Detour

Maritime shipping is the lifeblood of global trade, underpinning most of the purchases we make. If an item isn’t locally produced – from clothes to electronics to fuel – chances are it travelled via sea vessel at some point. It's the most cost-effective and high-capacity freight option, with the International Monetary Fund (IMF) estimating that maritime shipping carries over US$14 trillion worth of goods annually.

With so much traffic, having strategic control over key maritime choke points can be incredibly lucrative. The Suez Canal in Egypt, connecting the Red Sea with the Mediterranean, handles around 15% of the world’s maritime trade and brought in over US$9.4b in 2023. Meanwhile the Panama Canal, linking the Atlantic and Pacific Oceans, was responsible for 5% of global maritime trade and US$4.9b in revenue during the same period. Annually, about 10,000 ships traverse the Panama Canal and 25,000 cross the Suez. 

However, these crucial trade routes have recently faced significant disruptions. The Panama Canal has been hit by severe droughts, though it is expected to return to full capacity by October. The Suez Canal traffic was halved due to attacks by Houthi rebels in Yemen, with no clear resolution in sight.

This has forced many vessels travelling between the Indian Ocean and the Mediterranean to reroute via the Cape of Good Hope in South Africa. A detour of this scale hadn’t been seen since the Suez Canal’s completion in the 1860s, and it adds considerable time and fuel costs for ships. 

Despite these challenges, shipping companies have managed to pass the increased costs onto customers. Major players in the sector, such as Scorpio Tankers ($STNG) and Frontline ($FRO), have benefitted and seen their shares surge by over 50% in the past year. The two ETFs that invest in the sector, $BOAT and $SEA, have also jumped over 20%.

In response to rising shipping costs, the search for cost-cutting innovations has intensified. One idea harks back to ancient maritime practices: wind-powered ships with a modern twist. Advanced automated wind sails, designed to be retrofitted onto existing vessels, could potentially reduce fuel use by up to 30%. These sails have shown promise during trial voyages and could gain wider adoption if retrofit costs decrease.

Another centuries-old concept gaining renewed interest is the Arctic trade route. This could be navigated via three main passages: the Northwest Passage through Canada, the Transpolar Sea Route near the North Pole, and the Northern Sea Route along Russia’s borders to the Bering Strait. Though global warming has cleared the path somewhat, making these routes more navigable, only 1,700 ships currently pass through the Arctic each year. 

Russia aims to increase traffic on the Northern Sea Route tenfold by 2035, but this could prove difficult given geopolitical tensions and sanctions resulting from its conflict with Ukraine. This is similar to how airlines are avoiding Russian airspace, which is potentially reviving Alaska’s Anchorage airport as a major airline hub – reminiscent of its strategic importance during the Cold War. 

These developments underscore that while trade routes are influenced by geography, they remain deeply intertwined with the political landscape.