The Six Choke Points That Can Upend Global Trade

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The Six Choke Points That Can Upend Global Trade

By Alaric Nightingale | Bloomberg Businessweek | May 23, 2024

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Whether it’s shoes, TVs or steel bars, there are vast economies of scale to be reaped from concentrating production in one part of the world, as long as you can ship goods safely and cheaply to where they’ll be consumed. The pandemic stress-tested that proposition.

But now global maritime commerce is facing the biggest confluence of risks in generations: wars in Ukraine and Gaza, China’s tense standoff with its biggest trading partner, the US, and disruption to key waterways because of climate change.

Drone and missile attacks by Yemen’s Houthi militants on cargo ships traveling through the Red Sea—the shortest route between Europe and Asia—are a case in point. Most container ships are being rerouted around South Africa’s Cape of Good Hope, and shipping rates have soared as a result, complicating the task of central banks in Europe and the US that are in the difficult last mile of guiding inflation back to target. Fitch Ratings estimated in February that the trouble in the Red Sea was likely to increase prices of US imported goods by 3.5 percentage points by the end of 2024.

Bloomberg News has identified six “choke points,” essential shortcuts that handle a disproportionate share of maritime trade, along with the risks they face, using data from Clarkson Research Services Ltd., a unit of the world’s largest shipbroker.

1. Bab el-Mandeb.  Share of global seaborne trade volume 8.7%.  Container, Cars, Oil product, and Crude Oil are the major trade categories.  Share of global seaborne trade volume through choke point is around $2 trillion.  Nowadays, navigating the 18-mile-wide waterway, the most important transit point to and from the Suez Canal and which handles more than 15% of all seaborne trade by value, is a perilous undertaking for different reasons. Since mid-November, the Iran-backed Houthis, who control northwestern Yemen, have launched a string of attacks on shipping that have included firing drones and missiles. As a result, most container lines have chosen to sail around Africa instead, adding almost 6,000 miles to the journey, or a fortnight of travel time. 
2. Strait of Malacca.  Share of global seaborne trade volume is 23.7% – Crude oil, Propane, Cars, and Dry Bulk are the major trade categories and trade in value is $2.8 trillion in value.  About 94,000 ships a year come through, many of them stopping at Singapore either to deliver cargo or to refuel. That turns the island state’s waters—and the approaches to them—into a vast parking lot, with huge tankers crossing paths with fishing vessels, raising the risk of collisions. Ships often need to slow down through the strait, which makes it easier for pirates to board them. What’s more, Indonesia and other nearby locations are known for volcanic activity, raising the prospect that at some point an eruption could force ships to divert course.
3. Strait of Hormuz.  Share of global seaborne trade volume 11.1% – Crude oil, Propane, Oil products, and natural gas are the major trade categories and trade in value is $1 trillion in value.  Take the price of oil, and double it. That’s probably a conservative short-term assessment of any scenario in which Tehran follows through on threats made down the years—including in 2005, in 2008, in 2011 and in 2019—to close the Strait of Hormuz. 
4. Danish Straits.  Share of global seaborne trade volume 3.9% – Crude oil, Oil products, and dry bulk are the major trade categories and trade in value is $600 billion.  About 45% of Russia’s seaborne oil exports must pass near the coastline of Denmark on their way to international markets. The waters here are relatively shallow and can be treacherous in bad weather.
5. Turkish Straits.  Share of global seaborne trade volume is 3.1% – Oil products, Crude oil, Chemicals and Dry bulk are the major trade categories and trade in value is $300 billion.  Russia is also a major user of Turkey’s narrow Bosporus and Dardanelles shipping lanes to move its oil and other commodities from ports in the Black Sea.  Fog-ridden and sometimes beset by strong currents, the Bosporus and Dardanelles are prone to shipping mishaps. Wildfires also forced the government to close the straits for two days in 2023 to allow emergency services to reach affected areas.
6. Panama Canal.  Share of global seaborne trade volume is 3.0% – Propane, Containers, and Cars are the major trade categories and trade in value is $600 million.  The Panama Canal is fed by a vast artificial lake—Lake Gatún—that allows the locks below to fill so ships can cut between the Atlantic and Pacific oceans. Climate change has lowered Gatún’s water levels to the point where the authority that oversees transits has had to curb how many vessels can pass. 

3 key takeaways from the article

1. Whether it’s shoes, TVs or steel bars, there are vast economies of scale to be reaped from concentrating production in one part of the world, as long as you can ship goods safely and cheaply to where they’ll be consumed. The pandemic stress-tested that proposition.
2. But now global maritime commerce is facing the biggest confluence of risks in generations: wars in Ukraine and Gaza, China’s tense standoff with its biggest trading partner, the US, and disruption to key waterways because of climate change.
3. Bloomberg News has identified six “choke points,” essential shortcuts that handle a disproportionate share of maritime trade, along with the risks they face.  These choke points are: Bab el-Mandeb, Strait of Malacca, Strait of Hormuz, Danish Straits,  Turkish Straits, and Panama Canal.  Each faces a unique set of overlapping problems that could quickly turn an unforeseen incident into a more serious crisis.

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Topics:  Global Trade, Shipping, Trade Routes, Risk