Suez Canal Crisis Navigate Perilous Waters Amidst Risk and Opportunity

What shippers should know to mitigate disruption by Alejandra Salgado. Using alternative routes like the Cape of Good Hope not only means longer transit times but higher freight costs. Here’s what shipping experts had to say.

In the heart of global trade, the Suez Canal stands as a vital artery, yet recent events have cast shadows of uncertainty. Amidst potential risks and opportunities, stakeholders brace for impact.

Explore the intricate dynamics shaping the fate of the Suez Canal and its implications for global commerce.

Genres

Business, Logistics, Maritime, International Relations, Geopolitics, Economics, Transportation, Risk Management, Supply Chain, Environmental

The article delves into the critical juncture facing the Suez Canal, highlighting the recent disruptions and their far-reaching implications. From logistical challenges to geopolitical tensions, stakeholders navigate a complex landscape fraught with risk and opportunity.

Review

Salgado adeptly captures the multifaceted dimensions of the Suez Canal crisis, offering valuable insights for businesses, policymakers, and global citizens alike. The article’s comprehensive analysis provides a nuanced understanding of the situation, making it essential reading for anyone vested in international trade and maritime affairs.

Recommendation

With the advent of Houthi attacks on ships traversing shipping lanes in the Red Sea to the Suez Canal, some major carriers rerouted their cargo ships by way of South Africa’s Cape of Good Hope. Carriers that take this alternate route suffer additional costs and transit times. The trip from Asia to Europe around the Cape is 3,500 kilometers (2,175 miles) longer than the journey through the Suez Canal and costs an additional $500,000 to $1 million in fuel, as well as other expenses, such as insurance. As a result, delivery will be slower, shippers must hold inventory longer and shipping rates will inevitably increase.

Take-Aways

• Cargo shippers are diverting their vessels from the Red Sea and the Suez Canal due to attacks by Houthis.
• Taking alternate routes by way of South Africa’s Cape of Good Hope incurs significant additional time and costs.
• Shippers moving goods from Asia to Europe need to look carefully at their insurance policies.

Summary

Cargo shippers are diverting their vessels from the Red Sea and the Suez Canal due to attacks by Houthis.

Cargo ships going from Asia to Europe typically use the transport route from the Red Sea through the Suez Canal and then to the Mediterranean. The Suez Canal averaged 68 ships daily in 2022 when 23,851 vessels passed through.

“While an international operation is being coordinated to help secure safe transit for commercial vessels, logistics managers now find themselves assessing contingency plans until the situation is resolved.”

However, Houthi militants in Yemen started launching attacks against cargo ships in the Red Sea in 2023, increasing the risk of going through the Suez Canal. As a result, some major carriers (MSC, Maersk, and others) stopped using the Canal and began rerouting their European-bound ships by way of South Africa’s Cape of Good Hope.

Now, a coalition called Operation Prosperity Guardian is bringing together multiple countries – including the United Kingdom, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles and Spain – to address security challenges in the southern Red Sea and the Gulf of Aden jointly.

“Any commodity that can be shipped using alternative modes, such as air, may be safe from severe disruption.”

The coalition’s goal is to ensure freedom of navigation for vessels from all countries and to bolster regional security and prosperity. In the meantime, logistics managers are making backup plans.

Taking alternate routes by way of South Africa’s Cape of Good Hope incurs significant additional time and costs.

Going around the Cape of Good Hope and bypassing the Red Sea and the Suez Canal costs extra time and money. Traveling from Singapore to Rotterdam via the Cape – rather than the Suez Canal – adds some 3,500 kilometers to a container ship’s voyage. Because of the extra time this takes, shippers must keep inventory on their books for up to an extra month. And, the fuel used to round the Cape can cost up to an additional $500,000 to $1 million.

“Longer transit times are expected in the medium term…‘How much depends on what the vessels’ original routing was and when the vessel diverted. Keep in mind that some of these vessels were already diverted away from the Panama Canal.’” (Nathan Strang, director of ocean freight, US Southwest and SMB at Flexport)

Shippers sending goods from Asia to the US East Coast have the alternative of using sea freight to the US West Coast and then moving their goods by truck and rail to the East. Another available option, which could expedite cargo transit, is “sea-to-air.” In this scenario, cargo goes by ship from Asia, say Singapore, to Dubai and then continues by air. The sea-to-air option decreases delays and is more cost-effective than direct air freight. Given the situation in the Red Sea in the spring of 2024, rates for freight transport between Asia and Europe and also Asia and the US East Coast are likely to increase.

Shippers moving goods from Asia to Europe need to look carefully at their insurance policies.

The Suez Canal is the pivotal route for container ships transporting goods to Europe from Asia, the Middle East and India. Indeed, the route from Asia to Europe via the Suez accounts for some 30% of the world’s container ship traffic. The Asia to Europe shipping route will be the one most affected by problems with crossing the Suez Canal, the shortest available route, and for that reason fees for container ship transport to Europe will increase. However, because the industry has “excess shipping capacity available to address the disruption,” expert Judah Levine, head of research for Freightos, reports that the increase will be less than it was in 2021 when the Suez was blocked during the pandemic.

However, a scarcity of containers may lead to increased container costs for European recipients of goods from the Middle East, India, Southeast Asia and China. This issue also could affect US imports of clothing, toys and electronics from Asia and US East Coast exports of grains and fuel.

“You do risk losing your cargo, but I would also read insurance policies extremely carefully to see if you are covered in a situation where the risk is this obvious…I would not be surprised, as some might find it impossible to get their cargo insured at all.” (Lars Jensen, CEO and partner, Vespucci Maritime)

Overseas shippers from Asia to the American east coast are already mindful of continuing restrictions on passage via the Panama Canal due to drought. Many carriers will continue to use the Red Sea-Suez route, but until the situation is stabilized, they run additional risks and must consult their insurers about whether they cover hazards like Houthi attacks. It’s likely that they don’t. Indeed, reports indicate that shippers who decide to risk sailing from the Red Sea to the Suez Canal under the conditions prevailing in early 2024 might find it impossible to insure their cargo.

About the Author

Alejandra Salgado is a staff reporter for Supply Chain Dive. Before joining Industry Dive, she interned at CNBC, Bloomberg and Long Beach Local News.