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A Tale of Two Canals

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A Tale of Two Canals

By John F. Di Leo

 

The American economy can’t catch a break.  In addition to the massive price inflation of food, cars, housing, energy, and so many other elements, international companies are now suffering from a near-doubling of ocean transportation costs in just the past three months, due to simultaneous crises in Central America and the Red Sea that have restricted international shipping through the Panama and Suez Canals.

This is adding to the cost of goods all over the world, along with damaging lead times, as longer transits cause disruptions to both factory schedules and retail offerings.

For thousands of years, ocean carriers moved cargo.  They would fill up a ship with drums, barrels, crates, and boxes of goods.  Their math was relatively straightforward: charge for the transportation of the goods based on how much it cost to make the trip from port to port.

In the mid 20th century, Malcom McLean introduced a cost-effective way to switch most of the ocean industry to intermodal container shipping.  This means that most ships are now configured to transport thousands of stacked containers each in standard sizes — mostly 20’ and 40’ long — measured in “twenty foot equivalent units” or TEUs.  So, for example, a ship that holds 1750 standard or highcube 40’ containers is referred to as a 3500 TEU vessel.

There are now thousands of such ships on the high seas every day, traversing weekly scheduled routes, quickly transporting hundreds or even thousands of these reusable cargo containers. Huge cranes swing each container off the ship and onto a waiting rail car.  At rail hubs hundreds of miles inland, another crane swings each container off the train and onto a truck waiting with a specialized chassis for the final delivery to a warehouse or factory.

The shipping lines have had to switch thought processes. They no longer move freight, as such; they now rent out these containers. That means they have to anticipate how many empty containers they will need each week at points of origin, so they can handle the cargo booked for them.  Since there’s never an exact match of imported cargo and exported cargo, the carriers move hundreds of thousands of empty containers all the time.  It’s a cost of doing business.

This process has been honed to a fine point over the past 70 years, and worked wonderfully until the painful market disruptions of the COVID “pandemic,” when massive bottlenecks caused by understaffing at seaports, railroad hubs, and warehouses due to “social distancing” doubled and even trebled transit times.

Now we are seeing similar problems with two completely different causes.

The global shipping community has become dependent on the Panama Canal. An immense amount of cargo — several dozen ships, holding from 1500 to 8000 forty-foot containers each — have crossed the Panama Canal every single day for decades.

But last fall, a combination of a severe drought in Central America, and the Panama government’s failure to properly plan for such a drought in their last huge expansion, has required Panama to greatly curtail the vessels using the canal.

Now Panama must limit the crossings to fewer than twenty vessels a day, and those twenty must be either on the small side, or, if large, must be loaded far below capacity, in order to handle the reduced drafts in the locks (there’s no longer enough water to float the heaviest ships). On top of this, Panama is hiking the prices for using the locks at all.

Shipping lines have to choose between taking the much longer route around South America or reducing their payload, leaving a third or half of their potential cargo unbooked so they can be one of the few using the canal at these higher prices.  A lose-lose scenario.

As an example of how severe a choice this is, Maersk is taking the unprecedented step of deciding to unload their ships on one side of Panama and then rail the contents across the isthmus, reloading it all into another empty ship at the other side.  Consider the cost of unlading thousands of containers, railing them, then positioning an empty ship to accept them all at the other end.  The fact that this costly option is cost-effective by comparison should clarify how incredibly expensive the additional cost of sailing around South America is, now that we’ve had a century to become dependent upon the Panama Canal.

Half a world away, the situation is even worse.

Almost all transportation between Europe and Asia goes through the Suez Canal.  The Iran-funded Houthi rebels, who have been attacking cargo ships in the Red Sea for months, have now effectively driven all the shipping lines out of the region.  They don’t have any rail options like we do in the Americas; if you can’t get to Suez, you have to sail around Africa, or go around the world in the other direction and sail through Panama.

Now, it should be obvious what this does to global inflation: The lines are sailing half-empty ships, and having to buy hundreds of thousands of additional empty containers (almost all made in China).  Transportation costs are increasing by 50% to 100% over just the past three months on almost everything moving by sea. We suffer lengthening of transit times in many major lanes, and considerable disruption of factory schedules as critical components are late.

But what public policy lessons can we draw from this?

  • The United States chose to give up the Panama Canal during the Carter administration.  With our rigorous processes for major capital projects, it’s inconceivable that a Panama Canal under U.S. control would have undergone its recent expansion without making proper provision for the necessary additional water sources to prepare for an extended drought.
  • The Houthi rebels are controlled by Iran.  They have been active in Yemen since the 1990s, but never caused significant trouble in the Red Sea until the fall of 2023, after the Biden-Harris regime broadly eased controls on Iran and authorized massive new funding sources to the mullahs of Tehran. The Houthis would have neither the weaponry nor the free hand to pursue such attacks were it not for the pro-Iranian moves and general foreign policy weaknesses of the Biden administration, which has seen the United States lose its hard-fought respect throughout the world.
  • Global trade itself — the free flow of goods at market prices — is generally an economic and societal good, but not when a preponderance of domestic industry becomes dependent on it, especially on imports from a single source.  Over the past 40 years, both the American and European economies have become dependent on mass imports from China. This is the reason why these current canal problems are a massive one-two punch to the global economy, rather than just a harmless hiccup.

What we teach in our business schools, how our manufacturers source the materials they make and sell, which business choices are rewarded or punished by Wall Street investors — and most of all, who we elect to public office —  makes a difference.  Sometimes a very costly difference indeed.

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8 COMMENTS

  1. There is lso the thought that the Israelis want a new canal cutting Egypt out of the loop. I think it was posted here some weeks back.
    The USA will adapt. Business there adapts very quickly and the likes of Walmart will suffer but those that Manufacture at home will prosper again. They will need all the immigrants to work in the factories and china will lose.
    Not so much of a bother to those of us south as much of our trade is around the Pacific rim. China is the problem there.
    Europe and Britain ain’t going to save our bacon but we might get less shitty European cars.

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    • Viking, a new canal running between Israel and Gaza borders could be set up to run in one direction while the Suez Canal running in the other. Ignoring the potential for terrorist attacks, it could actually increase total freight through the area with Egypt not suffering any economic loss. (Mainly because with better canal maintenance you could run bigger ships, and those ships would have a faster transit and return times).
      Doubt it will ever happen though.

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  2. The wife and I sailed our 26 foot sailboat from San Diego through the Panama Canal into the Carribean in 1975. The canal was run by the USA back then and they charged by the ton. It cost us almost $22.00 to transit the canal. Got to sail accross Lake Gatun with two pilots on-board for 8 hours each. What a deal!

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  3. Always talk of this Canal to the north, to sucker the fools that are so lazy & always want to believe in nonsense as it is proving to be very successful propaganda!

    So many pack animals like not even knowing the River, & what Sea, & what it means.
    This canal project where they seem to pick this up & run with this as a perfect truth, as the money motive, as that seems to fit.

    Note the newspaper which this article comes from.
    Then just how feasible a new canal would be!
    It would be still be sailing along the Houthi coast line as it still has to sail up the Red Sea,

    The US had once proposed to use some 520 nuclear bombs on the Negev Desert (Naqab) to help create the canal.
    With Gaza razed to the ground, there have been alleged plans to literally cut corners and reduce costs by diverting the canal straight through the middle of the Palestinian enclave.

    https://www.newarab.com/news/what-israels-ben-gurion-canal-plan-and-why-gaza-matters

    For more reasons why this is often raised like in 2021 about the ‘Ever Given’ container ship blockage.
    https://aijac.org.au/fresh-air/the-great-suez-canal-plot/

    To go through the Negev Desert, would mean there can be no locks, as there is No water!
    So a sea level canal would be required, as is the Suez.
    But now to consider how to put that down through the heights & plateau of Rock of that desert.,
    One of the supposed big advantages that once built it would not need any maintenance, like dredging, as there are no sands to blow in, and so much more safer as being so deep in the landscape the ships will not be effected by violent winds.
    Of course it will be cheaply built, as quoted, so money wise a great return on investment in using up so many nuclear heads, all to be part of free testing in the 1960’s.

    The point of the nuclear bombs would have been sending all that material to the 4 winds to dispose of it.
    Even the Israelis would not be so happy with that stock pile of contaminated nuclear rock hanging around.
    It would have to be a war to dump it on any other country’s land.
    Dug in any conventional sense, where do you put the spoil from all that digging. Where & how far do you have to cart it to? Fill in the Dead Sea?

    To give a sense of what has to be cut.
    Here is a graph of the heights this canal must be dug through.
    A hell of a lot over 2000 feet and up to over 3,000 feet above sea level, for some reasonable length.

    https://qph.cf2.quoracdn.net/main-qimg-e62bd7fc5045ee855e81651527435418

    There are oil pipe lines and now a fast train set up being put into place, but a canal, is just to make sense why you should support the Arabs in opposing what is called an “Israeli plan” at all costs,
    The propaganda works on the Suckered.

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