Writing for Capital Matters the other day, Dominic Pino noted how the weakness of the response by the Biden administration to the Houthi attacks in the Red Sea had led shipping giant Maersk to once again pause sending any tonnage through that route.
As Dominic noted:
The Red Sea is vital to global commerce because it acts as the passageway between the Indian Ocean and the Suez Canal, which connects to the Mediterranean Sea. The Suez Canal saves time and fuel for ships sailing between Europe and Asia. The alternatives to using the Suez Canal are to sail all the way around the southern tip of Africa or go around the world the other way through the Panama Canal.
Speaking of the Panama Canal, there’s trouble there, too.
A severe drought that has cut ship traffic through the Panama Canal is having ripple effects on the global food supply chain, forcing U.S. grain carriers bound for Asia to take lengthy detours through the Suez Canal or around southern Africa.
Maritime transport accounts for over 80% of global trade, according to the United Nations Conference on Trade and Development. The bottleneck at the Panama Canal, a main maritime trade route through which roughly 13,000 vessels pass annually, threatens to raise food prices for Asian consumers.
The El Nino climate pattern has led to the lowest October precipitation on record in Panama, resulting in a drought that has depleted water levels in the canal.
In response, the Panama Canal Authority (ACP) limited the number of vessels passing through the waterway. The daily limit was lowered to 22 ships in December, down from the normal 36 vessels or so.
The ACP said on Dec. 15 that it will raise daily transits to 24 in January, citing improved rainfall and water levels, but that figure remains well below the normal volume.
But back to the Red Sea.
Tensions in the Red Sea are rising, pushing up prices Thursday for several things related to shipping.
Container carriers’ shares advanced. Maersk rose as much as 3.7% to hit a five-month high after Bank of America upgraded the stock. Hapag-Lloyd rallied too, as did the shares of Israeli carrier Zim and China’s Cosco.
Cosco, eh?
On December 19, 2023, Chinese professor and military expert Yun Hua, who is a faculty member at the PLA’s National Defense University, shared a video on his YouTube account in which he said that the Houthi attacks in the Red Sea have “effectively closed the door for the Suez Canal,” posing significant challenges for the United States and Israel in managing the war situation. He said that China’s COSCO Shipping Holding has emerged as the sole major shipping conglomerate capable of navigating the Red Sea, adding that the “rise of land transportation” will significantly benefit China. He also said that the current developments are a potential catalyst for “weakening the influence of American maritime hegemony and striking a blow to the U.S. hegemonic system.”
China, of course, is in the same camp as Iran, and Iran backs the Houthis.
One of these days, the U.S. is going to have to accept the extent of the challenge posed by China, a threat that is not going away.
Back to Bloomberg:
European natural gas futures rose as the recent flare-up of geopolitical strife in the Middle East stoked concern over supplies. Oil went higher after jumping more than 3% yesterday as supply disruptions in Libya and attacks in the region raised worries for the key crude exporters.
Container rates are also heading higher. Bloomberg Intelligence senior logistics analyst Lee Klaskow, in a research note Wednesday, said transpacific rates jumped 56% from a week earlier to $2,769 for 40-foot container, based on the Drewry Hong Kong-Los Angeles benchmark.
Freightos data shows spot rates from Asia to the US East Coast and Europe surging over the past week.
Container ships are hauling the equivalent of about 4 million 20-foot steel boxes the long way around Africa in order to avoid attacks by the Houthi militants in the Red Sea, according to Clarkson Research Services.
The price hiking is spreading to other modes of transcontinental freight. Rail rates from China to Europe are marching higher, too, according to a LinkedIn post on Wednesday from New Silk Road Intermodal.
“It is expected that the spot freight rates for Europe-bound service in January will exceed 20% compared with last month. At present, platforms such as Chengdu and Chongqing have a competitive advantage in booking prices, and the spaces of early January are almost fully booked,” New Silk Road Intermodal said in the post.
Pino:
Situations like this one are why the U.S. has a global military. Freedom of navigation is not automatic, and ocean trade frequently passes through dangerous parts of the world. It is a tremendous achievement of the U.S. and allied navies that, ordinarily, so much trade can pass through the Bab-el-Mandeb strait at the southern entrance to the Red Sea, which is only about 15 miles wide at its narrowest and is bordered by Eritrea, Djibouti, Somalia, and Yemen.
Less than reassuringly, Bab-el-Mandeb translates as “Gate of Tears” in Arabic.
There’s also another country that borders this strait, and that’s Somaliland, which Dominic probably has omitted from his list for the old-fashioned reason that it is not formally recognized by any other state (which is a mistake; it’s far better run — low bar — than Somalia, with which it merged in 1960).
On Monday, an agreement signed in the Ethiopian capital, Addis Ababa, between Prime Minister Abiy Ahmed and President Muse Bihi Abdi of the breakaway republic of Somaliland preceded a shocking announcement that has already set the tone for interstate relations in the Horn of Africa this year.
The memorandum of understanding was for the leasing of 20km (12 miles) of Somaliland’s sea coast to landlocked Ethiopia. In exchange, Somaliland will receive shares in its neighbour’s flagship carrier, Ethiopian Airlines — and receive formal recognition as a sovereign state.
International recognition has been a long-sought goal for Somaliland, a region in northern Somalia that has enjoyed de facto independence since 1991. But the groundbreaking agreement has created shockwaves in the region and fury in Somalia, which views it as a hostile violation of Somalia’s sovereignty.
Whether the deal would be that unambiguous on the question of recognition remains (typically) unclear, but clearly this will not add to calm in the region.
The fading of the Pax Americana will not be cheap.