The current landscape in the Panama Canal and the Red Sea are impacting the industry rapidly. Mohawk Global continues to analyze the ever-changing developments, to better understand the influence that further actions may have on our clients.

Panama Canal

The Panama Canal is vital for East-West trade and positive developments could ease some of the impacts of the Red Sea being difficult to pass. While the water level has been a primary focus of concern, the shortage is not as drastic as previously predicted. Available daily vessel passages were expected to be reduced to 18 starting in mid-January, but instead have been increased to 24. Delays to vessels still moving through the canal have been minimal.

In November and early December, ocean carriers had re-routed some services from Asia to the U.S. East & Gulf Coast Ports via the Suez Canal. Now, given the cautiously optimistic news in Panama and the difficult circumstances in the Red Sea, carriers may opt to use the Panama Canal more than previously expected. However, water levels still remain below average and the long-term outlook for the canal is worrisome.

Red Sea Security

Since mid-December, attacks by Yemen’s Houthi forces on commercial vessels in the Red Sea have sent shockwaves through the ocean shipping industry. By December 15, most container lines had decided to re-route vessels around Africa and the Cape of Good Hope, rather than attempt to transit the Red Sea to get to the Suez Canal.

There have been intermittent returns to Red Sea transits by various steamship lines, but continued attacks have prevented any large-scale change. On December 24, Maersk had announced intention to resume the use of the Red Sea and Suez Canal, but then suffered another vessel attack on December 30, to the Maersk Hangzhou, which prompted Maersk to call off the plan and resume routing around Africa.

CMA is another steamship line intending to use the Red Sea and the Suez Canal and has not changed plans, despite an unsuccessful attack on the CMA CGM Tage. Other vessels have also been routed through the waterway, though it remains clear most vessels will not take the risk.

A joint statement released on Jan 3, by the White House and several other countries, warned the Houthis over their actions and stated consequences should they continue. However, this seems to have had little impact, as the day after the statement’s release, an unmanned vessel packed with explosives was launched and detonated in the vicinity of commercial and naval vessels alike.

At this time, steamship lines still lack the security needed to resume Red Sea transits. Stronger military action carries the risk of broadening the regional conflict, which could further reduce the security of the Red Sea.

Impact of Avoiding the Red Sea

Transit Time Considerations

Transit time to the U.S. East & Gulf Coast ports were being negatively impacted by the re-routing of vessels from the Panama Canal to the Suez Canal, as these routes could add anywhere from 7 to 14 days to normal schedules. Re-routing around the Cape of Good Hope likely adds an additional 10 to 14 days to these times, possibly longer. Therefore, a vessel departing Shanghai that opted to skip the Panama Canal but then had to move around Africa to avoid the Red Sea, could see a normal transit time to New York of 30 days reach closer to 55 days.

As these decisions happened quickly, most shippers did not have time to prepare inventories or lead times. This will likely lead to fulfillment challenges, as there is no expectation of a normalization in transit times.

Blank Sailings & Container Imbalances

During the COVID-induced challenges of the 2021-2022 shipping seasons—when vessels (and by extension containers) did not maintain schedules—a balance of availability was impossible to sustain. This resulted in container shortages in heavy export regions like China and Southeast Asia, and led to “Operational Blank Sailings”, which were sailings that did not occur simply because of lack of available vessels to service.

This same shortage problem will hit almost immediately, given the rash of changes that have quickly occurred over the last eight weeks. As containers are emptied from China and other major ports in Asia, vessels are not consistently returning to re-stock. We already have reports of 20’ and 45’ containers  being in short supply from major China ports, which generally happens first. Without a correction, this issue will soon appear for the more commonly used 40’ and 40’HC containers, which will create a broader issue.

We have also seen blank sailings from steamship lines occur, at a time when the demand for sailings is relatively high. This will create an inevitable back-log of containers to clear out of ports, but with vessels in unfamiliar positions and well behind schedule, it will be a challenge to get vessel capacity to keep up with demand.

Container Pricing Increases

Anytime there is a capacity issue in either sailings or containers, there is a risk of higher demand than supply. When this occurs in a period of acutely high demand, such as in a pre-Chinese New Year environment, there exists a recipe for a serious supply/demand imbalance.

In such an environment, prices will generally take a sharp turn upwards, as they are doing now. Container Freight Indexes, such as the Freightos Baltic Index and the Shanghai Container Freight Index, already show this dramatic spike, but at best these are lagging indicators. Forward projection of ocean rate levels tell us that they are expected to be much higher than current prices, at least in the short term.

Ocean carriers have announced a litany of new and standard surcharges to attempt to cover the costs of all the mitigation measures they are taking. From the standard General Rate Increases and Peak Season Surcharges to newer items such as Transit Disruption Surcharges and Emergency Contingency Surcharges, keeping up with price announcements and adjustments is a difficult task.

The Federal Maritime Commission has reiterated their regulatory requirements as it pertains to price announcements and increases, though there are tools available to steamship lines to implement surcharges without such announcements, like declaring Force Majeure, a limited step already taken by CMA and Hapag-Lloyd.

Regardless of whether shippers utilize the canals or not, there will be an increase in demand for services to the U.S. West Coast from Asia that will strain the capacity. U.S. rail congestion will become a high possibility, as well.

Availability & Pricing of Bunker Fuel

Ships sailing away from the Red Sea and around Africa, will put pressure on the supply of bunker fuel, especially Very-Low Sulfur Fuels (VLSFO), in African ports not typically used at such high levels.

Ports in South Africa, Mozambique, Angola and Mauritius have already seen higher than normal demand. While fuel supply is currently balanced, there are concerns about the long-term ability to keep up with this demand.

Higher demand for the bunker in these ports can also cause delays to transit time, and even the potential for vessel congestion to build up as an increasing number of ships wait for their opportunity to refuel. This would worsen the already elongated transit times and imbalance issues already expected to be seen.

Further, costs for the available bunker fuels at these ports are generally higher than refueling locations along traditional routes and those commonly used for bunker calculations in ocean freight formulas. This could lead to new surcharges or revisions to bunker formulations by steamship lines to keep up with the added costs. 

A look Ahead

There are no easy or quick answers to the difficulties we are facing. Shippers should expect problematic conditions for at least the first quarter of 2024. Any path to resolution in both the Panama and Suez Canals is vital to the return of balance to schedule integrity and pricing. Preparations should be made for large swings, at least in the short term, in lead times and pricing.

Mohawk Global will continue to monitor the situation and provide updates, as necessary. If you have questions, reach out to your Mohawk Global representative.

By Chris Lindstrand, Director of International Transportation

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