turns the Israel-Palestine war into a global economic problem. For weeks, ships transiting the strait, a choke point in the Suez Canal, have been
under attack from the Houthis, a group of highly trained, Yemen-based, Iran-backed militants with access to an array of sophisticated naval artillery. The attacks are part of the group’s offensive against Israel’s bombardment of Gaza.
At least 10 of the world’s biggest shippers and one oil supermajor have decided to avoid the canal, a passageway for more than 20,000 ships
a year, which account for 12% of global trade, 9% of oil demand, 6% of LNG imports and 30% of container shipments. More than 300 ships have taken a detour of 6,000 nautical miles around the Cape of Good Hope this week. This has led to an increase in transit time, shipping rates and insurance premia, and threatens to send production schedules across the world awry.
ET spoke to ship owners, exporters, trade and industry bodies and insurers about the crisis. They all hope it will be short-lived, especially with the US setting up a task force to protect shipments. Many fear that, if prolonged, the crisis would destabilise shipping rates that fell just recently after reaching dizzying highs during the Covid years. It will also add to inflationary pressures that are squeezing economies across the world.
“A total of 314 vessels were diverted between December 19 and 22,” says Dominique Nadelhofer, spokesperson of Kuehne +Nagel, one of the world’s biggest freight forwarders. “A week ago, that number was 5. So the situation is very dynamic.”
However, according to a statement from the Suez Canal Authority, more than 2,128 ships transited the canal between November 19 and
December 17, and only 55 had taken a detour. Each detour around the Cape of Good Hope stretches transit time by 10-12 days. This increases costs and even the requirement of vessels. A round trip between India and Europe, for instance, takes 56 days and 8 vessels. If the trip extends to 63 days, an extra vessel will be required. The prices are inching up — Brent crude rose by 1.2% on Wednesday. Freight rates have gone up, too.
“We have seen an increase of up to 40% in on-the-spot freight rates over the last three and a half weeks,” says Christian Roeloffs, CEO, Container xChange, an online marketplace for containers. “Over the last two weeks, we have seen an uptick in prices of secondhand containers, especially in northern Europe, because the industry expects some form of tightening of supply as the region is notoriously import-focused. More containers
are arriving from China than departing again. This leads to container scarcity.”
Insurance premia are also going up. “Insurers charge vessel owners what are called war insurance premia if vessels are deployed in or near war areas. These are quoted as a percentage of the vessel value and have to be ultimately borne by shippers,” says Roeloffs. An insurer says, on condition of anonymity, that in the past, shippers had to pay a 0.5% breach or additional premium when a ship got attacked.
Nick Shaw, CEO of Londonbased International Group of P&I Clubs, says the Houthi attacks will have no impact on normal protection and indemnity insurance.
INDIA CONNECT
India’s connection with the Suez Canal stretches back to its crisis in 1956, when the country’s first prime minister Jawaharlal Nehru took the lead to mobilise global opinion to help Egypt’s president Gamal Abdul Nasser thwart an invasion from Israel, Britain and France. It resulted in an enduring
partnership that formed the foundation of the Non-Aligned Movement. In March this year, Egypt and India announced that Cairo was planning
to allot land for Indian industries in the Suez Canal Economic Zone (SCEZ).
“About 65% of India’s crude oil imports in FY2023, worth $105 billion, likely passed through the Suez Canal,” says Ajay Srivastava, founder of Global Trade Research Initiative, Delhi. “In terms of overall merchandise trade with Europe and North Africa, India’s exports and imports in FY2023 were $106 billion and $98 billion, respectively. Approximately 50% of these imports and 60% of exports, totalling a trade value of $113 billion annually, may have utilised the Suez Canal route,” he adds.
India exports low-value, containerised goods like machine parts as well as low-end textiles to Europe via the canal. According to the latest data from the Suez Canal Authority, about 9% of total cargo passing the canal in 2019 originated from or ended in India.
“A couple of our own container ships have been attacked and we have been forced to divert quite a few of our services round the Cape of Good Hope. So this is a matter of concern for us,” says Sunil Vaswani, executive director, Container Shipping Lines Association (India). “It’s unfortunate that while container shipping lines have done all they could to increase capacities and introduce new services to assist supply chains, the global scenario is making things more difficult,” adds Vaswani.
When would this end? Prahlad Tanwar, global head of logistics at KPMG, says, “The problem could continue till the next quarter.”
NOW & THEN
The last time a major disruption in the Suez Canal threw shipping and trade into a tizzy was in 2021, when a Taiwanese vessel called the Ever Given ran aground. It worsened an already severe container shortage as ships were stuck in shut-down ports across the world due to Covid-19. Global shipping rates rose by 10 times.
Roeloffs doesn’t foresee such a surge in rates now. “We don’t anticipate the price bump to last very long,” he says. He says the rerouting and longer transit times will soak up about 1.4-1.7 million vessels out of the market. That will be about 5% of total vessel capacity. However, unlike during the pandemic, the world has an oversupply of vessels now.
“We believe that in the midterm, just because of supply overhang and price pressures and, of course, measures like the international navy stepping in to protect merchant shipping, the price bump will be removed. And we will be back to the shipping rates that we had four weeks ago,” says Roeloffs.
GEOPOLITICAL SOLUTIONS
Earlier this week, the US announced a multinational task force called the Operation Prosperity Guardian, with 10 countries on board, to protect ships pass ing through the canal. On Tuesday, Prime Minister Narendra Modi and his Israeli counterpart Benjamin Netanyahu, too, met to discuss marine safety in the light of the Houthi attacks.
While India is not part of the international task force, experts say the country can play the role of a mediator, thanks to its improving relations with Iran. “India should be part of the deliberations because not only are we an affected party, we are also a large trading nation. So is China,” says Uday
Bhaskar, retired naval commodore and director, Society for Policy Studies.“If India and China want to be reckoned as credible players, both of them should use whatever influence and assets they have. Today India and China have greater access to Iran in terms of a dialogue than countries like the
US,” he adds.
