Logistics chains have finally adapted quickly to the new configuration of the container shipping market resulting from the Houthi attacks on vessels in the Red Sea. The return to the old Cape of Good Hope route as an alternative to the Suez Canal has become a sort of new norm.
Situation under control except in Egypt
The rise in freight rates has provoked some fears but has remained sufficiently limited to allow the shipping companies to avoid being accused again of contributing to inflation. Even the environmental aberration represented by the massive diversion of container carriers round the cape has not provoked any special reaction, despite the climate emergency in which we currently find ourselves.
The only big loser seems to be Egypt. Even if the Suez Canal is continuing to handle close to 50% of its usual tonnage, its revenues are about 60% down, according to our estimates. The container carriers, which are now transiting in great numbers round the Cape of Good Hope have a high taxable value. If the situation persists, Egypt’s revenue losses could rise to $6 billion on the basis of annual revenues of around $10 billion prior to the start of the Houthi attacks. In addition to these direct losses, there are indirect losses, given that there are now less containers transiting through Port Said and Damietta. One can estimate that this represents a further loss of about $1 billion.
Return of the boomerang
The situation created by the Houthi attacks is temporarily camouflaging the colossal overcapacity which is currently developing on the container shipping market. We are even seeing some pressure this spring on access to capacity aboard ships departing from Asia.
The artificial bubble which has thus been created could burst, however, in the second half of 2024 or, at the latest, in the first half of 2025. If the Houthi threat disappeared overnight, allowing use of the Suez Canal to resume, we would risk seeing freight rates suffer a real collapse, combined with a big increase in canal tolls to cover the months of lost revenues.
Return to normal inevitable
It is not in the interests of Western economies to allow the Houthi threat to persist, with the risk of seeing it spread. Setting aside the Western economies, China, too, urgently needs international trade to return to normal, as it undergoes the first big economic crisis in its recent history. East-West economic questions are sensitive and strategic in nature. They cannot, therefore, be allowed to be «polluted» for very long by regional disruption. China called for an end to attacks on civilian vessels in the Red Sea and for safe navigation in the area, when Chinese Foreign Minister Wang Yi met his Yemeni counterpart in Beijing on 28 May.
As, after the overheating of freight rates caused by the Covid 19 pandemic, the main difficulty, no doubt, will be managing the transition. In 2022, the turnround in the market was sudden. To prepare for the next one, it could be a wise move today to aid the Egyptian state. Should we introduce a Suez support fee in the form of a levy of $10 or so per container transiting the canal as a mean of help the country in this particularly difficult period? The idea might seem strange and difficult to propose at a time when shippers are feeling the effect of higher freight rates, but we could also see it as an investment which will soften the impact of the shock to come.
