Skip to content

CONTRIBUTORS

Kim Catechis

Investment Strategist, 
Franklin Templeton Institute

International trade drives global economic growth, and around 80% of the global movement of goods is via maritime transport (Exhibit 1). Access to the two most important canals in the world has been fundamental to this growth. Today, they are chokepoints.

Exhibit 1: Major Shipping Lanes Around the World

Source: Franklin Templeton Institute

One is the Suez Canal, which the Suez Canal Company of France completed in 1869. It connects the Mediterranean Sea and the Red Sea, providing the fastest and cheapest route between Europe and Asia. Around 30% of global container traffic, 12%-15% of global trade, passes through this narrow stretch of water, estimated at over US$1 trillion of goods per year.1 That equates to 19,000 ships and revenues of US$9.4 billion in fiscal year 2023.2

In December 2023 and January 2024, the flow of traffic has been reduced by around 42%3 because of the Houthi militants' missile and drone attacks on shipping, supported by Iran. The US and UK militaries are attacking Houthi missile installations in response, but so far without stopping the attacks. The route from Singapore to Rotterdam via Suez is 8,500 nautical miles and takes 26 days. Diverting to the route around the Cape of Good Hope is 11,800 miles and 36 days, adding US$1 million to the fuel costs of a round trip.4

We see indications that European importers are building inventory, effectively choosing “just in case” over “just in time.” Naturally, shipping rates have rocketed; the rates from Shanghai to Europe for example are up 256% since early December.5 Insurance premiums have also surged, adding to costs. The last time the canal was blocked in 2021, Lloyds List estimated that it was holding up US$9.6 billion6 worth of containerized traffic each day. Today, energy prices are clearly at risk, as 9.2 million barrels of oil and 4.1 billion cubic feet of liquified natural gas (LNG)7 flow through the canal each day.

The other is the Panama Canal. Built by the United States in 1914, it negotiates a 26-meter difference in water level between the Pacific and the Atlantic Oceans by way of inland lakes and locks. As a result, significant volumes of water are needed to get each vessel across the canal.

Here, the problem is climate change. We are seeing more frequent El Niño weather patterns,8 which result in drought, with a direct impact on the capacity of the canal. Normally it transits 12,000 vessels per year, carrying around 600 million metric tons of goods and earning US$4.97 billion in revenues. The number of ships is now down to 24 per day, a 27% decrease.9 The Panama Canal Authority (PCA) attributes the situation to higher temperatures in the Atlantic, compounded by El Niño and the delayed rainy season. The PCA forecasts the water level in the key Gatun Lake to fall 2% by April 2024, which will have a bearing on the tonnage of vessels that can use the canal, due to their draught.10

While Suez is intensive in commercial goods, food and oil shipments, Panama is the route for over 20% of global soybean exports, and over 15% of maize. It is also the main route for exports of LNG to Asia.11 We have seen shipments diverted to Europe, replacing volumes from the Middle East, and even resulting in lower prices for the European Union.

For US soybean exporters, the Mississippi River is the immediate problem—barge flow restrictions have been more frequent because of lower water levels caused by drought. Close to 60% of US grain exports (wheat, soybeans, corn) travel this route by barge to get to the export terminals in the Gulf of Mexico. The winner here? Potentially Brazilian soybean farmers, who ship to China via the Atlantic route around the Cape of Good Hope. Midwestern farmers can use the railroads going west instead. Or use existing rail routes to Mexico and then divert to the Mexican Pacific ports.

It is too early to say if these bottlenecks will cause inflation. But it would be prudent to treat them as inflationary pressures that risk becoming structural. This is because of the wide variation in the cost increase by subsector, depending on the supply/demand balance in their destination markets and the extent to which longer sea routes impact the availability of empty vessels for the return journey.

Something to watch.

Endnotes

  1. Source: “Shippers remain wary of Red Sea transit as regional tensions rise.” S&P Global Commodity Insights. January 2, 2024.
  2. Source: “Suez Canal annual revenue hits $9.4 billion, chairman says.” Reuters. June 21, 2023.
  3. Source: “Red Sea, Black Sea and Panama Canal: UNCTAD raises alarm on global trade disruptions.” United Nations Conference on Trade and Development (UNCTAD), January 26, 2024.
  4. Source: “Shippers remain wary of Red Sea transit as regional tensions rise.” S&P Global Commodity Insights.  January 2, 2024.
  5. Source: “Red Sea, Black Sea and Panama Canal: UNCTAD raises alarm on global trade disruptions.” United Nations Conference on Trade and Development (UNCTAD). January 26, 2024.
  6. Source: “Suez Canal remains blocked despite efforts to refloat grounded Ever Given.” Lloyds’ List.  March 24, 2021. 
  7. Source: “Red Sea chokepoints are critical for international oil and natural gas flows.” EIA. December 4, 2023.
  8. Source: “Has climate change already affected ENSO?” National Oceanic and Atmospheric Administration (NOAA). July 27, 2023.
  9. “The Panama Canal to increase daily transits to 24 starting in January.” Source: Panama Canal Authority (PCA). December 15, 2023.  
  10. The draft or draught of a ship is the vertical distance between the waterline and the bottom of the hull, or keel. It includes rudders, propellers etc.
  11. Source: “Principal; Commodities shipped through the Panama Canal.” Panama Canal Authority (PCA), Statistics. Accessed February 9, 2024.

 

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Investments entail risks, the value of investments can go down as well as up and investors should be aware they might not get back the full value invested.

Issued in Luxembourg by Franklin Templeton International Services S.à r.l. Investors can also obtain these documents free of charge from any of the following local authorised FTI representatives: Switzerland: Issued by Franklin Templeton Switzerland Ltd, Talstrasse 41, CH-8001 Zurich.

Australia: Issued by Franklin Templeton Australia Limited (ABN 76 004 835 849, AFSL 240827), Level 47 120 Collins Street, Melbourne, Victoria, 3000. Austria/Germany: Issued by Franklin Templeton Investment Services GmbH, Mainzer Landstraße 16, D-60325 Frankfurt am Main, Germany. Authorised in Germany by IHK Frankfurt M., Reg. no. D-F-125-TMX1-08. Tel. 08 00/0 73 80 01 (Germany), 08 00/29 59 11 (Austria), Fax: +49(0)69/2 72 23-120, [email protected]. Canada: Issued by Franklin Templeton Investments Corp., 5000 Yonge Street, Suite 900 Toronto, ON, M2N 0A7, Fax: (416) 364-1163, (800) 387-0830, www.franklintempleton.ca. Netherlands: Issued by Franklin Templeton International Services Sàrl, Dutch branch, NoMA House, Gustav Mahlerlaan 1212, 1081 LA, Amsterdam. United Arab Emirates: Issued by Franklin Templeton Investments (ME) Limited, authorized and regulated by the Dubai Financial Services Authority. Dubai office: Franklin Templeton Investments, The Gate, East Wing, Level 2, Dubai International Financial Centre, P.O. Box 506613, Dubai, U.A.E., Tel.: +9714-4284100 Fax:+9714-4284140. France: Issued by Franklin Templeton France S.A., 20 rue de la Paix, 75002 Paris France. Hong Kong: Issued by Franklin Templeton Investments (Asia) Limited, 17/F, Chater House, 8 Connaught Road Central, Hong Kong. Italy: Issued by Franklin Templeton International Services S.à.r.l. – Italian Branch, Corso Italia, 1 – Milan, 20122, Italy. Japan: Issued by Franklin Templeton Investments Japan Limited. Korea: Issued by Franklin Templeton Investment Trust Management Co., Ltd., 3rd fl., CCMM Building, 12 Youido-Dong, Youngdungpo-Gu, Seoul, Korea 150-968. Luxembourg/Benelux: Issued by Franklin Templeton International Services S.à r.l. – Supervised by the Commission de Surveillance du Secteur Financier - 8A, rue Albert Borschette, L-1246 Luxembourg - Tel: +352-46 66 67-1- Fax: +352-46 66 76. Malaysia: Issued by Franklin Templeton Asset Management (Malaysia) Sdn. Bhd. & Franklin Templeton GSC Asset Management Sdn. Bhd. Poland: Issued by Templeton Asset Management (Poland) TFI S.A.; Rondo ONZ 1; 00-124 Warsaw. Romania: Issued by Bucharest branch of Franklin Templeton Investment Management Limited (“FTIML”) registered with the Romania Financial Supervisory Authority under no. PJM01SFIM/400005/14.09.2009,, and authorized and regulated in the UK by the Financial Conduct Authority. Singapore: Issued by Templeton Asset Management Ltd. Registration No. (UEN) 199205211E. 7 Temasek Boulevard, #38-03 Suntec Tower One, 038987, Singapore. Spain: FTIS Branch Madrid, Professional of the Financial Sector under the Supervision of CNMV, José Ortega y Gasset 29, Madrid, Spain. Tel +34 91 426 3600, Fax +34 91 577 1857. South Africa: Issued by Franklin Templeton Investments SA (PTY) Ltd which is an authorised Financial Services Provider. Tel: +27 (21) 831 7400 ,Fax: +27 (21) 831 7422. Switzerland: Issued by Franklin Templeton Switzerland Ltd, Talstrasse 41, CH-8001 Zurich. UK: Issued by Franklin Templeton Investment Management Limited (FTIML), registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL Tel +44 (0)20 7073 8500. Authorized and regulated in the United Kingdom by the Financial Conduct Authority. Nordic regions: Issued by Franklin Templeton International Services S.à r.l. , Contact details: Franklin Templeton International Services S.à.r.l., Swedish branch c/o Cecil Coworking, Norrlandsgatan 10, 111 43 Stockholm, Sweden. Tel +46 (0)8 545 012 30, [email protected], authorised in the Luxembourg by the Commission de Surveillance du Secteur Financier to conduct certain financial activities in Denmark, in Sweden, in Norway, in Iceland and in Finland. Offshore Americas: In the U.S., this publication is made available only to financial intermediaries by Templeton/Franklin Investment Services, 100 Fountain Parkway, St. Petersburg, Florida 33716. Tel: (800) 239-3894 (USA Toll-Free), (877) 389-0076 (Canada Toll-Free), and Fax: (727) 299-8736. Investments are not FDIC insured; may lose value; and are not bank guaranteed. Distribution outside the U.S. may be made by Templeton Global Advisors Limited or other sub-distributors, intermediaries, dealers or professional investors that have been engaged by Templeton Global Advisors Limited to distribute shares of Franklin Templeton funds in certain jurisdictions. This is not an offer to sell or a solicitation of an offer to purchase securities in any jurisdiction where it would be illegal to do so.
Please visit www.franklinresources.com to be directed to your local Franklin Templeton website.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.