Suez Canal / Panama Canal trade disruptions and diseconomies of scale

This year global trade has been disrupted by terrorist activities and drought. Terrorist attacks in the Red Sea has seen traffic in the Suez Canal reduce by 50% from 2023 and a drought in Panama has substantially reduced daily ship crossing by 32% in the same year.

The Suez Canal usually accounts for 15% of global trade whilst the Panama Canal equates to 5%.

The new favoured direction of trade is around the Cape of Good Hope which increases delivery times by 10 days or more on average. By the first half of February 2024, 586 container vessels had been rerouted, while container tonnage crossing the canal fell by 82%. See image – before and after Red Sea attacks and Daily Transit Volumes graph.

Climate change is impacting the Panama Canal with worryingly low water levels. The Panama Canal Authority has reduced daily transits from an average of 36 to 22, with plans for further reductions to 18 per day.

Impact on emissionsThe rerouting of container ships means increasing speeds to cover longer distances. For example, accelerating from 14 to 16 knots increases fuel use per mile by 31%. Going the long way round via the Cape of Good Hope suggests a 70% increase in greenhouse gas emissions for a round trip from Singapore to Rotterdam.

Container freight rates on Asia–Pacific to Europe routes have risen sharply since November 2023. A record weekly spike of $500 was observed in the last week of December 2023. Average container shipping spot rates from Shanghai in early February 2024 more than doubled – up by 122% compared to early December 2023. The rates from Shanghai to Europe more than tripled, jumping by 256%. Source: UNCTAD

Shipping costs and diseconomies of scaleThe rerouting of container ships will mean that some companies will have increasing costs and diseconomies of scale. As a company increases in size there are returns to scale which refers to the change in output achieved by the firm as a result of a proportionate change in all inputs – e.g. land, labour, capital and enterprise. This can be: 

• Increasing returns: where output increases at a proportionately faster rate than the increase in factor inputs. Economies of Scale

• Constant returns: where output increases at a the same rate as the increase in factor inputs. Constant Returns to Scale

• Decreasing returns: where output increases at a proportionately slower rate than the increase in factor inputs. Diseconomies of Scale

Diseconomies of scale becomes apparent when there are decreasing returns reflected in an increase in unit costs and the average cost.

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