Shipping doldrums

Ahmed Abdel-Hafez and Niveen Wahish, Tuesday 16 Jan 2024

Houthi attacks on ships sailing through the Red Sea are disrupting shipping, and the Suez Canal is feeling the brunt, write Ahmed Abdel-Hafez and Niveen Wahish

Shipping doldrums


QatarEnergy, a major global exporter of liquefied natural gas, announced this week that it had stopped sending tankers via the Red Sea in the wake of Houthi attacks on passing ships.

The Qatari company is not the first to halt its shipping in the Red Sea. Since 2 January Maersk stopped all vessels bound for the Red Sea and Gulf of Aden in light of the ongoing developments in the area. Likewise, the German company Hapag-Lloyd has diverted its ships around the Cape of Good Hope since late December, saying the situation “remains too dangerous to transit the Suez Canal”.

The Houthis, a rebel group controlling parts of Yemen, said their attacks were a reaction to Israel’s war on Gaza and that they are aiming at blocking Israeli ships from passing through the Red Sea.

But this does not bode well for the Suez Canal, one of Egypt’s main hard currency earners. Osama Rabie, chairman of the Suez Canal Authority, said on 11 January that canal revenues were down 40 per cent since the beginning of the year compared to the same time last year. Speaking on television, Rabie said 544 vessels passed through the canal since the beginning of the month compared to 777 last year. The Suez Canal brought in a record $9.4 billion in fiscal year 2022-23.

Reduced passage because of the risk of attacks causes vessels to deviate around the Cape of Good Hope, increasing the cost of moving cargo and the time for products to reach their destination, noted Gabriel Fuentes, assistant professor at the Norwegian School of Economics. The Cape of Good Hope is around 16,000 kilometres longer than sailing through the Suez Canal. The most profound impact of the current crisis, according to Fuentes, is seen in the disruptions to the global supply chain. This is particularly troublesome for companies reliant on “just-in-time” inventory systems or those that need continuous restocking, he told Al-Ahram Weekly. “Any instability in the Red Sea not only affects shipping costs and timelines but also has a ripple effect, disrupting businesses and economies worldwide,” Fuentes said.

All this will make itself felt in the end product to consumers. According to Fuentes, shipping companies which opt to pass through the high-risk area will bear increased insurance costs due to the heightened risk.

Because the area south of the Red Sea has been labelled dangerous, and ships fear being hit by mistake, insurance premiums spiked by 250 per cent and sailors and seamen are demanding higher pay as well, Mohamed Ibrahim, a professor of shipping economics and logistics, told the Weekly.

“These additional costs are often transferred to the consumer,” said Fuentes. Meanwhile, ships that reroute around the Cape of Good Hope will consume more fuel, leading to a surcharge for the extra fuel consumed.

For the moment, the impact on container shipments has been somewhat muted, Fuentes said, primarily because during this time of year shipments are traditionally fewer. And the same goes for oil tankers travelling from the Middle East to Europe, he said. “The peak season typically arrives around September just before Europe’s winter begins,” Fuentes said, adding that during that period the pressure to use the Suez Canal increases significantly, and for many companies, avoiding this route is not a feasible option.

It is critical that by the time of these seasonal peaks, conditions are more secure, ensuring the safety, not only of the cargo, but more importantly the seafarers operating the vessels, Fuentes stressed.

Ibrahim suggested that to avoid being targeted, the data of the traversing ships is announced, including their flag, cargo, and destination. This prevents them from being targeted by mistake, he pointed out.

Military action in this region was not effective in the past and, therefore, it is not a solution, Ibrahim said. In fact, the Houthis could retaliate by targeting other regional borders which would only broaden the conflict in the region, he said. The solution must be diplomatic, Ibrahim stressed.

US and British military forces launched dozens of air strikes across Yemen on 12 January in retaliation for Houthi attacks.

Military activity in the area likely forms a part of the solution, providing a sense of security and stability to this important maritime route, said Fuentes, adding, however, that the situation requires continuous monitoring and adaptation.

Emad Al-Saei, a logistics and shipping expert, suggested that shipping companies hire officers to accompany the ships at risk to protect them and possibly have naval ships accompany the vessels.

Al-Saei said to solve the root cause of the problem, military intelligence action is needed but that it would be very complicated as across the waters from Yemen there are several military bases in Djibouti, including French, Japanese, Chinese, US and Italian bases.

Wael Kadoura, a maritime shipping expert and former board member of the Suez Canal Authority, suggested offering discounts and freezing any increase on canal tariffs to offset the hike in insurance premiums.

Kadoura stressed that it was important for the authority to stop depending on canal tariffs as the main source of income and that it needs to partner with global companies to offer more services.

Amr Al-Samadoni, a member of the Chamber of Logistics, believes the crisis will eventually end. All stakeholders in global trade will not want the situation to continue because it will mean more inflation. During Covid-19, the cost of transporting a 40-foot container from Asia to east of the Red Sea reached between $16,000 to $18,000, compared to $2,500 before the pandemic. A few months ago, the cost of shipping began to cool down close to the prices prior to the pandemic, Al-Samadoni said, but increased again to $6,000 as the targeting of ships began.

* A version of this article appears in print in the 18 January, 2024 edition of Al-Ahram Weekly

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