Enterprise explains: How is climate change impacting trade routes? (Part I): Climate change and trade have increasingly been making headlines together over the past few months, as rising sea levels and droughts impact key trade routes across the globe, including most notably the Panama Canal. In the first part of this two-part series, we’re looking at what the biggest threats of climate change are to trade, and what trade routes and ports are the most vulnerable.

Rising global temperature and sea levels have an impact both on shipping routes and global value chains , like agriculture and manufacturing, according to the Center for Economic Policy Research(CEPR). Exports of agricultural products and light manufacturing from poor countries have been found to decline at an average rate of 2-5.7% in response to every 1°C rise in the country’s temperature, CEPR notes.

Harsh weather conditions are also bad news for ships: Out of 38 vessel losses in 2022, eight were directly caused by extreme weather, Allianz said in its latest safety shipping review (pdf).

Climate change also presents a direct threat to the operation of ports due to their locations along open coasts and in low-lying deltas, according to UNCTAD, which notes threats like storm surges, rising sea levels, waves and winds, and flooding, as well as tectonic events as just some of the climate hazards that can impact ports.

The latest victim: The Panama Canal. The canal — which handles around 6% of global maritime commerce — directly depends on the availability of freshwater for the passing of ships and is therefore highly vulnerable to changes in precipitation patterns and drought. The Canal authority has had to impose restrictions on the largest ships passing due to falling water levels in nearby lakes. The restrictions include slashing the tonnage allowed on vessels, and decreasing draft lengths allowed through the canal, according to the news outlet.

How important is the canal to global trade? The canal provides a relatively inexpensive passageway for vessels that pass through it, 30% of which are Panamax vessels. The canal reduces time, costs, and carbon emissions, and its strategic location binds trade routes and global markets in Asia, Europe, North and South America, according to canal data (pdf).

How it will impact volumes + traffic: The draft length limit alone may reduce the tonnage of some container ships by 40%, Asharq Business cites Director of Ocean Freight at Flexport Freight Forwarding Services (Linkedin) as saying. The canal faced delays of approximately 15-19 days per vessel in the first week of August, on the back of the lower water levels. The restrictions also mean that shipping companies may have to split their heavy load into two containers, as opposed to one, which could cost users of the canal an additional fee of USD 1.5k per container, Everstream Analytics John Davis told Asharq.

This also drives up shipping costs: The shortage of water is leading to higher fees imposed on vessels — ranging between USD 300-500 per container — to mitigate the impact of new restrictions, Asharq writes.

Volume restrictions + increase in fees = less ships passing through: The combination of these factors will lead to less traffic in Panama in the foreseeable future, Davis said.

Low rainfall is also reducing water levels in Europe’s Rhine River and disrupting transport in the waterway , Gibson Shipbrokers said in a recent tanker report (pdf). Low water levels in the river, which is used for cargo transport and fuel distribution, is causing draft restrictions and has reduced quantities of cargo on barges. Cargo vessels are restricted to hauling 40% less than they usually carry. While this is common around this time of year, the report notes that such disruptions are expected to become more frequent due to climate change.

Stakeholders are scrambling to adapt: Freight operators are starting to revamp fleets to allow them to navigate the shallower water, Bloomberg reports. German chemicals giant BASF is rerouting its logistics to trains and trucks, while German plastic manufacturer Covestro could be shifting some of its production to Belgium.

In our neck of the woods, the Suez Canal is not immune: The Suez Canal, one of the world’s most important trade routes, carrying 12% of global trade and 30% of global container traffic, is also susceptible to climate vulnerabilities, according to a report by risk and strategy firm Marsh Mclennan. Threats include the increasing incidence of sandstorms, as a result of extreme heat, which can impact visibility levels and an increased need for dredging due to sand deposition, the report said.

Confluence is the bigger risk: Becausethe Suez Canal is susceptible to a number of climate change impacts, the risk of confluence events — where multiple events occur simultaneously — is heightened, the report said. The Ever Given incident, where the ship ran aground in the canal in 2021 — could have also been a result of a similar confluence event, the report notes, adding that temperatures of 43.6°C were recorded in Luxor, while a sandstorm preceded the incident.

Some trade routes are also opening up on the back of climate change: Based on global warming projections, the retreat of Arctic Sea ice will soon make the Northwest Passage, which runs through Russia’s northern flank, viable for shipping. The route is currently being used mostly to ship hydrocarbons, and only operates nine months of the year due to the thick ice covering most of the route during winter months, but is expected to become a year-round trade route in 2024 as the arctic warms.

The impact of the route: The development of this route comes as Russia’s key objectives as a competitive strategic national transport artery for use of transport between Europe and Asia. This route slashes seven days off the 23 days it currently takes to sail from the North American east coast to the Bering Strait via the Russia-hugging Northern Sea Route.

Some companies are already planning to use the northern sea route’s viability in 2024: Russian natural gas producer Novatek plans to launch year-round Arctic to Asia voyages via the Northern Sea Route (NSR) in 2024.

STAY TUNED for part two , where we unpack what this means for global trade routes and what countries and shippers around the world are doing to mitigate the impact.