Tale of two canals: Ongoing chaos in oceans may drastically raise prices in India

As the Houthis continue their attack on cargo ships in the Red Sea, maritime traffic has reduced and freight rates have been raised which could potentially lead to a rise in the price of goods.

In Short

• Houthis continue attack on cargo ships in Red Sea
• Shipping rerouted from Suez Canal, affecting Indian trade
• Red Sea crisis coincides with Panama Canal drought

The Indian Navy reportedly rescued two cargo ships attacked by Houthi rebels in the vicinity of the Red Sea. In separate incidents, US allies reportedly shot down 15 drones fired by Yemen’s Houthis. The situation in the Red Sea, a response to Israel’s ongoing offensive in Gaza, is a concern for global trade, and India is not immune.

The Suez Canal in the Red Sea facilitates 15 per cent of global maritime trade, according to UN Portwatch.

India uses the Suez Canal for trade with European countries, North Africa, and North and South America, which account for more than 35 per cent of its total foreign trade, according to credit rating agency ICRA. The Suez Canal reduces travel time between India’s west coast and Europe by almost 15 days, compared to the route via the Cape of Good Hope in South Africa.

However, the attacks on commercial ships have prompted shipping companies to re-route traffic away from the Red Sea, which facilitates over 22,000 transit calls annually.

As per the UN, “Many economies in the Middle East, Europe, Asia, and Africa heavily rely on the Red Sea shipping lane for exports and imports. It is particularly important for oil exports from the Middle East to Europe and from Russia to Asia.”

On January 1, 2023, an average of 70 ships crossed the Suez Canal every day. This remained consistent throughout the year, with an average transit of 75 ships on December 1, 2023. But, this number began declining rapidly on December 16.

On January 1, 2024, the average transit was 56 ships, which declined to 37 on February 1 and fell further to 35 on March 4.

What makes the situation worse is that the Red Sea crisis coincides with the Panama Canal, another significant waterway, facing drought, leading to significantly reduced transit since November 3, 2023. “Water levels have fallen to critical lows because of one of the most severe droughts in the canal's 143-year history,” the UN said. The Panama Canal Authority announced a substantial restriction to the number of booking slots to pass the canal starting November 3, 2023.

Ports in Panama, Nicaragua, Ecuador, Peru, El Salvador, and Jamaica rely the most on the canal, and 10-25 per cent of their total maritime traffic has been affected. The effects are being felt as far away as North America, Asia, and Europe.

All of this combined has dramatically raised the freight rates, which may eventually have to be absorbed by the consumers. Cargo ships increase speeds to cover longer distances and a one per cent increase in speed typically leads to a 2.2 per cent rise in fuel consumption. The United Nations Conference on Trade and Development found that accelerating from 14 to 16 knots increases fuel use per mile by 31 per cent.

“Container freight rates on Asia-Pacific to Europe routes have risen sharply since November 2023. A record weekly spike of $500 was observed in the last week of December 2023,” the intergovernmental organisation noted. Average container shipping spot rates from Shanghai in early February 2024 more than doubled, up by 122 per cent compared to early December 2023. And rates from Shanghai to Europe more than tripled, jumping by 256 per cent.

The ocean crisis is not only delaying goods delivery and making them expensive — it can also erode environmental gains achieved through the slow steaming of ships. The longer distances caused by re-routing from the Suez Canal to the Cape of Good Hope can potentially cause a 70 per cent increase in greenhouse gas emissions for a round trip from Singapore to Northern Europe.

Published By:
chingkheinganbi mayengbam
Published On:
Mar 11, 2024