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Route Canal Therapy

The Panama Canal Authority has taken steps to increase transits in January to 24 ships a day from 22 currently, having previously suggested that the number might fall to 18. The auction process is to be split by vessel type, easing the cost for smaller vessels such as old 32.2 metre beam Panamax bulkers which can use the old locks as they will not have to compete with larger LNG tankers which use the newer, larger locks and have operators willing to pay more to keep their trade flowing.

Actions to relieve the Panama water shortage, such as performing a rain dance, or praying for rain, feel more likely to ease the situation than praying for peace in the Middle East to stop the Houthis lobbing drones and missiles at passing commercial vessels. Ship operators who choose, like BP Shipping or AP Moller - Maersk, to avoid the area and sail from the Indian Ocean to the Atlantic Ocean via the Cape of Good Hope at Africa's southern tip, are making sensible choices. The geopolitics of the middle east predate the modern commercial shipping industry which has little to no input in solving them.

There are of course potential benefits to all ship operators if some ships take longer to sail from A to B because the availability of ships on any given day to lift cargoes at any given port is reduced if more ships are busy transporting cargoes at sea. For those who like to imagine shipping as an ocean-going version of Uber, think of the situation like this: it is hailing hand grenades in Manhattan at rush hour...what kind of surge do you expect?

During past conflicts, fortunes have been made by those brave or foolhardy enough to run the gauntlet - or rather, to instruct their ships' captains to run the gauntlet - of unpredictable attacks. John Fredriksen was the poster child for those who made millions in the so called tanker wars between Iran and Iraq in the 1980s. These days, the good guys and the bad guys all have public access AIS data to track the good guys tonnage, but the security services do not share their data on where the bad guys are, leaving the good guys to run the gauntlet or shove off and find another route to their destination.

The Bab-al-Mandab strait, along with the Suez Canal and the Panama Canal are well known chokepoints which, when choked, cause all kind of plans to circumvent them to be pulled from old filing cabinets and dusted off, ready to be re-made for the digital age. We hear little these days about the Nicaragua Canal, a scheme to bypass the Panama Canal. The route, from the Pacific coast of Nicaragua, via Lake Nicaragua to the Caribbean Sea, would be about 250 miles long, compared to around 50 miles of Panama Canal from Christobal on the Pacific coast to Gamboa at the entrance to Gatun Lake. Cost estimates started ten years ago at about USD 30 Bn, which sounded a lot but is cheaper than building a railway from a suburb of London to a suburb of Birmingham, on which nobody wants to ride, using trains which will not be as fast as intended.

The Nicaragua Canal was last proposed by China's HK Nicaragua Canal Development Investment Co., Ltd in 2013 and even got as far as an agreement with the Nicaraguan government to build and run the canal on a 50 year franchise with a further 50 year option. HKND closed down in 2018 with zero progress on the project. One has a sense that on this occasion the plan was largely in order to thumb a nose to the perceived US control of the Panama Canal even after the Canal Zone was returned to full Panamanian sovereignty at the end of 1999.

If Venezuela’s frankly crazy government decides to act on its referendum to claim a large chunk of neighbouring Guyana, the Caribbean Sea could become a warzone to rival the Red Sea and north western corner of the Indian Ocean. At that point, one might presume that the US would enact the Monroe Doctrine to intervene, though that presumption itself could come under pressure depending on what kind of government the US has after November 2024.

The industry is currently dealing with war in the Black Sea which has led to attacks on commercial shipping. Piracy may not nake the headlines as it did a decade ago but it is still a risk in several regions. All the voyage planners need to complete the set now is some kind of disruption to the Straits of Malacca, or a blockade of the South China Sea – exactly the sorts of event which the Chinese Navy has been enlarged to counter. China already has long range plans for alternative routes for its imports and exports. These include the Northern Sea Route and a canal through Thailand.

Exporting Chinese goods via the Northern Sea Route means Russian icebreakers and security for commercial shipping – both welcomed by China. The Northern Sea Route from the Bohai Bay to Rotterdam is around 15,000 kilometres compared to around 21,000 kilometres via the Suez Canal. The imbalance is stark still, as there are over 17,000 annual transits of the Suez Canal compared to just hundreds of transits of the Northern Sea Route. In time, as the Arctic sea ice shrinks, China and Russia expect to exploit this alternative passage westwards.

The Kra Canal is a Chinese proposition which would run through Thailand’s Kra Isthmus. It would allow China to cut sea voyage distances by 1,200 km from the Indian Ocean to China’s east coast and to avoid the crowded Straits of Malacca at the bottom of the Malaysian peninsula. The Kra Canal would be up to 100 km long, as it would have to be cut through hills reaching up to 75 metres above sea level along the Kra Isthmus which is only 44 km wide at its narrowest point. A canal has been proposed several times since the 17th century. China’s proposed canal would cost upwards of USD 25 Bn, it was estimated in 2020, and could take up to 20 years to complete.

The Thai government approved further planning on receipt of China’s proposal in 2007. No significant progress was made until November this year when Thailand itself proposed relaunching the project as a USD 28 Bn, 90 kilometre land bridge transporting 20 Mn TEU a year. Thai Prime Minister Srettha Thavisin is said to have, er, floated the land bridge idea during the APEC summit in San Francisco. He was quoted as claiming the land bridge would save six to nine days of transit time for goods moving west from China.

China’s investments in Egypt and Morocco (see my earlier Macro Macchiato note, “The Future of Logistics?”) might gain traction if sea routes end up having to divert around a growing number of geopolitical danger areas. In other words, global supply chains may splinter into regional supply chains to de-risk them. From a risk management perspective, it is becoming increasingly rational to site manufacturing and assembly geographically closer to consumer markets. This is a side-effect of the process of deglobalization which characterises international relations in the post-GFC world.

One way to ease an infected tooth is to extract it. The more modern way is to apply root canal therapy. Global logistics planners may have to decide whether canal route therapy is available to them or if they will have to extract themselves from the issue by shortening their supply chains. Shipping will have to live with the consequences because it has no legal means of protecting supply chains itself. The military role in securing global shipping routes is a discussion for another edition…

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