For the past year, some of the world’s most important regional shipping routes have been heavily impacted by the consequences of unfavorable regional developments such as regional geopolitical and military tensions and temporary shifts in regional weather patterns. While some of these issues have shown notable signs of improvement in recent months, other issues such as a simmering political dispute in the South China Sea or intermittent rocket attacks in the Red Sea show little to no sign of resolution. As a result, those depending on goods moving through these waterways should remain on alert for regional developments that could have a negative impact on trade flows through these regions.
Shipping traffic through the Panama Canal normalizes as drought conditions improve
Lake Gatun is a freshwater lake in the interior of Panama that drives the Panama Canal and provides the water that allows ships to traverse the series of locks across the region. In other words, it is the mechanism that makes the Panama Canal work. Last year, starting in mid-April 2023, water levels in Lake Gatun began to decrease quicker than usual. By the second half of July, water levels had reached their lowest point since 1965. This trend of historic low water levels continued through the end of 2023 and into April of this year until lake levels started to increase again. These low levels were mainly caused by an El Nino that developed in the eastern Pacific. This long-term oceanic pattern caused the suppression of rains in Central America and set up drought conditions for the area. As a result, last year’s wet season was suppressed and made the dry season for Lake Gatun much longer than it normally would have been.
In response to the water situation, local authorities imposed lower draft restrictions as early as mid-April 2023 and later limited the daily number of vessels allowed to transit through the area at all, resulting in vessel backlogs and a drop in shipping traffic. However, since May of this year, levels have been on the rise again due to three main factors. First, the El Nino event ended by the beginning of May. Second, the wet season typically starts around the start of May bringing substantial rains to the area which includes Lake Gatun. Lastly, the shipping restrictions in place helped moderate levels as less water was used from Lake Gatun due to a lower number of vessels traversing the Panama Canal. As of October 18, Lake Gatun water levels stood at nearly 87 feet which is 2 feet higher than the 10-year average and tied for third highest level of the past 10 years. As water levels began to improve, authorities have also loosened restrictions on vessel traffic. In its latest announcement in late August, the Panama Canal Authority (ACP) confirmed that the number of daily transit slots will increase to 36 from September 1, with 10 slots allocated to Neo-Panamax vessels and 26 slots to Panamax vessels. The maximum draft allowed for Neo-Panamax vessels was also increased to 50 feet (15.24 meters) with immediate effect.
In terms of the forecast the most important driver of rainfall in Panama is the status of El Nino or La Nina. Within the past month, a weak La Nina has developed across the equatorial Pacific, and it is expected to stick around through the end of 2024 and into early 2025. This will likely result in above normal levels of rains continuing during the remainder of the wet season that lasts into November. As winter begins, rainfall typically drops dramatically across Panama and Central America as the dry season starts in December and extends through March and into April. With the levels of Lake Gatun going into the dry season at historically high levels, this virtually guarantees that there will be adequate water reserves for the Panama Canal to operate normally through at least the spring of next year. For the next wet season from May until November 2025, there is no indication in the long-lead guidance of an El Nino event developing next year yet. Thus, there is no indication that the region will return to a drought scenario during much of 2025, and the number of ships moving through the Panama Canal will likely remain at normal levels in the foreseeable future.
Shipping through the Suez Canal remains disrupted as Houthi attacks continue in the Red Sea
Intermittent attacks carried out by the Yemen-based Houthi militant group that began on October 19, 2023 in response to Israel’s offensive against Hamas in the Gaza Strip forced many major ocean carriers to divert vessels away from the Red Sea and the Suez Canal to the longer, costlier route around the Cape of Good Hope in South Africa. The vessel diversions have lengthened shipping journeys between Asia and Europe by around 10 days and caused delivery delays and higher transportation costs.
Before the beginning of the Red Sea crisis, the Suez Canal, an artificial sea-level waterway in Egypt that connects the Mediterranean Sea with the Red Sea, was one of the world’s busiest waterways and handled around 12% to 15% of global trade in 2023. However, shipping traffic through the canal dropped significantly since the start of the crisis. According to a statement by the Suez Canal Authority, Egypt’s annual revenue for the fiscal year 2023/24, which lasted from July 2023 until June 2024, declined by 23.5% from $9.4 billion (€ 8.44 billion) to $7.2 billion (€6.47 billion) year-on-year. In total, only 20,148 vessels carrying roughly one billion tons of cargo transited through the Suez Canal during the last fiscal year, a notable drop from the 25,911 ships that used the canal from July 2022 until June 2023 to move around 1.5 billion tons of cargo prior to the attacks. With attacks continuing intermittently, the number of ships transiting through the area will likely remain curtailed during the current fiscal year as well.
In early September, A.P. Møller – Mærsk A/S claimed that the number of ships using the canal dropped by around 66% percent since last October, but did not clarify whether the numbers referred to its own vessels alone or shipping traffic through the canal as a whole. Other major shipping companies that were forced to divert at least some of their vessels around the Cape of Good Hope due to security concerns since the crisis began include CMA CGM, Diana Shipping Inc., Evergreen Marine Corporation, and Hapag-Lloyd AG. Mediterranean Shipping Company (MSC) also halted shipping through the region in December, but recently announced plans for a regular service through the Suez Canal from February 2025. However, other major operators are adjusting their services in preparation for the Suez Canal disruptions to persist in the long-term. Most notably, A.P. Møller – Mærsk A/S and Hapag-Lloyd recently confirmed that their Cape of Good Hope network will launch on February 1, 2025, and include 29 mainliner services and 8 intraregional shuttle services, indicating that they expect security issues in the region to continue well into 2025.
These route changes have resulted in service adjustments and a shift of cargo volume that strained local port infrastructure and caused congestion, processing delays as well as capacity and equipment shortages at seaports in Asia, Europe and Africa. Among the ports that saw an uptick in vessel traffic are the Port of Tangier in Morocco and the Ports of Algeciras and Barcelona in Spain, which became important transshipment hubs for destinations in the Mediterranean that could no longer use the route to Asia through the Suez Canal. For example, the port in Barcelona reportedly saw a 23.6% increase of vessel traffic and a 45% increase in transshipments during the first half of 2024. In Asia, several major ports such as the Port of Colombo in Sri Lanka, the Ports of Klang and Tanjung Pelepas in Malaysia, the Port of Shanghai in China and the Port of Singapore all faced congestion earlier this year that was at least in part driven by increased vessel traffic due to route diversions amid the Red Sea crisis.
In an attempt to win back some of the shipping traffic, the Suez Canal Authority has started to introduce temporary measures such as a reduction of transit fees of up to 75% until the end of the year for 12 types of vessels, including bulk carriers, container ships, oil and liquefied natural gas carriers. Despite these financial incentives, shipping traffic through the Suez Canal will likely remain curtailed until attacks on vessels transiting through the Red Sea stop.
However, even an immediate cessation of attacks could result in its own regional shipping disruptions. A sudden shift back to carriers sending all their vessels through the Red Sea and the Suez Canal again could result in processing delays and port congestion in parts of Europe due to a larger number of vessels reaching the continent faster than during the previous year. Some industry representatives reportedly fear that a sudden full reopening of the Suez Canal could cause weeks or even months of operational disruptions at European ports due to the additional influx of vessels. But with fighting in Gaza continuing unabated and a potential ceasefire deal between Israel and Hamas stalled, the crisis shows little sign of being resolved soon, and with that shipping disruptions in the Suez Canal will likely continue in the months to come.
Geopolitical tensions threaten trade activities through the Taiwan Strait
Another major international waterway that remains at risk of disruptions due to geopolitical tensions is the Taiwan Strait, a major trade route through which almost half of the world’s container vessels and the majority of the world’s biggest vessels by tonnage sail every year. Although a full-scale escalation seems unlikely at the moment, trade through the region remains at risk as tensions between China and Taiwan continue to simmer. As recently as mid-September, Wellington Koo, Taiwan’s defense minister, warned that China’s growing military activity will make it more difficult for his government to notice an impending military attack on the island as the lines between training, military exercises and a potential full-scale invasion are increasingly blurred.
Most recently, the Chinese military conducted a 1-day military drill around Taiwan on October 14. The so-called Joint Sword-2024B exercise was held in the Taiwan Strait and several other areas around the island. The latest drills reportedly focused on sea-air combat readiness patrols, blockading ports and other key areas as well as on practicing attacks on maritime and ground targets. Taiwanese officials claimed that the drills included at least 14 Chinese warships and 153 military aircraft, a record number of warplanes operating around Taiwan within a 24-hour period. According to Chinese authorities, the drills were held in response to what its government perceives as continuous separatist acts of Taiwanese officials. A similar 2-day military exercise called Joint Sword-2024A took place in late May. These drills began just days after Taiwan’s new president William Lai was inaugurated and involved simulated strikes on targets such as Taiwanese ports and airports. Sources suggest that the People’s Liberation Army (PLA) has already breached the so-called air defense identification zone (ADIZ), a self-declared buffer zone just outside of Taiwan’s sovereign airspace, which China does not officially recognize, almost 2,500 this year. The number of non-military government ships such as coast guard, marine research and maritime safety vessels deployed by the Chinese Government has reportedly been on the rise as well.
Although recent Chinese military activity caused little disruption to the transportation of goods and a full-scale military offensive remains unlikely in the near future, trade moving through the Taiwan Strait will be at risk as long as political tensions remain high. Even if Chinese authorities abstain from an all-out military confrontation, an increase in the frequency or scope of military drills could still impede shipping traffic through the area temporarily, potentially limiting access to major global seaports in north-eastern China, western Taiwan, and Hong Kong.
Shipping traffic through major waterways to remain at risk
In addition to these longer-term risks to global trade, a number of other major regional waterways also experienced shorter shipping disruptions this year. In Europe, shipping traffic along parts of the Danube and the Rhine Rivers had to be halted during the summer due to high water levels. In the United States, the Mississippi River, the country’s largest waterway, faced the opposite issue, with local authorities forced to impose draft restrictions in late summer due to decreasing water levels. Other notable short-term disruptions in the Americas region included the Parana River in Argentina and the St. Lawrence River in Canada, where shipping came to a halt after vessels ran aground while passing through these waterways, blocking them for several days and causing vessel backlogs. These short-lived disruptions had a more limited impact on global trade, but underline the risk of unexpected events that can strike major waterways across the world and bring regional shipping traffic to a halt with little to no notice.
While the weather-induced disruptions at the Panama Canal have seen noticeable improvements as weather conditions improved during the first half of 2024, disruptions to ocean freight moving through the waterways affected by long-standing political disputes show little to no signs of an imminent resolution, which will likely prolong shipping-related impacts along these routes for the foreseeable future.
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