China, Russia see Suez Canal blockage as an opportunity

The weeklong blockage of the Suez Canal — coming as it does on top of a year of escalating ocean freight rates for the Asia-European trade, port congestion in both regions and shipping delays — has inevitably prompted debate about alternatives.
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Suez Canal, then and now

Shipping alternatives

The alternatives, though, sound at first sight even more outlandish.

The first plays into China’s Belt and Road program and involves sending containers by rail from China to Europe.
Believe it or not, the route exists.
The journey takes some 15 days to Moscow or 20 days to Duisburg in Germany, shorter than the sea voyage. However, it is historically more expensive, with 40-foot container rates in the region of $10,000 to Duisburg. Meanwhile, ocean freight rates reached $3,000 this time last year.
However, as ocean freight rates have doubled and then trebled and delays have extended, the rail route has gained favor. Volumes doubled in January and February this year, long before the Suez Canal blockage this month and delays lengthened further.
The rail route will no doubt gain traction if ocean rates remain elevated. Rail holds the promise of marginal savings and a quicker transit. Long-term success will rely on economies of scale and operational improvements driving cost savings and lower rates.

The Arctic route

The second option plays not to China’s hand, but to Russia’s.
The Financial Times reported on Russia’s state nuclear corporation Rosatom’s promotion of the Arctic northern sea route from Asia to Europe as an alternative to the longer and congested Suez-Mediterranean route.
Why would Rosatom be the body to promote such a route? Because you still need a nuclear-powered icebreaker to keep the northern sea route clear.
So, for the Russians, Rosatom is in charge.
Russia sees this as the start of a long-term opportunity. Global warming has already extended the ice-free period from August to November and promises more by the end of the decade.
In so doing the 5,000-kilometer shorter Arctic route will become increasingly attractive. It will be particularly so for cargoes from northern Asian ports in South Korea, Japan and northern China.

Potential challenges for the Arctic route

But the economics of an Arctic route are not a slam dunk, a research paper on MDPI suggests.
It offers the prospect of savings in fuel costs and time.
However, it comes with consequences.
A transit fee would be payable to the Russians for navigating their waters, much like the Suez transit fees. Environmental considerations would also add to costs. Because transit would be through the Arctic, pollution would be an issue and vessel emissions more strictly controlled, impacting vessel choice and fuels.
Insurance would also be much higher — possibly 50% more, the report suggests. As such, 40% shorter does not equate to 40% cheaper.
Still, both the rail and Arctic routes do suggest alternatives exist. Both will likely feature more significantly in the years ahead, not just due to quicker transit times but because both China and Russia see geopolitical advantages in promoting their preferred options.
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