Jan 24, 2024 - Energy & Environment

Climate change and conflict converge to disrupt supply chains

Illustration of a row of shipping containers falling like dominoes.

Illustration: Shoshana Gordon/Axios

Geopolitical risks in the Red Sea and extreme weather in Central America are converging, jostling global supply chains fed by the Suez and Panama Canals.

The big picture: The impact on trade highlights what experts have long warned about, with compounding events amplifying the growing economic toll of climate change.

  • Suez and Panama, two of the world's most crucial maritime trading chokepoints, are simultaneously at limited capacity — one of them for climate-related reasons.
  • In Panama, an extended, severe drought has cut the canal's capacity. The canal is fed by artificial freshwater lakes, which are also used to supply much of the country with drinking water.
  • Meanwhile, its Egyptian counterpart has become a dicey option for shipping companies amid attacks by Houthi forces in Yemen. Most major shipping firms are avoiding the Red Sea entirely and re-routing around the Cape of Good Hope.

What they're saying: "Both the Suez Canal and the Panama Canal are critical strategic choke points, in terms of the global supply chain. And so you've got a bit of a perfect storm at the moment," Guy Platten, secretary general of the International Chamber of Shipping, tells Axios in an interview.

Zoom in: In Panama, the drought is tied partly to the El Niño climate cycle, along with long-term, human-caused climate change. Water levels in the reservoirs that fill the canal have plummeted.

The backstory: Studies have warned for years that climate change poses growing risks to complex global supply chains.

  • For example, last year's National Climate Assessment highlighted the possibilities of climate-change-related supply chain disruptions to the U.S.
  • It stated that efforts to make supply chains more resilient "are not yet sufficient."
  • The Panama Canal is a vital component of many U.S. companies' supply chains since a trip through there cuts transit times for goods going between Asia and the Gulf and East Coasts.
  • About 40% of all U.S. container traffic comes through the canal.
  • With 24 ships permitted to transit the canal daily, down from a typical daily average of 38 vessels, many shippers are bypassing the canal.

The intrigue: Some carriers, including oil and liquefied natural gas tankers, are responding to the situation by sending their ships around the southern tip of South America. This adds about six to 14 days to their journey, along with higher fuel costs and greater emissions.

  • Others, like Danish shipping giant Maersk, are putting cargo on railcars to traverse Panama, with ships taking goods the rest of the way.
  • Shippers aren't the only ones losing money. Panamanian officials have said the lower water levels may cost the canal authority between $500 to $700 million this year.
  • The reduction in canal capacity has occasionally yielded long backups of ships waiting to transit through the 50-mile waterway, with the marine traffic captured via satellite images.

Between the lines: The severe drought has depleted Lago Gatún, the largest lake providing water to the canal system. In mid-August it rivaled all-time lows and is now about 5 feet below its average water level for this time of year.

  • While Panama is a tropical country with typically abundant rainfall, climate change is also increasing the odds and severity of drought in this region.
  • In addition, El Niño events favor below-average precipitation in Panama from July to December in particular, and a strong El Niño is currently underway in the tropical Pacific Ocean.

Yes, but: In this case, the dry conditions pre-date the El Niño and have defied the typical relationship with this climate cycle as well as a preceding La Niña.

Context: "The compounding effects of drought in the past three years has contributed to the situation," said NOAA research meteorologist Andrew Hoell, via email.

  • "The most recent round of dryness seems to be related to the ongoing El Niño while dryness in past years was different from what typically happens during La Niña."
  • This suggests other factors being involved, such as climate change.

Of note: Supply chain experts told Axios the dual canal delays are likely to eventually push up prices for certain products, particularly manufactured goods that depend on timely shipments of parts to factories.

  • "A delay of seven days is not just the delay in seven days, it's the knock-on effects of everything after that," said International Chamber's Platten.
  • He noted that as of Jan. 22, there were 255 vessels being rerouted by the Red Sea situation, with a capacity of 3.34 million standard containers. Another 174 ships that had been rerouted had already arrived at their destinations, he said.
  • Jonathan Colehower, managing director of global supply chain practice at UST, told Axios the impacts won't come in the form of empty store shelves but rather idle factories as crucial parts are delayed.
  • Especially at risk for this, he says, are car manufacturers and the electronics industry.

The bottom line: Global strife plus a poorly timed and placed drought are another reminder of the fragility of modern supply chains.

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