Impact of Suez Canal and Panama Canal Crises – with Calvin

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I had a chat with Calvin about the repercussions of the reduced throughput of both the Panama and the Suez canals.

00:00 Introduction
00:30 Throughput down 50% at the Panama Canal
04:30 Throughput down 50% at the Suez Canal
07:35 Impact on inflation
09:03 Impact on reshoring

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Hello everyone ltis Las moris from the wandering investor.com so today I right in front of the Panama Canal here in Panama City together with Calvin Calvin how are you good thanks for having me so Calvin runs a research service on shipping and we’ll be discussing some of the latest developments which are really

Huge that few people are discussing and that are going to have a very big impact on the economy if it continues this way so can you tell us about about the developments here at the Panama Canal and also at the Suz Canal right so you know the uh anama Canal was completed in

The early 20th century the Suez Canal was completed mid 19th century and we’ve essentially never had a situation where both of these canals have had their throughput greatly affected at the same time for a long time uh that’s uh very big for shipping it’s very big for a lot

Of commodity shipping retail shipping it’s inflationary um it causes uh gestion delays supply chain issues so it’s definitely you know anything that uh any anybody who follows economics or markets should be you know this should be right at the center of their focus so throughput is down by how much here at

The Panama Canal yeah it’s it’s about 50% and why so in Panama the issue is that the uh water level of gatun Lake it’s a freshwater lake and it’s what they use to regulate the uh locks so the the you know essentially the uh Panama is an ismos and the Atlantic and Pacific

Sides uh are not exactly at the you know they’re not the same elevation right and uh you have to uh essentially change the water level to get uh a ship between the two sides so in order to do that they you know the ship goes into the lock uh

The uh Canal pumps the water in and that either raises or lowers the ship down to uh the level or or up to the level that it needs to be to uh to pass through so in in the middle of these two saltwater sources you have a freshwater source and

You know you can’t you can’t uh contaminate the fresh water with the salt water so you can only use fresh water to regulate the water levels so is this just a oneoff or is it recurring uh it wasn’t like in 2016 they did an expansion of the canal so that they

Could allow bigger ships to go through and so uh there have been you know droughts before in Panama’s history but right now the uh seasonal water levels on the lake are by far the most extreme uh low that they’ve ever been um I think that it’s probably a mix of uh factors

The uh Canal expansion and uh sort of the seasonal uh you know uh weather patterns uh El Nino this is typically the dry uh part of of the year uh it’s going to get drier over the next couple of months mons so uh but this has been something that’s been sort of getting

Worse of time so it’s partially structural and partially seasonal so what what’s the alternative for for shippers well the alternative to going through the Panama Canal is to go around South America and obviously you know that’s a lot longer how many days it you know different ships travel at different

Speeds but you know let’s say minimum it’s anywhere from a few weeks to a month wow so inflationary definitely inflationary um the other uh you know the other aspect is I don’t think it’s really affected uh Panama’s budget so much um because they’ve essentially you know raised uh rates um

And you know they’ve also implemented an auction system so that you know people can uh bid to get a slot to go through um but yeah reducing that throughput has had huge effects uh on uh on shippers energy Traders uh commodity Traders um I I had dinner with an energy Trader in

Spain he’s the guy that books the ships I asked him what what would make the biggest impact on your business and he said uh knowing uh when the Panama Canal auctions will be and how much they will be because you just you know can’t really plan um if you have uh some you

Know huge cost that uh and you know huge time delay that you you don’t really know what it’s going to be until it until it comes so the situation here is quite bad but what about the the sues Canal right so the Suz Canal the issue is the uh the

Houthis uh in Yemen have uh essentially said that they don’t want to uh let any ship with ties to Israel go through the uh the Red Sea the Red Sea is the southern entrance to the Suz canal and you know obviously shipping is global um

If you think about you know where a ship would call Port you know who are the shareholders of shipping companies uh theoretically you could make a connection to Israel with just about any ship so the houthis have been you know firing uh missiles uh they’re supported

By Iran with a lot of Technical Services and weapons they do represent a very credible threat they’re not just goat herders they do have advanced ballistics capabilities they were the first uh group in the world to hit a moving ship with a ballistic missile so impressive the the way that a ballistic missile

Works is essentially uh you know you you fire something from the ground and then it comes back down with uh the uh with gravity right so uh it’s not you know so much a uh a guided missile it’s not a cruise missile um you know it’s it’s uh

Pretty complicated to uh hit a moving Target with uh ballistic missiles um ballistics are typically used to hit large stationary things like cities and the throughput is down by how much there yeah so the Suz throughput uh let’s let’s say it’s also down on average about half the container sector has been

By far the most affected um the container sector has had its throughput reduced you know it varies dayto day it’s been as much as 90% let’s say it’s 70% uh on average now yeah so this is very on a separate note this is very bearish for Egypt uh which has a very

Deep current account deficit issue so suddenly all of that income being gone is absolutely not bullish Egypt so what’s the alternative route then well the alternative route is around Africa and how many extra weeks is that anywhere from a few weeks to a month depending on the speed of the ship same

As the issue here and so we’ve had the sus Canal being closed down for a few years in the past what what’s the impact on the whole shipping industry back then well in the from the ‘ 67 to 7 5 closure the uh that was sort of when the age of

The super tanker started and that you know age started because they needed to find a new way to get oil out of the Middle East because they couldn’t really rely on the Suez Canal so the uh they started building these uh very large crude carriers which were basically you

Know gigantic football multiple football field size ships for carrying crude oil uh between 197 and 1975 the size of that Fleet increased by about 15x wow okay so looking at the current situation I see inflation from two sides one is with the increase in shipping rates yeah because it takes longer and

Two all the supply chain disruptions so you know if a spare part was to take 3 weeks before now it might take six weeks yeah absolutely so uh as you said one you get back backed up on shipments if you have an industrial operation and you really need some uh some components

Those components are on a ship they’re you know back a couple weeks then now your customers are down a couple weeks their customers are down a couple weeks so that’s sort of the same thing that we saw after Co um it’s been uh it’s been interesting also uh watching some of the

Skepticism from people on uh whether or not this would have Global impacts and I’ve said from the very beginning absolutely it will have Global impacts um both of these canals having their throughput impacted to this level um is is historically unprecedented uh and uh if it if this situation

Persists uh you’re you’re going to see Freight rates much higher uh pretty much across the board it’s it’s going to cause more congestion it’s going to cause schedule slippage and uh you know it’s it’s not just like one little area is affected shipping is global you mess

Things up considerably and you know one key choke point you’ve affected the whole planet so bullish reshoring maybe um you know the the thing about reshoring is you need to have the industrial capacity in place to do it it’s not an overnight solution it takes years to build factories and

Highways and railroads and pipelines right so it’s uh it’s not an overnight solution and uh the uh the steel production capacity for instance or the cement production capacity in the United States is also limited there’s a lot of components that we just simply don’t produce here anymore a lot of

Electronics that we don’t make here right so you can’t uh go from a very globalized world to a uh somewhat decentralized World in a short time period And even and you know even if you do move towards that uh you know globalization has been a very deflationary Trend right um you know

We’re talking about lower and lower costs faster and faster delivery schedules you know very uh very uh optimized uh shipment processes uh and that has really been enabled you know sort of by the Pax Americana American global dominance and uh you know protecting shipping lanes but it seems

Like we’re not really able to uh to do that anymore so you know now if you need you know a factory in the US or Mexico or Brazil um that does the same things a factory in uh in China was doing uh you know making those new factories and

Making those new products all these redundancies uh it it might be bad for the producers of those products they might see you know lower earnings in China because they don’t have as many customers um but on a global basis you’re talking about the need for a lot

More raw materials in those uh in those local levels I would say longterm uh reshoring is probably structurally bearish uh large ships um but uh again it’s something that’s going to take a very long time to happen interesting so essentially your research service takes this sort of thinking and research and translate

Itself into a model portfolio correct right we have a model portfolio WE Post trade ideas we uh we post uh weekly updates so we sort of follow the sector fundamentals we follow the companies we follow the Commodities we follow the the big industrial companies you know

Shipping is sort of you know most of human trade revolves around stuff moving around on ships it’s the most efficient form of Transport so uh I I think that if you you know want to really uh get an edge in the markets uh you can’t do better than studying shipping

Interesting great so if you’re interested there is an affiliate link below with a 20% discount for his newsletter there is both an annual plan and a monthly plan so just want to try it for a month low risk you can try that as well Calin thank you much always a

Pleasure yep make sure to download my free ebook 12 mistakes to avoid when investing in international real estate which you can find on my website link below and feel free to follow me on Instagram at the wandering investor i’ look forward to hearing from you