Can plunge in Suez Canal earnings prompt Egypt to broker peace to end Red Sea crisis?

The escalation of attacks on commercial ships in the Red Sea by the Houthi armed forces is further intensifying after increased air strikes by the U.S. and UK forces in Iraq, Syria, and Yemen.

Paradoxically, the military intervention has not deterred the Houthi rebels, who have promised further retaliation against merchant vessels as a sign of solidarity with Palestinians. The Houthis have ascribed their actions as a response to Israel’s bombing of Gaza, initially targeting Israel-bound and owned vessels insisting humanitarian aid be allowed into the war-devastated strip.

The Houthis seem to be delivering on their promises as they claimed responsibility for striking two bulk carriers, Star Nasia and Morning Tide, on February 6. The incidents occurred 57 miles west of Hodeida.

Houthi’s military spokesman Yahya Saree said that operations will continue “against Israeli shipping or those heading to the ports of occupied Palestine until the siege is lifted and the aggression against the Palestinian people in the Gaza Strip is stopped.”

As maritime security concerns heighten, the only viable solution to end these attacks and restore stability to the region and international trade lies in brokering peace in the Gaza-Israel conflict.

Qatar has been mediating talks between Hamas and Israel and the two sides seem to be on the brink of a deal on a ceasefire. However, a permanent peace needs to be established given the devastating human toll of the ongoing conflict, estimated to have taken at least 27,000 Palestinian lives, including over 11,000 children.

The escalating conflict in Yemen is reshaping global maritime trade as vessels reroute around the Cape of Good Hope, causing a significant decline in Suez Canal toll earnings. Recent data from Veson Nautical highlights a stark shift in traffic patterns, driven by geopolitical tensions and heightened maritime security concerns in the strategically crucial region. The implications extend beyond the immediate disruption, impacting Egypt’s economy and prompting a potential catalyst for increased diplomatic efforts to broker peace.

Analysis of Suez Canal toll fees from early 2023 to January 2024 reveals an overall reduction of approximately 40%. Container tolls took the hardest hit, plummeting by around 66%, while the LPG sector saw the most substantial drop at 93%. The ongoing conflict has led to a considerable decrease in Suez Canal transits, translating into financial implications for both the canal and the Egyptian government.

Shift in Traffic Patterns and Economic Consequences

Comparative data on Suez Canal Net Tonnage (SCNT) and vessels transiting through the Cape of Good Hope illustrates a notable trend since November 2023. There has been a 38% decline in SCNT through the Suez Canal, accompanied by a 25% increase in the Cape of Good Hope region/transit zone. The surge in attacks on vessels in the region has compelled ship operators to choose alternative routes, leading to increased costs, shipment delays, and concerns about geopolitical instability.

The effects on various cargo markets vary. In the crude tanker sector, rates for Suezmaxes and Aframaxes have strengthened, driven by longer voyages around the Cape of Good Hope. Container sector rates have reversed a downward trend, with vessels diverting from the Red Sea. The bulker sector, although less impacted, continues to experience historically high rates, according to Veson’s data.

As such, Egypt might have an important financial incentive to lead diplomatic efforts to broker peace in the ongoing conflict as calls for a humanitarian ceasefire continue to mount across the globe.

While longer transit times and increased earnings may be acceptable in the short term, the potential long-term costs to owners raise concerns, Rebecca Galanopoulos-Jones, Senior Content Analyst, Veson Nautical believes.

“From the perspective of Egypt, reduced traffic through the Suez Canal and therefore a lower income from toll fees is likely to persist for the foreseeable future. However, understanding the economic repercussions on the nation could foster a more proactive approach to resolving the conflict and alleviate its adverse effects on global trade,” Jones said.