The Red Sea Crisis - Security Concerns, Economic and Legal Consequences
Transport & Insurance Focus
Omar OmarPartner,Head of Transport & Insurance
Hany MaamoonSenior Counsel,Transport & Insurance
The Red Sea, a vital maritime route linking the Mediterranean Sea—and thereby Europe—to the Indian Ocean and Asia, has emerged as a hotspot for geopolitical tensions and security issues. The current armed escalation impacted both the Egyptian economy and global maritime security.
The situation intensified after the Houthi's declaration on October 31, 2023, aligning themselves with the conflict between Israel and Hamas,. This included threats to close the Red Sea to Israeli-affiliated vessels, a stance that was later extended to any vessel trading with Israel. Initially, this did not affect navigation through the Red Sea and the Suez Canal, as major shipping companies were still evaluating the situation.A turning point came on November 19, 2023, when Houthi rebels claimed they had seized the car carrier “Galaxy Leader”. Subsequently, the group escalated their assaults, launching missile and drone attacks against ships. By December 2023, leading container shipping lines began to reroute their vessels away from the Red Sea to avoid these threats. In response to the Houthi attacks, a United States-led multinational coalition took military action against the Houthi bases. Despite these efforts, and additional strikes by the US and the UK, the attacks have persisted and even intensified, targeting vessels associated with the US and the UK. As a result, an increasing number of shipowners are avoiding the Red Sea and the Suez Canal, opting instead for the longer but safer route around the Cape of Good Hope.
This article aims to explore the ramifications of the Red Sea crisis on the Suez Canal and Egypt's economy, along with the legal repercussions for delays in cargo shipments from Egypt during this period of uncertainty.
In January 2024, the Suez Canal reported a significant drop in revenue by 46%, amounting to $428 million, compared to $804 million in the same month of the previous year. This downturn was a direct consequence of a 36% reduction in the number of transiting ships, totaling 1,367 vessels, primarily due to concerns over Houthi insurgent activities in the Bab al-Mandab region. These figures were disclosed by Lieutenant General Osama Rabie, the Chairman of the Suez Canal Authority. Supporting this data, the United Nations Conference on Trade and Development (UNCTAD) revealed that trade volume through the Suez Canal saw a 45% decrease in the last two months of the previous year, attributing this decline to the Houthi attacks in the Red Sea.
The following comparison highlights the stark contrast in the Suez Canal's performance in January 2024 compared to January 2023.
January 2023
January 2024
SOUTH BOUND
1009 SHIPS
57 M. TON
656 SHIPS
29 M. TON
NORTH BOUND
1143 SHIPS
65 M. TON
711 SHIPS
32 M. TON
TOTAL
2152
122 M. TON
1367
60 M. TON
AVARAGE TON.
+ 56
TON
+ 43
AVARAGE DAILY
69
SHIPS
44
BULK CARRIER
598
518
CONTAINER SHIP
445
162
G. CARGO
156
99
LNG.
67
18
LPG.
58
26
OIL TANKER
418
324
OIL/ CHEMICAL
197
116
VEHICLE CARRIER
91
25
YACHT
12
3
OTHER
110
76
It's evident that there's been a significant decline in the Suez Canal's activity, with vessel traffic dropping by 40% and cargo weight by approximately 50%, leading to a near 50% reduction in canal revenue. As the Red Sea crisis persists into its sixth month without resolution, the possibility of further declines in vessel traffic looms. For the first time in its recent history, the Canal has been seeing during the second half of February and the beginning of March, 2024, unprecedented low numbers of vessels, and March 4th recorded the lowest number of vessels transiting crossing the canal in decades, with only 8 Northbound vessels and 16 South Bound, However, the avenge number of vessels transited the Canal during the first week of March is about 32 vessels per day.
In response to this crisis, and as a silver lining, major shipping lines have begun exploring alternative routes that bypass the Bab-el-Mandeb Strait, utilizing ports such as Jeddah, Jabal Ali, and Salalah. These alternative routes, which involve combined transportation methods, have shown potential, particularly for trade between Europe and Gulf Countries. However, this solution is more expensive and not viable in the long term due to limitations in port capacity and the absence of robust logistical support for handling large volumes of inland trade.
The Suez Canal is a critical conduit for global trade, facilitating 12% to 15% of the world's trade and 25% to 30% of container traffic. With recent challenges in the Panama Canal, reliance on the Suez Canal has increased, amplifying the impact of disruptions like the Houthi attacks. Rerouting around Africa not only slows global trade but also increases fuel consumption and shipping costs, leading to supply chain disruptions and higher global market prices. Additionally, the longer route poses significant risks, including potential piracy.
Given Egypt's dependence on Suez Canal revenues as a major source of foreign currency, the economy has been severely impacted. The tourism sector, another key revenue source, has also suffered, particularly in Sinai, a prime tourist destination bordering the Gaza Strip.
The Egyptian economy has faced challenges not only due to the decline in Suez Canal revenues but also in its citrus fruit export sector. Notably, Egypt is the world's leading exporter of oranges. The orange export season, beginning in early December, has been significantly impacted. This is particularly due to the inability to export to Far Eastern countries. Shipping oranges from a Mediterranean port in Egypt to a destination like Shanghai via the Cape of Good Hope extends the transit time by 25 days, resulting in a total journey of 45 days. Additionally, destinations further afield, such as Japan or Australia, could experience even longer transit times. This extended period poses a risk of damage to perishable goods like fresh fruit.
The disruptions in the supply chain mirror those experienced during the closure of the Suez Canal by the "Ever Given" in March 2021. Consequently, the impact of the Red Sea crisis extended beyond Egypt, affecting numerous countries globally. This was reflected in the significant increase in sea freight costs, which spiked by 30% to 200% in certain instances. The variation in rates was influenced by factors such as route, type of goods, and mode of transport.
During the early stages of the 2023 Red Sea Crisis, which could be termed as the "Period of Uncertainty," the world's leading ocean carriers were indecisive about their next steps. They were torn between completely avoiding the Red Sea, reducing the number of vessels passing through the Suez Canal and the Red Sea by rerouting a minimal number through the Cape of Good Hope, or temporarily halting vessels at sea while awaiting further instructions. Despite this uncertainty, container lines continued to take bookings for Europe-Asia and vice versa routes, relying on the Suez Canal as the shortest and most cost-effective path. As a result, cargo began accumulating, either on the docks or already loaded on ships without a clear itinerary, leading to decisions during the voyage to either navigate around Africa or offload goods at unplanned transit ports for transfer to other ships heading towards the Cape of Good Hope.
This disruption in vessel scheduling profoundly impacted hundreds of thousands of traders and their goods, potentially leading to a significant number of claims against the carriers, particularly concerning perishable and seasonal items.
The initial defense that lawyers often consider is invoking Force Majeure. However, proving Force Majeure is notably challenging, especially in Egyptian courts or those within the MENA region. Legally, although Force Majeure could potentially apply to some delay claims for vessels already en route to the Suez Canal or the Gulf of Aden at the time of a major attack or if the vessel is identified as a target by the Houthi forces, it does not completely exempt carriers from liability for many delay claims. This is because numerous vessels continue to traverse the Red Sea in both directions without the Red Sea or the Gulf of Aden being officially designated as war zones, despite ongoing attacks on merchant vessels and retaliatory strikes on Houthi militants. In our view, merchants should not bear responsibility for some carriers' hesitance or delay in deciding to reroute around Africa during the “Period of Uncertainty.” Bearing in mind that the Egyptian Supreme court continues to define the acts which may be described as a Force Majeure , if such acts are unpredictable and impossible to be prevented , i.e. of irresistible nature. And of course, the carrier's liabilities would vary depending on the nature of the transport documents, as to whether we are dealing with bills of lading or charter parties.
The Red Sea crisis highlights the intricate links between geopolitical, security, and economic issues. Addressing these challenges necessitates a unified international approach aimed at fostering stability by resolving longstanding conflicts in the Middle East and ensuring safe passage through this vital maritime route.
As the Red Sea crisis unfolds, affecting both the Suez Canal's operations and the wider Egyptian economy, the need for expert legal guidance has never been more critical. Our law firm is poised to support clients navigating the complex legal terrain that has emerged from this situation. Whether you're facing delays in cargo shipments due to the crisis or grappling with the legal implications of rerouting and increased costs, we are here to help. Our team specialises in maritime law and has a deep understanding of the unique challenges posed by the Red Sea crisis. We offer comprehensive legal services to address the following issues:
Legal Analysis and Force Majeure Claims: We can assess whether the Houthi attacks and subsequent disruptions qualify under force majeure clauses in your contracts, providing a robust defense or pursuing claims as necessary.
Negotiating and Litigating Delay Claims: Our expertise extends to managing delay claims related to the crisis, especially for perishable and seasonal cargoes that have been adversely affected.Strategic Advice on Cargo Rerouting: We provide legal advice on the implications of rerouting around the Cape of Good Hope, including the analysis of contractual obligations and the potential for recovering increased costs.
Assisting with Insurance Claims: Our team is equipped to assist with filing and negotiating insurance claims arising from the crisis, ensuring that you receive fair compensation for any losses incurred.
Advising on Long-term Contract Adjustments: Given the ongoing nature of the crisis, we can help revise your existing contracts to better protect your interests in the face of future uncertainties.
The situation in the Red Sea is a reminder of the interconnectedness of geopolitical, security, and economic factors in global trade. Our law firm is committed to providing the legal support you need to mitigate the impact of this crisis on your operations and to safeguard your interests. Contact us today to learn how we can assist you during these challenging times.
For further information,please contact Omar Omar and Hany Maamoon.
Published in March 2024
