Revenge of Geography – Maritime Chokepoints and Supply Chains
Bab-El-Mandeb in Arabic means, “Gate of Tears” and the word Panama according to local legend means, “Abundance of Fish, Trees and Water”. It is ironic that, while one has been causing grief, the other has been less abundant to the global shipping industry and supply chains. In the past few weeks, Red Sea and Panama Canal shipping have been in the news, albeit for different reasons, one Geopolitical and the other Climate Change. Both highlight the importance of Geography along with the limits and constraints it imposes.
This is reality staring at us in a world enamoured by “Flat World” theory and about technology obliterating national borders and geographic divisions. It’s simple – Ninety percent of the global trade in goods is conducted through the world’s seas and oceans and movements across these waters are defined and dictated by a small number of geographic chokepoints, any minor disruption to which can play havoc with global supply chains and in-turn with our economies. Guaranteeing the security and stability of these maritime routes and transit points is crucial for the global economy and this importance has come to the fore at Bab-El-Mandeb and Panama Canal.
Understanding Maritime Chokepoints
Ships and the shipping industry are the backbone of international trade. 90% of all goods traded: Oil, Food, Metals, Minerals and Manufactured products, move by ships, about 11 billion tons annually, accounting for 70% of the value. Much of this trade relies on sea routes through one or more maritime chokepoints, which are vulnerable congested passages between land areas that connect maritime sea lanes. These chokepoints are narrow with heavy shipping traffic and in some instances are located in geopolitically volatile areas. Globally there is a general consensus that eight such chokepoints are critical for the world trade and economy, based on volume of trade flows and heatmaps of shipping traffic. These are liable for closure or blockage and there is no viable and expedient alternate route.
To understand the importance of these chokepoints, let us focus on just two product categories: Oil and Food. Chokepoints for maritime transit of oil are a critical part of global energy security. As of 2019, about 65% of the world's petroleum and other liquids are transported using maritime routes. The Strait of Hormuz and the Strait of Malacca are the world's most important strategic chokepoints by volume of oil transit. Since much of the world depends on crude oil exports from Persian Gulf, the tankers carrying them must pass through the Strait of Hormuz to reach open seas and then those destined for East and South-East Asia pass through the Malacca Strait, while those destined for Europe and the Americas need to navigate through Bab-El-Mandeb Strait and the Suez Canal.
These chokepoints are also critical for global food trade and security. According to a Chatham House report, it is estimated that 55% of all internationally traded foods: maize, wheat, rice, and soybean are shipped through at least one of these chokepoints. These four are considered the most important foods globally, the first three accounting for approximately 60% of global food energy intake, while soybeans are one of the most important foods for protein globally, contributing 65% of intake. Suez Canal is the most important chokepoint in global food trade, accounting for 14.6% of world cereal imports and 14.5% of world fertilizers. By 2030, 38% of the value of global trade in agricultural commodities, excluding fertilizer, is expected to transit the three main global chokepoints: 20% through Panama Canal, 10% through Turkish Straits, and 8% through the Suez Canal.
Global dependence on seaborne trade is increasing. According to data published by UNCTAD, over the past three decades, globalization has caused a steep increase in maritime trade, with the total volume growing from 4 billion tons in 1990 to more than 11 billion tons in 2019. Container shipping in particular has boomed over the past three decades, with total shipping volume growing nearly eightfold since 1990. Growing international trade means that chokepoint dependency is likely to increase for the foreseeable future. Some chokepoints will become more vulnerable due to various geopolitical factors, and this is apparent with what is happening in Turkish Straits, Straits of Hormuz, Bab-El-Mandeb, and Suez Canal. Adding to the geopolitical tensions, climate change is increasing the threat of disruption, with the increase in frequency and severity of extreme weather. Rising sea levels and declining water levels in inland waterbodies are likely to threaten the infrastructure of the ports and integrity of port operations.
What would happen with a potential disruption to trade through one of the chokepoints? Remember the name Ever Given? on March 23, 2021, the Suez Canal was blocked for six days by the Ever Given, one of the largest container ships in the world, that had run aground in the canal. This completely disrupted the trade between, Asia, Europe, and Middle East. On 28 March, at least 369 ships were queuing to pass through the canal, stranding an estimated USD 9.6 billion worth of trade. It took a couple weeks, before the blockage was removed, but the effects were catastrophic. According to a study by Allianz, one of the world's largest insurers, between 23-29 March, each single day the Suez remained blocked could decrease global annual trade growth by 0.2-0.4% and cost USD 6-10 billion and, or the equivalent of USD 400 million per hour. It caused delays in delivering everyday items to customers across the world and also clogged up the ports. There was a steep rise in prices globally and countries had to tackle high inflation.
Geopolitics and Bab-El-Mandeb Straits
Bab-El-Mandeb, a natural waterway that separates Asia and Africa, flanked by Yemen, Djibouti, and Eritrea, provides crucial maritime passage from the Red Sea to Guld of Aden. From the ancient times it has been an important transit route for the trade between east and west and in the modern times, it has acquired a strategic importance post the opening of Suez Canal. It does not derive its importance so much for the amount of maritime traffic or the volume of goods, but more as a Southern gateway to the Suez Canal to reach European and North American markets and as the northern entrance to Indian Ocean and the vast Asian and African markets. If the shipping traffic through the Bab-El-Mandeb straits are disrupted or closed, it pretty much knocks out trade movements through Suez Canal and that can be catastrophic for the global economy.
Here are a few key statistics about the importance of Suez Canal:
Around 12% of global trade flows through the canal, representing 30% of international shipping container volume.
Nearly 5% of world’s crude oil, 10% of oil products and 8% of LNG flow through Suez Canal.
14.6% of world cereal imports and 14.5% of world fertilizers imports depend on it.
In the first half of 2022, goods traffic increased by 5.8% to 553.5 million tons from corresponding period in 2021. Oil & Oil Products reached 124 million tons in the first half of 2022, compared to 92.8 million tons in the same period of 2021, an increase of 33.6%.
Suez has seen an Increase in oil tankers transits, Northbound due to rise in European and Canadian imports from the Persian Gulf and Southbound due to diversion of Russia’s crude exports to Asia.
The number of transiting ships in the Suez Canal reached 23,583 in 2022, an increase of 15% over 2021.
Over the past few weeks there has been rising concern over the Houthi attacks on shipping. As I am writing this, Danish shipping giant, Maersk has paused shipping through the Red Sea until further notice after one of its vessels came under attack from Houthi militants over the weekend. The container ship Maersk Hangzhou came under attack by four small boats crewed by Houthi militants. The US navy responded to the distress calls and sank the Houthi boats, but the incident highlights the precariousness of shipping through the straits at the present moment. Maersk controls 15% of container shipping traffic globally and Hapag-Lloyd, which controls 7% of the container market, also paused traffic through the Red Sea.
According to Maersk, the vessels will be rerouted through Caper of Good Hope in Southern Africa. Many other shipping lines are rerouting similarly and can have a severe impact. This will not only increase the freight rates and insurance, but also can cause serious capacity crunch. The number of ships that have diverted from the Suez Canal to the Cape of Good Hope has reached a record high of 125 ships as of 24 December, exceeding the number seen when the Ever Given was grounded in the canal in March 2021. This could lead to a capacity crisis as ships that were supposed to return to Asia from Europe and the US East Coast via the Suez are delayed by two to three weeks. The impact is already being felt on the ground, as this coincides with the usual cargo rush before the Chinese New Year, starting on 10 February 2024, and has filtered through to the freight market, resulting in the Shanghai Containerised Freight Index (SCFI) rising by 15% on 22 December.
This whole issue needs to be seen in a broader perspective. The past few weeks, the Iran backed Houthis have stepped up their attacks through drones, missiles, and fast-moving boats. According to Kamran Bokhari of Geopolitical Futures,
· “Although the Houthis maintain that their attacks will continue until Israel stops its military campaign in Gaza, the group’s more immediate goal is to use the Israel-Hamas war to cement itself as the strongest force in Yemen. None of this would be possible without Iran, which not only helps to fund, equip, and train the Houthis but also uses them to project power in strategic waters far from Iran’s borders. More broadly, the Houthis’ rise in Yemen – especially in the most densely populated areas on the Red Sea coast and along the border with Saudi Arabia – is a key component in the Iranian strategy to encircle the Saudis.”
As I had written in my earlier article after the Hamas attack on Israel, though both Iran and Saudi Arabia agreed to normalize ties in March 2023, mediated by the Chinese, they remain wary of each other. For Iran, Saudi efforts to normalize relations with Israel pose a threat to their position in the region. Thinking similarly, Saudis know that Iran will continue to undermine the kingdom’s regional position through its proxies, just as it has done with Hamas, Hezbollah, and the Houthis since October 7th attack on Israel. We sure have not heard the last in this matter and what if these tensions lead to escalation in the Straits of Hormuz? That’s a different situation altogether we would be talking about.
Climate Change and Panama Canal
The Panama Canal has been a key shipping route since its inauguration in 1914. Between 1915 and 2018, more than a million ships have transited through it carrying over 10.3 billion tons of cargo. It is the only port with terminals in two oceans, Pacific and the Atlantic. Panama Canal has a significant share of global seaborne trade:
· 3.0% of world maritime trade
· 18.0% of LPG
· 6.3% of grains
· 5.4% of petroleum products
· 3.4% of chemicals
· 3.1% of containers
· 2.5% of LNG
In 2022, more than 14,000 ships traversed the canal, transporting fuel, grain, minerals, and goods from the factories of East Asia to the consumers of North America. More than 40% of consumer goods traded between Northeast Asia and the US East coast are transported through the canal.
But changing climate is casting a dark shadow over the future of the Panama Canal and global trade. Over the past year, the region has experienced a rainfall deficit due to El-Nino, and this has resulted in the water levels in Lake Gatun, the canals lifeline, fall to their lowest in living memory. The passage of ships through the Panama Canal has slowed and the queue of tankers waiting in the bay to pass through has seen a significant increase. There are already warnings that the situation might deteriorate restricting further access and the effects could be felt all over the world.
So let us understand first how a ship transits through the Panama Canal.
To make the journey, ships enter through a narrow waterway and then through a series of locks, rise to more than 26 metres above sea level into the man-made Lake Gatun. On the other side, the process is reversed through another set of locks and the ships descend. The all-important locking system relies on fresh water from Lake Gatun and every ship that passes through the canal uses 200 million litres of water, which is then discharged into the sea. But here is the catch, Gatun lake is also the major source of drinking water for more than half of Panama’s population, which puts the administration in an unenviable situation of balancing between the demands of international shipping and the domestic requirements. The twin demands of shipping and drinking water have left a deficit of 3 billion litres a day for Lake Gatun.
This problem has rarely occurred over decades. Panama as a country and the areas surrounding the canal, are some of the wettest on the globe and the lakes in the region have always had abundance of water. But changing climate and El-Nino have played havoc in 2023. The falling water levels have forced the canal authorities to restrict shipping. From handling 36 ships a day during normal times, the number now stands at 22 towards the end of December and is likely to fall to 18 by February 2024. This has left the shippers with no real alternatives. They can either wait for weeks to get a passage or need to cough-up USD 4 Million to jump ahead of the queue or take an option what many liners have taken, chose the alternate route via the treacherous Cape Horn and add 13000 km to the distance, added costs and weeks of delay.
Geography Matters More Than Ever
I would be worried if I was Jerome Powell and super worried if I was an investor. According to Allianz Commercial Asia:
· “With attacks on the world’s busiest trade route in the Red Sea leading many companies to avoid the Suez Canal altogether, restrictions at the Panama Canal will only pile more pressure on global supply chains – just as governments around the world attempt to tame inflation. In the long run we’re looking at a big increase in the cost of commodities it will be passed on to the consumer.”
It is also making analysts and supply chain professionals nervous. Panama’s drought, Red Sea shipping disruptions and worrisome weather patterns elsewhere remind them of 2021, when disruptions to seaborne shipping resulted in a surge in shipping costs and high consumer demand resulted in shortages and high inflation globally.
One of the best books I have read is, “Power and Plenty – Trade, War and the World Economy in the Second Millenium” by Ronald Findlay and Kevin O’Rourke. Those interested in economic history and want to understand how trade and globalization have evolved over a span of thousand years, read it. The authors though being economists make a very valid observation:
“Many of today’s key interregional tensions can be traced back to earlier interactions between the world’s main regions. In seeking to understand this history, economists need to think seriously about another subject they have too often neglected, namely geography. By “geography” we do not mean the highly stylized models that pass for “economic geography” today. When we say geography, we mean geography: mountains, rivers, and all. If Genghis Khan had been born in New Zealand, he would have left no traces on world history. The Irish might have enjoyed holding the rest of Europe to ransom by controlling access to Southeast Asian spices, but never had the opportunities which geography afforded the rulers of Egypt. A European seeking direct access to India might well head westward and stumble across the Americas, but no Chinese sailor would have been foolish enough to seek an eastern passage to Arabia.”
Today, as we move towards a fragmented world order, two manifestations of Geography become topics of utmost importance: Geopolitics & Geoeconomics and Climate Change.
· Studying and understanding Geography has never been more important!