THE SUEZ CANAL BOYCOTT
HISTORY AND INTRODUCTION
One of the world’s most common shipping lanes, the Suez Canal is a sea-level waterway connecting the Mediterranean and the Red Sea and is the shortest maritime route between Europe and the lands around the Indian and western Pacific oceans.
The first canal was dug around 1850 BCE. Known by the name, the Canal of the Pharaohs, the channel was extended by the Ptolemies via the Bitter Lakes as far as the Red Sea.
Construction began in 1859 and took 10 years instead of the envisaged 6 years due to various difficulties including climatic difficulties, the cholera epidemic in 1865 and many more.
In the canal’s first full year of operation in 1870, there were 486 transits; less than 2 per day. This number rose close to 58 transits per day in 1966 and in 2018, there were 18,174 transits per day.
The Suez Canal had been incorporated as an Egyptian joint stock company with its head office in Paris.
The Canal provides a shortcut for ships traveling between Europe and Asia. Instead of traveling all the way around Africa, ships can take the Suez Canal, which is much faster and more cost-effective. However, the canal has been a topic of debate and has been boycotted by several countries due to reasons.
CURRENT SITUATION
The strait of ‘Bab-el-Mandeb’ (meaning the gate of grief in the Arabic language) located in the Suez canal in Egypt is living up to its name for the shippers and the traders across the world as it turns the Israel-Palestine war into a global economic problem. Ships passing through the strait, a choke point in the 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). Out of the major share of global trade ships (about 12%) that pass through the strait, 10+ ships have been attacked by the Houthis. Due to the diversion of routes via the Cape of Good Hope, the transit durations, shipping costs, and insurance premiums have risen, posing a potential disruption to global production timelines. The journey of the trade ships has increased by about 16-31 days depending upon the speed and the type of vessel. This has led to a lot of problems in transportation by shipment. Due to this the traders and exporters are suffering huge trade losses. The disruption has contributed to higher oil prices as well. The price of Brent crude oil futures, the global benchmark, rose by 1.2% above $80, having fallen below $74 a week earlier.
REACTION OF THE EXPORTERS ON THIS CRISIS
Sellers and exporters fear that, if prolonged, then the crisis would destabilize shipping rates that fell just recently after reaching dizzying highs during the COVID-19 pandemic years. It will also add to inflationary pressures that are squeezing economies across the world. This would in turn cause huge losses to the suppliers. At least ten 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 about 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. A major chunk of shipments, especially the ones closer to the Red Sea ports will move to roadways. This has led to an increase in transit time, shipping rates and insurance premium.
IF NOT RED SEA,WHERE ARE THE SHIPS SAILING?
Some companies have rerouted to the traditional route of traveling via the Cape of Good Hope, going all the way towards Africa to avoid Houthi aggression which adds cost and delay to global trade. The journey is longer and more treacherous with fierce winds, rocky outcrops and heavy shipping traffic.
Following is a picture depicting the alternative route taken by companies-
CONSEQUENCES
The Suez Canal boycott not only posed a threat to the crew or to billions of dollars worth of goods on board but also added expenses, such as marginal payments made to the crew and expenses incurred on buying more fuel.
It also leads to disruption of supplies, in turn resulting in an increase in crude oil prices in anticipation of these events, which according to the US WTI has risen by about 8%.
Insurance companies have factored in the missile range and asked for more premiums to insure the goods on the ship as well, calling it the ‘war risk premium.’ This premium which used to be less than 0.10%, has spiked to 0.70% now indicating a steep rise in freight costs. An increase of 12% has been observed recently.
The increased costs will eventually be passed on to the final consumers. As an exclamation, the US Government is setting up a naval coalition called Operation Prosperity Guardian along with the UK, Canada, Italy, and others to patrol the Red Sea.
INFERENCE
Thus, we can conclude that the attacks launched by Yemen’s Houthi group on commercial ships at the southern end of the Red Sea have prompted several shipping companies to divert vessels. A dichotomy can be observed, leaving binary options with the companies to either face the risk of traveling through the Red Sea and incurring the increased insurance costs or divert their vessels around Africa which brings the risk of delays and increases their costs. Efforts taken by country groups and organizations such as Operation Prosperity Guardian by the US are the only way to mitigate these risks. A lot also depends on how long the war continues. In the short term, major losses to oil suppliers and fertilizer companies can be anticipated.
REFERENCES
Curated By: Vanya Bagla and Devansh Khandelwal
(Vanya Bagla is a 1st year student pursuing BMS(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.)
(Devansh Khandelwal is a 1st year student pursuing BCOM(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.)