Odds are whoever reads this is a supply chain professional or, at the very least, with a company that engages in shipping activities. It’s common for domestic shippers to also be international shippers—whether that’s purchasing and importing products and materials from overseas or exporting finished goods or raw materials to buyers abroad.
While the expertise of Commerce Express pertains to providing domestic and cross-border service solutions, the team is well aware that external supply chain events across the world can impact freight movement within the states and North America.
Over the past several weeks, certain events around the world have transpired, each shaping into a unique disruption for international trade.
The outstanding Panama Canal crisis
The manmade 51-mile canal slices through the Isthmus of Panama, carving an accessible route for oceangoing vessels between the Pacific and Atlantic oceans. The canal is a vital shortcut for ships which otherwise would transit around the entire South American continent, a long and treacherous journey.
The Panama Canal is credited for making all-water westbound transits from Asia to the U.S. East and Gulf coasts an economically viable strategy.
However, the canal’s revolutionary contributions to trade have been overshadowed in recent months. In early 2023, an abnormally potent dry season spiraled the Panama Canal into a historic drought, severely lowering the gateway’s water levels through the summer and into the present day. The weather-related event has led to unnerving disruptions to international shipping.
The Panama Canal Authority has had to impose draft restrictions on ships to negotiate the canal’s poor conditions. In return, ocean carriers have placed load restrictions on their vessels, translating to higher transportation costs and container surcharges for their shipper-customers.
To make matters worse, the Panama Canal’s deteriorated state is expected to sustain, if not worsen, into early 2024. At this time, the drought-related adjustments to transportation are indefinite.
In November, the canal’s authority announced extended restrictions up until February. Next month, the canal is expected to only allow 18 ships to sail through the waterway each day. In normal (non-drought) conditions, the canal typically permits 35 to 40 vessels to pass through.
Aside from surcharges and restrictions, queued vessels, awaiting entry, have spawned ship congestion outside of the canal. If it wasn’t clear already, the Panama Canal crisis has become a trade black hole, one that’s feared to be compounding day by day.
SPIN: While some, especially earlier on, have braved the canal’s conditions, it has become increasingly recommended to avoid the embattled gateway. Whether they like it or not, the drought-struck Panama Canal has ultimately forced stakeholders to find service alternatives.
One devised workaround has been rerouting imports through Western Mexico’s Port of Lázaro Cárdenas. Amid the crisis, the port has captured a fair share of calls from ocean carriers.
Lázaro Cárdenas, Mexico’s second-busiest container port, has been tapped as an intermodal solution to bypassing the canal crisis. Railway Canadian Pacific Kansas City has made agreements with carriers to provide rail services from the port to inland U.S. destinations, like Dallas, Kansas City, and Chicago.
Ironically, this volatile situation has benefited CPKC, essentially giving the railroad an audition for its intermodal portfolio. Aside from stops in Mexico, discretionary canal-routed volumes have been rerouted to the U.S. West Coast, to also be railed to inland hubs across the country.
However, for all-water services from Far East Asia to U.S. East Coast ports, some shippers sought an atypical routing—an eastbound transit via the Suez Canal. The voyage is lengthier in transit and higher in cost, but it averts any sort of canal crisis—oh, wait.
Well, it seemed to work for a bit, but unfortunately, this leads into international shipping’s other existing crisis—a devious coincidence which involves the world’s other notable canal—the Suez.
Suez Canal out of the picture indefinitely following escalating ship attacks
In a case of poor timing, the Suez Canal is in hot water with a crisis of its own. In December, just as the industry caught wind of this service alternative, geopolitical tensions in the region began to unfold.
Last month, Yemen rebel militants unleashed aggressive attacks on merchant ships in the Red Sea and Gulf of Aden (bodies of water between the Suez Canal and Arabian Sea). At first, the assailants claimed that they were only targeting vessels with Israeli-links, however subsequent assaults on non-Israeli fleet, like Hong Kong-based OOCL, suggested otherwise—the rebel bombardments were indiscriminate.
At first, ocean carriers maintained their services through the canal and Red Sea, with many floating risk surcharges onto shipper-customers. However following escalating, seemingly arbitrary, attacks on several ships, it became apparent that their seafarers and assets were in imminent danger.
By the new year, virtually all major ocean carriers had indefinitely suspended routings through the Suez Canal.
Israel-based Zim was the first ocean carrier to withdraw its fleets from the Suez Canal and Red Sea. Given the company’s intimate ties with Israel’s government, Zim easily has the largest target on its back. Last month, vessel tracking data indicated Zim ships rerouted around Africa’s Cape of Good Hope, bypassing the canal.
As December concluded, all other major carriers followed suit. Containerships are now absent from the typically bustling Suez as they all are making the longer voyage around Africa.
SPIN: Canals are built for invaluable reasons—to bridge faraway markets closer, to reduce transit time, and carve the most efficient trade routes. The indefinite exclusion of the Suez from international shipping is having a significant impact on the industry’s market.
For transits from Asia to the U.S., services around Africa’s Cape of Good Hope tack on another 10 to 14 days versus the Suez route, which already added a week in transit versus the Panama Canal.
While demand remains relatively low, the industrywide adoption of a longer transit around Africa will absorb capacity in the market. In other words, carriers will have to allocate more vessels in their rotations, especially if they intend on maintaining weekly services.
Coupled with a capacity squeeze, the service’s length inherently raises container rates for shippers.
In the meantime, there’s conversation on whether nation-led military convoys could be deployed to escort commercial ships through the Red Sea. However, these plans have not materialized yet.
Chinese New Year right around the corner
The two incapacitated canals form into a two-headed monster of sorts, a terrorizing dynamic, right head of a crucial period for U.S. transpacific importers—Chinese (Lunar) New Year.
Chinese New Year is an annual 15-day holiday period in China which occurs on a varying date between late January and February. This year, CNY is later than usual, beginning Feb. 10.
However, preparations for CNY typically start three weeks in advance. Factories and other businesses will slowly shut down ahead of the holiday, while workers will leave early to travel and celebrate the new year with their families.
This celebratory period, and the weeks leading up, pose specific logistical challenges in China: production halts; port operations are limited; schedules are disrupted; and transportation is delayed.
SPIN: These hurdles contribute to what folks in the industry call a “pre-CNY” cargo rush—a surge in shipping demand is typically observed in the week before CNY’s start. The increase often leads to unavailability of containers, shipping delays, and heightened rates.
There’s anxiety leading into CNY 2024 as the perennial phenomenon will be paired with the current canal crises. For importers, they must plan ahead, communicate their needs with logistics partners, and pre-book vessel space to ensure any ready cargo gets prioritized ahead of the holiday.
Considering the start for this year’s holiday, Chinese businesses will likely halt their operations and production by January 25. During this time, major Chinese ports will handle a rush of goods, ready to be shipped to the U.S.
If shippers who intend on sailing cargo before CNY haven’t pre-booked space yet, they are advised to do so immediately. If this isn’t done over the next week, if not few days, they are better holding off and waiting until March when operations in China return to normal.
Final Thoughts
Contact one of our team members if you have any questions regarding this topic or any others in domestic logistics.
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