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Israel-Gaza war a threat to ocean freight and global supply chains

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An Israeli artillery unit fires towards Gaza, near the northern Gaza Strip border, amid the ongoing conflict between Israel and the Palestinian Islamist group Hamas, as seen from Israel, on February 11, 2024. PHOTO | REUTERS

The tensions related to the ongoing Israel-Gaza war have stretched to nearby regions such as Yemen. Attacks by the Houthi rebels pose serious security concerns for shipping lines using the Red Sea and the Suez Canal, a route that facilitates about 12 percent of global trade. It has worsened the risks cargo vessels face, and the ripple effects of the disruption of the global supply chain are already being felt worldwide.

Since October 2023, several freight companies have temporarily halted or chosen different routes for their transit. Major shipping lines have ceased plying the Bab el-Mandeb, the Red Sea and the Suez Canal route to avoid the threat of losses due to the attacks.

Most cargo has now been redirected to go through the Cape of Good Hope in South Africa, a diversion that adds about 3,500 nautical miles to the transit times. And for economies which rely heavily on the Red Sea for trade, the route spells slower delivery times and increased freight costs, which is a great hindrance to an otherwise seamless supply chain.

Kenya, one of Africa's most vibrant economies, has been affected by this decision. The Kenyan economy is heavily reliant on imports and exports. Key commodities such as tea, coffee, and horticultural products constitute a significant portion of its exports. On the other hand, Kenya's imports comprise of a wide range of goods, including machinery, transportation equipment, petroleum products, and iron and steel.

Kenya’s trade relationship with the Red Sea and the Suez Canal is critical. In 2021, for instance, Israel had a large net trade with Kenya in the exports of machines ($20.7 million), plastic and rubbers($12.2 million), and chemical products ($9.64 million) in 2021.

Kenya’s exports to Israel during the same year included vegetable products ($9.35 million), animal products ($1.83m), and wood products ($1.1 million).

The Suez Canal has always been a strategic route for Kenya’s trade with Israel and other nations in Europe, the Middle East, and Asia. The route offers the shortest maritime transport between Asia and Europe, thus reducing shipping time and costs.

Transit times, before the Houthis attacks, ranged from 10 to 14 days, but with the alternative route through the Cape of Good Hope, this time has increased by two to four weeks and raised the costs per ship by up to $1 million, according to Superb Cargo Shipping Agency Limited.

As a result, ocean shipping rates have been on an upward trajectory as security remains a big issue for carriers in the Red Sea regions. For example, Asia to Mediterranean prices have increased 115 percent, according to January 18 rate data from Freightos.

While some analysts argue that the freight rates may not hit an all-time high considering the macroeconomic environment and the fact that there’s limited capacity for trade to absorb the costs, there is no doubt that insurance premiums will increase.

Shipping lines looking to continue using the Suez Canal will face additional surcharges for war risk, as announced by different carriers.

If the situation persists, the disruption at the Red Sea might create a strong headwind to various economies, including many African countries still recovering from the Covid-19 pandemic and the geopolitical consequences of Russia’s invasion of Ukraine.

Experts warn that low-income countries which import energy will be highly affected if the Red Sea attacks continue. If the prices of oil increase, it will worsen the inflationary pressures countries are facing, further complicating central banks’ efforts to pivot easing and will lead to increased production and transportation costs.

Unfortunately, the double whammy of the increased freight costs and longer transit times is only the beginning of bad headaches for shippers. The war has caused devastating damage to Gaza’s infrastructure and economy.

Israeli airstrikes have devastated Gaza’s already weakened infrastructure, but safe rooms and air-raid shelters have allowed most studio production within Israel to continue into the second week of rocket attacks.

The disruption of production due to the conflict has resulted in an economic toll that may cost Israel an estimated $400 billion in lost economic activity over the next decade.

Meanwhile, the whole situation underscores the need for peaceful resolution of conflicts and the importance of maintaining secure and reliable trade routes for the global economy to thrive.

Kemboi is Group Chief Operating Officer at Siginon Group.