The UN Conference on Trade and Development (UNCTAD) has released a report signalling how attacks on Red Sea shipping which have severely affected shipping through the Suez Canal, added to existing geopolitical and climate-related challenges, are re-shaping the worlds’ trade routes.
The “Navigating Troubled Waters: The Impact to Global Trade of Disruption of Shipping Routes in the Red Sea, The Black Sea and the Panama Canal” report by UNCTAD also explains how this development compounds the ongoing disruption in the Black Sea due to the war in Ukraine, which has resulted in shifts the oil and grain trade routes, altering established patterns.
Disrupting the lifelines of the world
Additionally, the Panama Canal, a critical artery linking the Atlantic and Pacific Oceans, is confronting a separate challenge: dwindling water levels. Diminished water levels in the canal have raised concerns about the long-term resilience of global supply chains, underscoring the fragility of the world’s trade infrastructure.
UNCTAD estimates that transits passing the Suez Canal decreased by 42% compared to its peak. With major players in the shipping industry temporarily suspending Suez transits, weekly container ship transits have fallen by 67%, and container carrying capacity, tanker transits, and gas carriers have experienced significant declines. Meanwhile, total transits through the Panama Canal plummeted by 49% compared to its peak.
Costly uncertainty
Mounting uncertainty and shunning the Suez Canal to reroute around the Cape of Good Hope is having both an economic and environmental cost, also representing additional pressure on developing economies.
Growing significantly since November 2023, the surge in the average container spot freight rates registered the highest ever weekly increase growing by US 500,- in the last week of December. This trend has continued. Average container shipping spot rates from Shanghai more than doubled since early December (+122%), growing more than threefold to Europe (+256%), and even above average (+162%) to the United States West coast, despite not going through Suez.
Ships are avoiding the Suez and the Panama Canals and seeking alternative routes. This combination translates into longer cargo travel distances, rising trade costs and insurance premiums. Furthermore, greenhouse gas emissions are also growing from having to travel greater distances and at greater speed to compensate for the detours.
The Panama Canal is particularly important for the foreign trade of countries on the West Coast of South America. Approximately 22% of total Chilean and Peruvian foreign trade volumes depend on the Canal. Ecuador is the country most dependent on the Canal with 26% per cent of its foreign trade volumes crossing the Canal.
Foreign trade for several East African countries is highly dependent on the Suez Canal. Approximately 31% of foreign trade by volume for Djibouti is channeled through the Suez Canal. For Kenya, the share is 15%, and for Tanzania it is 10%. Among East African countries, foreign trade for the Sudan depends the most on the Suez Canal, with about 34 per cent of its trade volume crossing the Canal.
Soaring prices
UNCTAD underscores the potential far-reaching economic implications of prolonged disruptions in container shipping, threatening global supply chains and potentially delaying deliveries, causing higher costs and inflation. The full impact of higher freight rates will be felt by consumers within a year.
In addition, energy prices are surging as gas transits are discontinued and directly impacting energy supplies and prices, especially in Europe. The crisis could also potentially impact global food prices, with longer distances and higher freight rates potentially cascading into increased costs. Disruptions in grain shipments from Europe, Russia, and Ukraine pose risks to global food security, affecting consumers and lowering prices paid to producers.
Climate impact
For more than a decade, the shipping industry has adopted reduced speeds to lower fuel costs and address greenhouse gas emissions. However, disruptions in key trade routes like the Red Sea and Suez Canal, coupled with factors affecting the Panama Canal and Black Sea, are leading to increased vessel speeds to maintain schedules which have resulting in higher fuel consumption and greenhouse gas emissions.
UNCTAD estimates that higher fuel consumption resulting from longer distances and higher speeds could result in up to 70% rise in greenhouse gas emissions for a Singapore-Rotterdam round trip.
Pressure on developing economies
Developing countries are particularly vulnerable to these disruptions and UNCTAD remains vigilant in monitoring the evolving situation.
The organization emphasizes the urgent need for swift adaptations from the shipping industry and robust international cooperation to manage the rapid reshaping of global trade. The current challenges underscore the exposure of global trade to geopolitical tensions and climate-related challenges, demanding collective efforts for sustainable solutions especially in support of countries more vulnerable to these shocks.
