The Suez Canal assumes the responsibility of a geographical choke point with utmost economic importance. Twelve percent of global trade flows through the strait, which in terms of container traffic is even higher at 30%, and those high stakes are in danger as of recently. Attacks by Yemen’s Houthi rebels have deterred cargo ships located in the southern part of the Red Sea from sailing up the canal and forced them to opt for the longer route around Africa instead.
At 192 km long, the canal is the quickest possible route between Asia and Europe. During the first six months of this year, it facilitated the passage of around 9.2 million barrels of oil per day, a figure that represents about 9% of global demand. At full capacity, it can hold over three-fifths of the total world fleet of tankers.
All of this is in jeopardy at the moment, however, due to increased attacks by Houthi rebels. The Iran-backed group is in control of the Bab Al-Mandeb strait at the southern tip of the Red Sea and has intensified its aggression on all ships passing through, regardless of origin or destination. On December 15th, one cargo ship was struck by a drone, and another, the MV Palatium III, was hit with an anti-ship ballistic missile, marking the first time such a weapon was used. The militant group has claimed that it is targeting every ship “headed to Israeli ports” until food and medicine are delivered to the Gaza Strip. They have expressed complete solidarity with Palestine and used it to justify their aggressions, but most of the ships they attacked were neither Israeli nor headed to Eilat, Israel’s port on the Red Sea.
Hope remains that the situation could be resolved diplomatically. The conflict between the Houthi rebels and the joint forces of Saudi Arabia and the United Arab Emirates remains alive, and the free passage of ships through Bab Al-Mandan could become a factor at the negotiating table. However, military intervention from the USA and its allies seems like the more likely outcome as they are already all present in the region. On December 16th, an American navy vessel, USS Carney shot down 14 drones across the Red Sea while a British ship, HMS Diamond shot down another. Western nations are aware of the capabilities of their adversaries, as it is well known that the rebels possess a large arsenal of anti-ship missiles. Fabian Heinz of the International Institute for Strategic Studies has insisted on this point, emphasizing the fact that some weapons range up to 800 kilometers.
The attacks have forced over a hundred ships to redirect their transits and suspend trade through the Suez Canal. Numerous companies have withdrawn from the strait, but a handful are more significant than others. CCA GGM, MSC, Maersk, and Hapag-Lloyd all find themselves on that list and together account for 53% of global container trade. All the ships redirected around Africa towards the Cape of Good Hope will experience a delay of 12 to 20 days depending on the ship’s speed and potential port congestion.
The introduction of bunker adjustment factors (BAFs), increased transport costs, and war surcharges are anticipated according to logistics company MTM Logix. Insurance premiums are expected to rise simultaneously and overall travel expenses everywhere, not just in that region of the world are subject to hikes. Vassilis Korkidis, the President of the Piraeus Chamber of Commerce and Industry, has warned of dire economic consequences of a prolonged avoidance of the Suez Canal, comparing the situation to the ten-day closure two years ago. It is estimated that the entire four-week delay of transport cost over $6 billion per week in lost value. However, oil tankers’ revenue from fares doubled, and demand for ships increased after many were left stranded in the Canal. In the current circumstances, if the Canal was simply not used, Egypt would feel a great burden in the sense of lost revenue. The tolls paid by ships that pass through the canal are a major source of income for the Egyptian economy, and revenue from the tolls hit a record high of $9.4 billion in the first half of 2023. In comparison, Israel will hardly feel an impact from the lack of business at Eilat which only represents 5% of its trade.
All in all, this seemingly insignificant point between Africa and the Arabian Peninsula has the potential to induce major economic damage on a global scale. A solution to the issue must come soon, or the whole world will feel its consequences.
Cover Image Caption: Ships pass through the Suez Canal. Image Source: https://res.cloudinary.com/globes/image/upload/t_800X392/v1702827133/COT_Pic/shutterstock_770783020_rudp1o.jpg.
