Suez Canal Revenue Hits A Snag Amid Houthi Attacks

September 26, 2024

 

Inaugurated in 1869, the Suez Canal, which connects the Red Sea and the Mediterranean Sea, has always been essential for Egypt’s economy, consistently ranking among the top sources of government revenue, according to the Central Bank (CBE).

Since December, that income has been declining as a result of Yemen-based Houthi rebels firing on Israel-affiliated freighters crossing the Red Sea’s southern strait (Bab el-Mandeb), demanding an end to the war in Gaza.

That has led freighters to seek alternatives. A July note from Maersk estimated that freight traffic on the Red Sea has dropped 66% since January 2022, when freight companies began diverting their ships from the route.

In July, state-owned Ahram English reported revenue from the Suez Canal dropped 23.4% in the fiscal year (FY) 2023/2024 compared to a year earlier. That decrease came as the number of freighters using the canal declined 37.7%, carrying 33.3% less cargo than in FY 2022/2023.

Such worrisome developments could last a long time, as disruptions in the Red Sea are no longer limited to the Houthis. “Multiple wars … in the Horn of Africa … are causing deep instability … contributing to the crisis in the Red Sea,” said a July report from the US Institute of Peace (USIP), a Congress-funded body.

The Maersk note said instability “underscores the need for businesses to develop strategies to enhance supply chain resilience … to better protect themselves from disruptions in [the] future.”

Hitting hard

Aside from the 23.7% decline in foreign currency revenues from crossing the Suez Canal, disruptions to the Red Sea trade route are hurting Egypt’s exports.

A March paper from the US Department of Agriculture (USDA) said: “Before the Houthi attacks, most Egyptian … exports transited through the Red Sea, whether directly across to the Port of Jeddah for the Saudi Arabian market or through the Bab al-Mandab Strait for other Middle Eastern and Asian markets.” Now, they sail east toward the Gibraltar Strait and around the Cape of Good Hope toward Asia’s southern shores.

That will hurt exports of perishables, in particular. A case in point is Egypt’s citrus fruit exports, which USDA forecasts will decline 12.5% this year, revising earlier projections of 25% growth. The longer Cape of Good Hope route results in shorter shelf-life at destinations.

That will significantly impact Egypt’s foreign currency inflows. According to the CBE, the Asian (Arab and non-Arab) and Australian markets accounted for more than a third of Egypt’s exports in FY 2023/2024.

Meanwhile, Egyptian products that reach Asia will be noticeably more expensive. “Longer routes mean more ships are needed to transport the same amount of cargo,” said the July note from Maersk. That is because freighters need to allocate more space for additional fuel and resources for crews on extended journeys, which increases the transportation cost per shipped unit.

Further raising transportation costs are “capacity shortages with ships tied up on extended voyages,” Maersk said. Available capacity was down between 15% and 20% in the second quarter of 2024.

Rising tensions

Disruptions in the Red Sea are flaring once more. In July, Israel – at the Red Sea’s northern tip – exchanged missile and drone attacks with the Houthis at the southernmost tip for the first time since October.

Such are a significant threat for freighters, increasing their exposure to missile and drone attacks for the length of the Red Sea route. The Israeli-Houthi skirmish could also expand geopolitical tensions if attacks violate neighboring nations’ sovereign waters and space or, worse, accidentally hit targets there.

That escalation comes as the US Navy has continued to confront the Houthis since December, “hitting [their] launch sites and batting down incoming drones and ballistic missiles,” reported ABC in July. That further increases the risk for freights traversing the Bab al-Mandab Strait.

Permanently risky?

USIP said that while Yemen’s Houthis rebels are “at the center of the storm,” broader conflicts across the Horn of Africa “could bring unprecedented chaos [threatening] a free and open Red Sea.”

Sudan, with its 853-kilometer (530-mile) Red Sea shoreline, significantly influences freight traffic. The country is on the verge of a civil war, and the Port of Sudan is the only viable gateway for landlocked net oil exporters South Sudan and Chad, as well as the diamond-exporting Central African Republic. An unfriendly leadership in Sudan could cut off those nations’ access to the Red Sea, further reducing traffic.

Meanwhile, landlocked Ethiopia’s efforts to secure permanent ports in Djibouti (which shares control of the Bab El Mandeb Strait with Yemen and Eritrea) and the Gulf of Aden in Somaliland, a breakaway region whose sovereignty is recognized only by the government in Addis Ababa, could make it harder for cargo affiliated with unfriendly nations to use the Red Sea.

Eritrea, with a Red Sea shoreline of nearly 3,400 kilometers, also is politically volatile. The country is “on the verge of a change in political leadership for the first time in 30 years, with few viable mechanisms for managing succession,” the USIP report said.

Amplifying conflicts in the Horn of Africa are non-African countries’ agendas for this region, USIP said. The list includes the UAE, Iran, Qatar, Saudi Arabia and Turkey.

Those conflicts are unlikely to recede soon. “For four years, geopolitical competition between China, Russia and the United States has thwarted any serious UN Security Council actions on the wars in Sudan and Ethiopia,” said the USIP. “Power brokers at the African Union [are] doing little of substance to address [cross-border] conflicts.

Finding options

Gordon Feller, a member of the Strategic Advisory Board of Parsons Corp., a defense and intelligence consultancy, wrote on the Tomorrow’s Affairs platform in April that shipping companies have several alternatives to traversing the Red Sea and Suez Canal.

Aside from the Cape of Good Hope route, the Panama Canal is one alternative. But it faces temporary problems as authorities there “reduced the number of daily ship crossings due to a severe drought impacting water levels,” Feller said.

Land freight is another alternative. One popular option is the “China-Europe Railway Express, [which] Chinese exporters are increasingly shifting to,” Feller said. “This intermodal option has seen a 30% increase in volume compared to previous years.” It is faster but more expensive than sea freight.

Lastly, Feller said air freight is the fastest and likely most secure option as it usually only enters sovereign spaces of trading nations. However, it is expensive, “often five to six times higher … than ocean shipping,” he said.

Despite the high cost, air freight is increasingly popular. “Airlines and freight forwarders have reported spikes of 20% [to] 30% in air freight volumes on routes impacted by the Red Sea blockages,” Feller said.

However, it is not a feasible long-term solution as “the air cargo industry has limited additional capacity to absorb large-scale modal shipping shifts.”

Having multiple viable choices to move products to target markets is essential to sustain long-term business success. “No one knows how long it will take for the effects of the Red Sea shipping disruptions to ease,” Maersk’s report said, “or how long a return to ‘normal’ could take.”

This article first appeared in September’s print edition of Business Monthly.