What the Canal reopening could mean for SA businesses

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DUDUZILE RAMELA: Security risks in the Red Sea have led to a risk-off appetite on the part of a number of businesses. However, the reopening of one of the most critical trade routes, the Bab-el-Mandeb Strait, is sending positive signals, though cautiously, with Asia-Europe container traffic sailing  via the Cape of Good Hope. And now with the reopening of the Suez we look at what this could mean for South Africa and its businesses.

Vernon Sinden is head of logistics at Investec Business and Commercial Banking. Thank you very much, Vernon, for your time this morning. Why is the reopening of this canal unlikely to deliver immediate cost savings?

VERNON SINDEN: Firstly, good morning to you and your listeners. Thanks for letting me talk a little bit about what’s happening in the market. I think the reopening is a misperception. The reopening of Hormuz [Bab-el-Mandeb Strait] is not a full reopening.

Only a few shipping lines are, starting to re-look at opening there. For example, CMA CGM  is starting to trade through. We know that Maersk is going through now. MSC is also starting to go through. So it’s not a full reopening, and we won’t see – in the short term, at least – that these shipping lines will stop going around the Cape of Good Hope. At  least for now.

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However, it’s mostly from Asia to Europe and vice versa, and it’s very, very much commodity driven. You’re looking at oil and gas, you’re looking at retail and a couple of other commodities. So I think that’s what’s really driving it – obviously the economy.

And from a South African perspective, we have to look at how it’s really going to influence us.

In the short term, if you’re looking at the at the rate levels, at least it’s not going to affect the rate levels in in the short term.

And if you had to compare last year versus this year, there is a significant difference.

DUDUZILE RAMELA: Tell us about that difference and that gap:  just how big is the difference?

VERNON SINDEN: Yes. If you had to compare, last year a 40-foot tank container from Shanghai to Durban, it was around $4 583 on average. Now, we’re talking just under $4 000 on average, and that’s a R20k difference in rand value.

So, so this year at least, the rates have dropped a little. But again, every year we expect this. At this time of year when it comes to peak season we’re looking at supply and demand out of the Far East coming into South Africa for various reasons.

DUDUZILE RAMELA: You mentioned that this waterway is partially open so traffic will be diverted via the Cape of Good Hope. That’s what we’re understanding from this; still not as much in terms of volume, but there will be some traffic. So there’s still opportunity for South Africa.

VERNON SINDEN: Yes. From a South African perspective how does it influence us? It indirectly influences us because if there’s a shortage of equipment – and when I say a shortage of equipment, that’s specifically like 40-foot and 20-foot containers – that’s how it influences us.

And then sailing schedules from the shipping lines. So, the faster that the shipping lines route via the Strait of Bab-el-Mandeb, that means that there should be a lot more schedule reliability and a lot more stability in the market in terms of the guarantee of us getting our cargo on time.

At the moment there are a lot of issues in the market in terms of re-routing. And if the shipping lines decide to go via the Strait of Bab-el-Mandeb again, how that’s going to influence us is that there will be fewer delays, of course, in our major trade lanes from the Far East into South Africa.

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DUDUZILE RAMELA: What should importers be planning for as the global volatility continues to evolve? We’re hearing that the strikes between the US and Iran haven’t stopped; in fact, they’ve picked up and are being elevated.

VERNON SINDEN: Yes. I think the message is quite clear for South African importers. The recommendation is to build buffers into your lead times, at least from various trades. And it also depends on where you’re importing from.

And then use more than one shipping line or carrier or routing option for critical cargo.

And just review your insurance or war risk as well. And then for transshipment ports, really look at your sailing schedules and where you’re transshipping from.

And checking which carriers have unexpected surcharges I think is quite important, because surcharges are coming up, depending on the Incoterm [international commercial term]. And then the model of the trade lane.

Read: The Iran war is exposing SA’s dependency on diesel

DUDUZILE RAMELA: Have you looked at a scenario where we see a gradual shift away from the Cape of Good Hope, and what this could mean for South Africa?

VERNON SINDEN: Yes, of course. If we had to predict that that had to happen tomorrow, as an example –  there’s no perception – but South Africa receives a major economic windfall from vessels sailing around the Cape of Good Hope. And the reality is more nuanced.  For ships passing around South Africa, we have missed the boat – no pun intended – because what we see is that these vessels could have refuelled, could have needed repairs from that perspective.

However, if that had to stop completely, again – it’s just around the sailing schedules –  in the schedule reliability we would see a massive improvement there in terms of capacity in the market, I believe. And then, just equipment availability as well, with 20-foot and 40-foot containers being available. And there’ll be more certainty in terms of our lead times.

Read: Hyundai reroutes ships around the Cape as Hormuz tensions disrupt supplies

DUDUZILE RAMELA: I wonder if you’ve looked at other countries right along this belt – the southern tip of Africa – that have actually prepared to catch the sales instead of letting the boats go, if you will, as a result of the factors that you speak of. Just some of the issues that are not put together or logistically that we have not actually sorted out. Which countries are seeing a boost from this traffic?

VERNON SINDEN: It’s very, very difficult to say. I don’t want to give a specific country because it’s very fluid. There’s disruption. One thing for certain is that with supply chain and logistics every year there will be some sort of disruption – if it’s going to be weather, if it’s going to be shortage of fuel, if it’s going to be war risk.

So, it all depends on the trade lane and the route, where it’s coming from, which country can potentially benefit from these types of disruptions.

But I don’t believe any country would have benefitted from it directly. The only people that benefit really, to be honest, are the shipping lines because of the cost of shipping. Obviously we have seen significant increases in shipping costs because of all these disruptions.

DUDUZILE RAMELA: Fair enough. Speaking of weather, El Niño is said to be a Godzilla El Niño. I know this because my mom keeps reiterating that –  stocking up and making sure that she’s prepared for Doomsday.

What are the preparations for that, if you will, and what are the projections in terms of the impact that this might have on supply chains?

VERNON SINDEN: Yes, it’s too soon to tell. It’s really too soon to tell. But the biggest storyteller here for us is history, what we’ve learned in the past – when we’re talking about floods in certain regions, when we’re talking about really bad weather in certain ports, for example Cape Town and Durban where we’ve experienced floods before.

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So I think it’s not foreign to us here, where we’ve experienced really bad or unpredictable weather. It’s just how do we plan around that? What can we do? The thing is, there are  a lot of options in terms of moving cargo.

Of course, if you are sea freighting cargo into South Africa, that’s one thing. But what we have seen a major shift in is that a lot of clients are moving ocean freight to air freight, because of the unpredictability in the market and weather conditions and so on. So, they’re ordering ‘just-in-time’. I think that’s what we might potentially see more of.

So if there are any major weather disruptions on the water, or near main ports, we’ll see that importers will convert their shipping mostly to air freight to for just-in-time.

DUDUZILE RAMELA: Fair enough. Thank you very much for your time this morning. Vernon Sinden is head of logistics at Investec Business and Commercial Banking.

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