Procurement and supply chain leaders head into 2024 amid a heightened state of maritime risk aggravated by several regional and international crises unfolding in parallel. In some cases, these events have intersected – complicating and exacerbating already fragile systems of order in the global economy, with consequences we have yet to fully experience.
The Russo-Ukrainian war, the Hamas-Israeli war, Yemen’s Houthi rebellion, and Iran’s bid for regional hegemony have turned the Black and Red Seas into conflict zones, imperiling commercial shipping that must transit through contested waters to keep the global economy humming. Even the Caribbean Sea, known more for hurricanes, industrial accidents, and oil spills, has become a riskier operating environment due to climate change and a growing international crisis between Venezuela, Guyana, and the UK.
These events and risks are occurring beyond the usual suspects for geopolitically driven maritime risk – namely, the Persian Gulf’s Strait of Hormuz, the Taiwan Strait, the wider South China Sea, and the Arctic Circle.
Maritime risk remains exceptionally high heading into 2024 and will have short, near, and potentially long-term implications for global trade. After all, maritime transport accounts for more than 80% of global trade, according to the United Nations Conference on Trade and Development.
Batten down the hatches and strap yourselves in – we’re in rough seas, with no line on the horizon.
Drought Conditions Slow Panama Canal Operations
Due to the worsening effects of climate change and an unusually strong El Nino, the Panama Canal Zone has experienced a rainfall deficit and drought conditions through 2023. As a result, lower water levels in the Chagres River, which feeds Lake Gatun, which feeds the Panama Canal, have led to fewer cargo ships transiting the canal in either direction. Here’s what’s at stake:
- More than $270 billion in global trade, or more than 40% of global shipping traffic, passes through the Panama Canal each year
- More than 40% of the consumer goods traded between northeast Asia and the East Coast of the United States pass through the Canal each year
In 2022, more than 14,000 ships transited the canal, roughly 36-38 ships a day. By December 2023, just 22 ships transited daily. Although the Panama Canal Authority plans to increase daily passage to 24 vessels effective January 16 due to increased water levels, that’s still two-thirds of its total capacity. Furthermore, the limited amount of water available to fill the locks has forced the canal authorities to reduce the maximum draught allowed for ships transiting the canal, from the usual 50 feet down to 44 feet. That results in decreasing by about 2,400 twenty-foot equivalent units the number of containers that an average container ship can carry through the canal, further reducing the overall capacity of the channel. Conditions may be improving, but not fast enough to halt or reverse all the negative impacts on global trade and the local economy.
Shipping and logistics providers are left with no good options:
- Wait 2-3 weeks or longer to transit, which adds lead time to delivery and impacts customers
- Pay up to $4 million to skip the queue, which adds overhead and reduces profit
- Re-route around the southern tip of South America, Africa, or through the Mediterranean Sea, which also adds time and cost and reduces customer satisfaction
- Transit other hot spots, namely the Suez Canal and the Red Sea, putting ships and crews at risk
Red Sea at Morning, Sailors Take Warning
Following Hamas’s attacks on Israel on October 7, Yemen-based Houthi rebels began attacking commercial shipping transiting the Red Sea, particularly near the narrow Bab al-Mandab Strait separating Yemen and Djibouti. Rebels claim that they are attacking shipping bound for Israel, regardless of the nationality of the vessel, in solidarity with Hamas and the Palestinian movement. Houthi rebels have been launching sophisticated anti-ship ballistic and cruise missiles as well as drones of Iranian design and origin. They’ve also been conducting helicopter-borne assaults on vessels, overtaking and diverting vessels to Yemen, and sporadically launching land-attack cruise missiles at targets in Israel via the Red Sea.
Many vessels have been targeted; several have been hit; some have been severely damaged. To protect commercial shipping and uphold freedom of navigation in the Red Sea, through which 12% of global shipping passes, U.S. Navy warships patrolling the Red Sea have been downing Houthi missiles and drones targeting vessels. The U.S. government has also launched Operational Prosperity Guardian, a multinational coalition of warships from ten nations not bordering Yemen to escort commercial shipping through the Bab al-Mandab Strait and the Red Sea.
The Red Sea has become a precarious environment in which to operate, resulting in significant impacts on commercial shipping, regional stability, and global commerce. Sailing through it isn’t just operationally risky for carriers and customers; it’s also financially risky for insurance underwriters, who have widened the risk zones within the Red Sea and raised insurance rates for high-risk passage. As of December 20, it cost 0.5% of a ship’s total value while transiting the high-risk zone to insure the vessel, compared to 0.1% or 0.2% before the attacks ramped up. Some insurance underwriters are refusing to cover passage altogether.
As a result of attacks on shipping and insurance spikes since late November, more than 350 container ships, plus many tankers, bulk carriers, car carriers, and other merchant ships, have diverted from the Red Sea. Cargo, crews, and vessels are too valuable to lose; and it costs too much to insure them, if they can find an underwriter that will. Many carriers are canceling contracts to sail through the Red Sea and Suez Canal unless and until the security situation improves there.
Instead, vessels are sailing alternate routes around the Horn of Africa, down to the Cape of Good Hope, east toward the Indian Ocean, or west from the Mediterranean out to the Atlantic Ocean. Although this avoids the risks associated with the Red Sea, they present their own risks. For example, sailing around the Horn of Africa, off the Somali coast, exposes ships to piracy. Continuing south toward the Cape of Good Hope adds 3,500 nautical miles to a ship’s journey, which increases lead times and inflates the costs of the shipment. There are no winners here – only survivors.
As with overcoming disruptions at the Panama Canal, shipping companies (carriers) don’t have many choices. They must pivot, shore up or recoup losses, and stay in the game to preserve market share. While they struggle to remain in the market, shippers and freight forwarders lose the capacity to ship quickly through the region and are likewise left with few good options. Similarly, beneficial cargo owners are left with a lot of uncertainty in the costs and lead times for moving their goods.
Lapsed Russia-Ukraine Deal Imperils Global Food Supply Chain
As the Russo-Ukraine war enters its tenth year, and Russia’s “special military operation” (i.e., full invasion) to depose Kiev’s government and occupy the country for nearly two years, the Black Sea remains a perilous body of water – and not just for combatants.
Whether by accident or intent, Russian forces have directly struck commercial vessels in ports or sailing to and from Ukraine’s ports since the expanded conflict began. However, these attacks have waned as Ukrainian armed forces have been able to push Russian air and naval forces farther east toward Crimea.
Both sides are known to deploy drones and naval mines, which have also struck commercial ships transiting the Black Sea – most recently on December 28. A Panamanian-flagged bulk carrier sailing toward Odessa to pick up grain struck a floating mine, which damaged the ship and injured two sailors. It’s the latest in a string of such incidents. At least six other commercial vessels have reportedly struck naval mines since the grain-export deal between Russia and Ukraine ceased at the end of July 2023.
Russia refused to extend or renew the deal and vowed to regard any vessel sailing to or from Ukrainian ports as a military target. Undeterred, Ukraine established the “grain corridor,” connecting Ukraine’s port of Odesa to the Bosporus Strait to enable ships to deliver its grain to Africa and Europe. Moscow appears to have followed through on its threats, as Russian aircraft were spotted dropping naval mines into the corridor.
The grain-export deal enabled Ukraine and Russia to export grain and fertilizer to their respective markets and shielded the shipments from attack. The deal benefited everyone – Russia, Ukraine, farmers, the global food supply chain, and those who experience food insecurity and rely on either Russian fertilizers or Ukrainian grains; or both. Consider that:
- In 2021, Russia exported $13.1 billion in fertilizer and was the world’s largest fertilizer exporter. The following year, Russian fertilizer exports fell 15%, yet revenues grew 1.5-fold to $19.3 billion.
- In 2021, Ukraine exported $5.1 billion in wheat and was the world’s seventh-largest wheat exporter. Total grain exports for the 2020-2021 season were nearly 45 million metric tons.
- In 2022, Ukrainian grain production dropped 32% during the 2022-2023 season. Exports are already down 24%, at 6.82 million metric tons, for the 2023-2024 growing season.
The impact of the war on global food supplies, particularly wheat, corn, and other cereals and grains, has been significant in terms of tonnage and prices. The initial shock of the invasion severely crimped the flow of Ukrainian grain to markets, which caused prices to spike. Most affected were developing countries, which have relied on Ukrainian wheat to mitigate food insecurity. The deal enabled 65% of Ukraine’s wheat exports to flow to the developing world. The grain deal relieved pressure on the markets and enabled commodities to normalize.
Nearly five months after the deal expired and Ukraine attempts to keep the grain corridor open, commercial shipping through the Black Sea remains perilous, and world food security hangs in the balance. Thankfully, production in other regions has made up for most of the shortfall of grains and seeds coming from Ukraine, resulting in a smaller-than-predicted impact on the global supply of these commodities (see Resiliency in World Grain and Oilseed Production and the Ukraine-Russia War).
Supply Chain and Logistics Leaders – Improvise, Adapt, andOvercome
Given the risks at sea and the impacts that these key regions pose for global supply chain, procurement, and logistics teams, it’s imperative that business leaders strive to build flexibility and resilience into their operations. Granted (and using the nautical analogy), it’s extremely difficult to build or rebuild a ship while it’s underway – ideally, you’re doing it while in dry-dock and there are no storms on the horizon. But here we are, standing at the bridge, about to cast off our lines, ready or not for the year ahead.
That said, there are ways that companies are, or could be, adjusting operations for these increased risks, and the market volatility and uncertainty they create. For example, it’s prudent to ensure that supply chain planning and optimization systems account for the new reality of higher variability in lead times and cost on key routes. Procurement teams may seek to increase inventory buffers to hedge against suddenly long lead times and high costs (lean inventory and “just-in-time” deliveries are so pre-pandemic).
Supply chain, procurement, and logistics leaders would also be wise to ensure that planning processes and systems are responsive to these unexpected updates in lead times and can provide solutions to mitigate the risks. In other words, plan for the unexpected – expect that something, somewhere is going to throw your lead times off. Teams must be agile enough to pivot in time. For example, assuming that it makes economic sense, be flexible with how you ship your goods or products – have backup capabilities to ship by rail or by air freight vis-à-vis disruptions at the Panama Canal, Red Sea, or Black Sea. These can be temporary and partial solutions to supplement – but not replace – ocean shipping. They can keep factories or shop floors humming for a couple of weeks while main shipments reach their destination.
To thrive in 2024, keep your eyes on the horizon, your options open, and be ready to turn the wheel at a moment’s notice. We’re in for a rough one.