Oil, food supply lines already stretched by war in Ukraine
Shipping freight rates on the rise due to diversions
Spiking insurance premia but coverage still provided
Rerouting vessels from the Suez Canal to the Cape of Good Hope raises speeds, increases bunker consumption and raises voyages’ emissions, according to a report by the United Nations Conference on Trade and Development.
Not registered?
Receive daily email alerts, subscriber notes & personalize your experience.
Among container ships, a 1% increase in speed typically leads to a 2.2% rise in fuel consumption. For example, accelerating from 14 to 16 knots increases fuel use per mile by 31%. As a result, the longer distances caused by rerouting from the Suez Canal to the Cape of Good Hope imply a 70% increase in greenhouse gas emissions for a round trip from Singapore to Northern Europe, UNCTAD said Feb. 22.
Attacks by Yemen’s Houthi rebels on merchant shipping in response to the Israel-Hamas war have prompted a number of shipping companies to divert vessels from the Suez Canal and go via the Cape of Good Hope. This trend has been entrenching itself since major shipping lines announced their intention to divert from mid-December onwards.
An oil tanker going from the port of Ras Tanura, Saudi Arabia, to Rotterdam, the Netherlands, will have to travel 10,358 km through the Suez Canal. The alternative journey via the Cape of Good Hope would be 17,975 km, UNCTAD said.
The rerouting has raised the profile of bunker ports such as Durban, South Africa, en route for vessels avoiding the Suez Canal. Platts, part of S&P Global Commodity Insights, assessed the premium of delivered 0.5%S sulfur fuel oil at Durban at a premium of $246/mt to Rotterdam on Feb. 21. Since the International Maritime Organization’s 0.5% sulfur cap came into effect Jan. 1, 2020, making 0.5%S FO the prevalent marine fuel on the high seas, the premium has averaged $137/mt.
Stretched supply lines
“The war in Ukraine has already shown how longer distances and higher freight rates can affect food prices,” UNCTAD said in a statement accompanying the report.
Following Russia’s invasion of Ukraine in February 2022, a range of countries imposed sanctions on Russia including embargoes on Russian crude and oil products. Additionally, the war in the Black Sea has imperiled exports of grains from the region. Ukraine and Russia together accounted for a combined 23% of global wheat trade in 2021-22 marketing year, according to the US Department of Agriculture.
The disruptions to the Suez Canal, alongside drought in the Panama Canal and issues of rerouting that proceed from that add to the effects of the Ukraine war. Going forward, it will be important to continue to monitor key developments and assess their potential implications for transport and trade, especially for developing countries, UNCTAD said. Key issues to track include shipping schedules and service reliability, security measures for ships, delays in shipments, increased freight rates and insurance premiums, UNCTAD said.
Shipping freight rates have jumped since the Suez Canal disruptions started. Platts assessed the rate to carry a 140,000 mt cargo of clean products from the Arab Gulf to UK Continent at $46.88/mt Dec. 15; it has since soared 39% to $65/mt on Feb. 22.
The Platts container index surged 126% to $2,439/forty foot-equivalent unit over the same timeframe.
Heightened insurance costs
War risk premia jumped in the final weeks of 2023, with transit through the Red Sea now attracting a premium of above 0.3% of a ship’s value, double the charge in mid-October, UNCTAD said. By early February 2024, some reports indicate premia rising from around 0.7% to 1% of a vessel’s value, having been under 0.1% earlier. By early January 2024, it was reported that there were still many players in the sector willing to provide coverage, UNCTAD said.
At the start of February, Neil Roberts, head of marine and aviation at Lloyd’s Market Association, said the situation is “sustainable … as it stands” as no major incident has been reported.
Since then, the crew of general cargo vessel Rubymar abandoned the ship, which was carrying fertilizers to Morocco, after an explosion in nearby waters on Feb. 18 caused some damage to the vessel, according to ship security and tracking services, as an international coalition and shipping industry participants struggled to counter the Red Sea shipping crisis.
Varying impact
“For the first time, the world faces simultaneous disruptions in two major global maritime trade waterways, with far-reaching implications for inflation and food and energy security,” UNCTAD said.
This poses a direct threat to global supply chains, potentially leading to delayed deliveries, heightened costs and inflation. Developing countries are the hardest hit by the fallout, UNCTAD said.
One high profile victim is Egypt. The Suez Canal is a major source of foreign currency revenue for Egypt, contributing $9.4 billion in the fiscal year 2022/23, about 2.3% of the country’s GDP. The Red Sea crisis has reportedly triggered a 40% drop in Suez Canal revenues, UNCTAD said.
Fees from canal traffic contribute nearly 8% to the Egyptian government’s revenue and generate a sizeable share of the country’s foreign-currency earnings, analysts at S&P Ratings said in a Jan. 25 report.
