There’s a joke about a death-row prisoner walking to the gallows complaining about the rain, to which the guarding officer replies, ‘Don’t complain, I have to walk back.’
By analogy, sometimes the market symbolizes this return journey where, perilous obstacles are overcome, but there always seems to be another one lurking. There’s a universal law that says when something seems very odd, something fishy is going on.
Indeed, that’s the case today. We have both. An odd development in the Red Sea, capable of upending things on a global scale. And of course, something fishy. Why fishy? It’s no coincidence that the disruption of maritime transport through the Red Sea, and hence the Suez Canal, coincides with the disarray now afflicting the Panama Canal — another ‘World Class’ infrastructure (through which 6% of world trade passes), and which has been experiencing a significant programmed reduction in the daily transit of ships, currently at a maximum of 22 freighters.
To put this in perspective, under normal conditions, 39 freighters go through the canal each day. Yes. We are witnessing a forced and chilling 44% reduction in traffic through this key infrastructure. In terms of volume shipped, the reduction is even greater, as transit limitations also affect the draught (cut from 15 meters to 13), meaning less cargo per ship. Naturally, this boosts the price of getting across the canal. An executive from a shipping company confided to me that his company paid $400,000 in August for one of its ships to move in line through the canal. “That’s 100% higher than normal,” he told me.
We have a double whammy: Less cargo, and much more expensive. For the uninitiated, the crisis in the Panama Canal is due to a prolonged drought that is affecting the two lakes that supply water to the canal. So, given the nature of the problem, I regret to say that we have no date for when this major setback might bem cleared up. The transit bottleneck will continue as restricting traffic helps conserve water. Each time a vessel passes through the locks on its Panama route, huge amounts of fresh water are wasted. But if this seems troubling, a prolonged disruption (like the one we are seeing today) of transit through the Suez Canal is even more so. Suez handles 12% of global trade, twice that of Panama.
It is therefore imperative to keep close tabs on the development of this crisis in the Gulf of Aden. Combined, both crises (Panama and Suez) constitute a perfect storm. Too perfect, I would say. Today, the rates to book a Suezmax-type vessel for transporting crude from the Middle East to Europe have increased by 25% in just one week (according to Vortexa). From my experience with past maritime transport crises, I can tell you that rates could skyrocket if the problem continues. The global rerouting we are seeing is doubling transport times, automatically reducing the availability of free vessels. Insurance premiums for shipping companies shot up 400% this week (from $2,000 to $10,000).
We are already seeing up to a 141% increase in the overall cost of contracts. In parallel, the price of Brent crude has soared this week, going from $72pbl to today’s $80pbl. The price of gas (LNG), which has not yet been affected, could follow in crude’s footsteps. For now, the extremely high volume of gas inventories in major ports is staving off a jump in prices, but once this is normalised, prices won’t stay stable for much longer.
The real-time picture shows higher than normal density on the West Indian Ocean maritime route, absorbing the transport from the Red Sea route. This explains the jump in freight costs. (source: Interactive MAP 2.0 – Eikon, based on data from each ship’s transponders).
How do we see this risk evolving?
I’ve had a chance to speak with a maritime transport operator working in a shipping company. His response (predictably) is that the extent of the impact will be determined by how long the attacks continue in the Red Sea by this paramilitary group (the Houthis), backed by Iran and hence by Russia. I say this not lightly, but to emphasize that the capacity to maintain this situation over time is very real. I hope I am wrong.
I’m already assuming that the situation in Panama will not improve substantially for months, and the crisis there alone was already causing serious problems in some supply chains. An important point to note: LNG leaving the east coast of the USA for Asia had been going through the Suez Canal. We’re talking about a key exchange. The ironies of life now make this canal also impractical. So one wonders: Are there any solutions left?
Losers and… not-so-big losers
I put it this way because you can’t really talk about ‘winners and losers’ in the current situation. Right now, nobody wins. One point that strikes me as important and unusual, I would say, unique: In the global economy, a problem typically represents an opportunity for someone. That’s what makes financial markets so charming. On this occasion, however, as hard as I try, I do not see any clear winners.
The disruption is likely to particularly affect medium acidic crudes from Middle Eastern producers (the losers), which could be replaced by similar qualities from Brazil, Guyana and Norway (the winners in my instinctive personal bet). The focus will then shift towards maintaining the supply of energy from American and Northern European nations through the Atlantic to Europe.
The market could become quite uncomfortable if the disruption at the Suez Canal runs another 10 days.
Qatar is the big loser. It tops the list of active carriers of cargo from the East bound for Europe (supplying 5% of the EU and UK’s net imports). On the brighter side, when it comes to LNG transport to Asia, Qatar leads the pack, closely followed by the United States, which has recently been using the Suez Canal due to the issues in Panama. Now, with problems in both canals, Asia becomes an unviable destination for USA LNG, which could allow Qatar to take over the North American share.
The other big loser is Europe. Prices for the Mediterranean route are skyrocketing as we speak. Rates for early January could already be double those of early December.
Someone asked me when we might start seeing the effects of the disruption of transit through the Suez Canal. I answered without having all the data at hand, but I said: two more weeks of this and the overall picture will shift dramatically. I won’t call what’s happening a ‘Covid-like event’, but this certainly reminds me of it.
Risky financial assets, and less risky ones, would be among the losers.
So, paraphrasing the caustic prison officer: Don’t grumble, I still have to walk back to this stifling market. And figure out how to deal with it.