Consider This: Canals Are Becoming Chokepoints

The importance of major canals to global trade cannot be underestimated. Franklin Templeton Institute’s Kim Catechis highlights some of the challenges they face, including militant attacks and climate change.

The worlds canals

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

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 LNG7 flow through the canal each day.