- Global maritime trade, responsible for 80% of world trade, faces a double challenge with water shortages at the Panama Canal and Houthi attacks disrupting the Red Sea.
- The Panama Canal, vital for U.S. trade, is grappling with low water levels, impacting agricultural exports.
- Meanwhile, Houthi attacks in the Red Sea have led to increased marine war risk insurance premiums and diversions, affecting global shipping.
- The compounding effects of these issues are amplifying disruptions and raising concerns about the resilience of global supply chains.
The backbone of global trade, maritime shipping, is confronting a dual threat as the Panama Canal battles water shortages, and the Red Sea experiences disruptions due to Houthi attacks. These challenges are intricately connected, compounding the complexities faced by the shipping industry and raising questions about the resilience of global supply chains.
Panama Canal Water Woes
The Panama Canal, a crucial link connecting the Atlantic and Pacific Oceans, plays a pivotal role in U.S. trade, with approximately 14% of all U.S. maritime trade passing through it. However, low water levels, exacerbated by the second-driest year in the canal’s watershed in 2023, have prompted unprecedented actions. With Lake Gatun, the primary water source, at historically low levels, the Panama Canal Authority has reduced daily transits by 33%, impacting cargo movement.
Affecting U.S. agricultural exports significantly, the Panama Canal’s importance is evident in the transit time and cost advantages it provides. As water-saving measures continue, including transit restrictions and limits on draft height, agricultural exporters, particularly grain shipments, are facing challenges. The situation has forced shifts in shipping routes, impacting not only the cost but also the reliability of transporting agricultural goods.
While short-term measures are in place, including considering alternative routes and water-saving techniques, the long-term solution involves investing in water management improvements and building an additional reservoir. The uncertainty persists, affecting not only the shipping industry but also U.S. agricultural competitiveness in international markets.
Red Sea Disruptions by Houthi Attacks
Simultaneously, the Red Sea, accounting for a significant portion of global maritime trade, is witnessing disruptions due to Houthi attacks. Houthi rebels, a U.S.-designated terrorist organization controlling Yemen’s territory near the Bab el-Mandeb passage, have targeted commercial ships since mid-November, with over 48 reported attacks by February 27.
These attacks, triggering Operation Prosperity Guardian by a U.S.-led coalition, have led to increased marine war risk insurance premiums. Shipping companies, especially container ships with high cargo values, are diverting from the Red Sea to avoid elevated insurance costs. Dry bulk ships carrying agricultural products face a dilemma, weighing the cost of diversions against insurance increases.
The impact on global trade is substantial, with bulk commodity shipping down by 31%, affecting liquefied natural gas (LNG), liquified petroleum gas (LPG), and dry bulk. The U.S. West Coast ports are anticipating challenges as shipping routes shift, emphasizing the need for preparedness and adaptability.
Compounded Effects and International Concerns
The compounding effects of Panama Canal water shortages and Red Sea disruptions are evident in shifting trade routes. Comparisons of U.S. grain exports reveal a significant flip in transit routes over time, with the Panama Canal’s reduced capacity leading to a surge in ships opting for the Red Sea or the Cape of Good Hope.
International concerns, voiced at the Federal Maritime Commission hearing, highlight the impacts on agriculture, food aid, and the broader global supply chain. Increased cargo volume, potential port congestion, and container availability challenges are anticipated, especially with rapid shifts from East to West Coast routes.
