week that the Red Sea crisis also affects container trades to the US. Until now the Suez Canal has been an alternative route to the US East Coast, avoiding the Panama Canal. 

Now shipping containers to the US West Coast and then transporting them by rail to the East Coast is a realistic option.

Shipping rates

David Jinks, head of consumer research at UK-based international parcel and courier firm ParcelHero, explains: “Generally, around 36 ships are allowed to transit the canal a day. However, from Jan 1, 2024, a limit of just 20 sailings has been in force. The result is that some desperate operators who haven’t booked their transit of the canal months in advance are paying up to US$4 million at auction.”

As Jinks notes, the normal price for a large container ship is US$300,000 for a Neo Panamax ship over 10,000 TEUs, or twenty-foot equivalent units.

Jinks suggests that the advantages of manufacturing abroad, rather than in Europe, could become outweighed by increased transport costs and global supply-chain disruptions.

Perhaps it is too early to go that far, but as Peter Sand, chief analyst at ocean freight shipping rate benchmarking and intelligence platform Xeneta, says: “We want to see safe, risk-free voyages through the area for vessels and the situation must calm down for that to happen.”

Xeneta expects ocean freight shipping rates from the Far East to the Mediterranean and North Europe to be up 200 per cent on mid-December.

Using a slightly longer timespan, S&P says that shipping rates have increased to over US$4,500 per forty-foot equivalent unit from one-third of that level in October on the same trades, while “other routes (are) rising by a similar amount, showing the global contagion from the disruptions”.

There has been excited talk in the media about the possibly dire consequences if the Suez Canal remains closed for any length of time. 

Well, I am sure the experts who are predicting that global economy will be shaken badly by the current crisis are right to a large degree, though I have heard some voices suggesting we should all calm down a bit.

What is happening at the moment is simply an example of what shipping always does when faced with challenges of any sort. It adapts.  

Let us assume that it will take months, at least, to return to the situation where most shipping companies consider it safe to send their vessels through the Suez.

Adapting to the new reality

Bear in mind that we have been here before. The canal was closed for eight years, between 1967 and 1975. Shipping very quickly adapted to the new reality, and sailing round Africa soon became seen as normal.

In those days, of course it was much easier for dry cargo liner companies to adjust their rates to allow for increased costs. The rate-setting “liner conferences” made sure that their member lines made significant profits. Shippers of those days would probably have said exorbitant profits.

The liner conferences are long gone, and in the current crisis there is bound to be a period of considerable instability with rates spiking and eventually settling down, probably once again to levels that hardly justify the massive investments required to keep liner shipping going.

Before too long shipping freight rates would reflect the extra costs involved in a scenario where the Mediterranean once more becomes a huge cul-de-sac, and the Panama Canal operates at well below theoretical capacity. The incredible global logistics mechanism that allows just-in-time deliveries would continue once the initial disruption had worked through.

In reality, it seems implausible that the current situation will be allowed to continue for long, but if it did shipping would just adapt, as it always has done.