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Global shipping headwinds imposes economic costs on Africa 07 Feb 2024

Global maritime is facing increasing risk as the war between Israel and Hamas is raising geopolitical tensions. The conflict in the Middle East adds to existing concerns about global shipping since the current Russia-Ukraine war broke out in February 2022. Sailing in the Red Sea, the Somali Basin, off the Horn of Africa, and the Suez Canal, which account for 12 per cent of global trade flows, including 30% of global container traffic, has become nightmarish.  

On the African front, Sudan has once again become a flash point after the ceasefire agreement  between de facto leader, General Abdel Fattah al-Burhan and Mohamed Hamdan Dagalo broke down. The failure to fully transition to democracy, after the previous dictatorship, has created a dangerous power vacuum in the country. The ensuing violence is severely impacting the global maritime logistics. Maersk began to explore solutions to stabilise its supply chain services in Sudan after shutting its offices in the cities of Khartoum and Port Sudan after the attacks in those regions.

Also, Somali pirates have been implicated in three incidents targeting commercial shipping since late November 2023. The attacks have consisted of two hijackings in the Arabian Sea and one ship boarding in the Gulf of Aden. A number of Iranian fishing vessels have also been targeted. In addition to attacks on international shipping, at least five Iranian fishing vessels have been hijacked. These attacks allegedly took place in response to illegal Iranian fishing in Somali waters, which the local fishermen view as a threaten to their livelihood. The pirates have threatened to use these hijacked vessels as motherships to target other ships; one of them was subsequently sighted sailing northwards near the Yemeni coastline.

In the Middle East, Yemen’s Iran-backed Houthi rebels have stepped up strikes on ships in the Red Sea in retaliation against Israel for its deadline military campaign in Gaza following the 7 October 2023 surprise attack in Israel by Hamas. The hostility by the Houthi rebels has forced some of the world’s biggest shipping and oil companies to suspend transit through one of the world’s most important maritime trade routes. There are fears that the Houthi drone and missile attacks against commercial vessels, which have occurred almost daily since 9 December 2023, could cause an even greater shock to the world economy.

Four of the world’s five major shipping firms – Maersk, Hapag-Lloyd, CMA CGM Group, and Evergreen – have announced they would pause shipping through the Red Sea amid fears of Houthi attacks. The oil giant BP has said it would do the same – a move that caused oil and gas prices to surge.

The attacks could force ships to take a far longer route around Africa, like the Cape of Good Hope, located at the southern tip of the Cape Peninsula, which is also home to Cape Town, the legislative capital of South Africa. This scenario will cause insurance costs to skyrocket. Companies could pass on the increased cost of moving their goods to the consumers, raising prices again at a time when governments around the world have struggled to tame post-pandemic inflation. The conflict and disruptions in the Horn of Africa, particularly around Sudan, can have several implications for shipping as briefly discussed below:

Rerouting and increased cost and voyage duration: Ships opting for the Cape of Good Hope route, instead of passing through the Suez Canal or the Red Sea, will experience a significant increase in voyage duration. This rerouting can lead to increased fuel consumption, additional costs, and potential delays in cargo delivery.

Pressure on alternative routes: The shift in routes can increase traffic and congestion along alternative paths, such as the Cape of Good Hope. This heightened demand may put pressure on these routes and associated port facilities, impacting overall efficiency.

Global supply chain disruptions: Extended voyage durations and potential delays in cargo delivery could disrupt global supply chains. Industries relying on just-in-time inventory systems may face challenges, and businesses might need to reassess and adapt their logistics strategies.

Insurance and risk management: Insurers and shipping companies may need to reassess risk factors associated with the new routes. The geopolitical situation in the region and the increased piracy risk off the coast of Somalia could impact insurance premiums and risk management practices.

Geopolitical considerations: The conflicts and shipping route changes highlight the geopolitical vulnerabilities of key maritime passages. Governments and international organisations may need to address security concerns and work toward ensuring the safety of these critical waterways.

Environmental impact: Longer routes with increased fuel consumption can contribute to higher greenhouse gas emissions, affecting the environmental sustainability of shipping operations. This may draw attention to the industry's environmental footprint and lead to calls for more sustainable practices.

It is essential for stakeholders in the maritime industry, including shipping companies, insurers, and governments, to closely monitor the situation, assess risks, and collaborate on strategies to navigate these challenges effectively. If the situation persists, the conflicts and disruptions in the Red Sea and Horn of Africa will in no time tell on the already struggling Nigerian economy.

However, some of the steps the Nigerian government can consider for mitigating the potential effects on the economy and the national currency include diversification of trade routes, enhanced maritime security, investment in port infrastructure, and promotion of sustainable shipping practices. Others include strengthening diplomatic engagement, facilitating trade insurance, promoting economic resilience, active monitoring and assessing of risks, collaborating with international organisations, and taking measures to stabilise the naira.

The government should strengthen maritime security measures in Nigerian waters to ensure the safety of shipping routes around the Gulf of Guinea. This includes efforts to combat piracy, enhance naval patrols, and collaboration with international partners to maintain a secure maritime environment. The agenda of the expansion and modernisation of Nigerian ports to accommodate potential increases in shipping traffic has become quite important. Efficient and well-equipped ports can help mitigate delays caused by rerouted vessels and contribute to smoother cargo handling.

In mitigating environment risk, shippers should be encouraged to adopt sustainable shipping practices to reduce the environmental impact of longer routes. This may involve incentivising the use of more fuel-efficient vessels and promoting eco-friendly technologies in the maritime industry.

The traditional leadership of Nigeria on the African continent calls for the active engagement of the government in diplomatic efforts to contribute to the resolution of conflicts in the affected regions. Building economic resilience should include encouraging businesses to make their supply chains more robust by adopting flexible logistics strategies. This may involve maintaining strategic inventories, diversifying suppliers, and having contingency plans in place to adapt to changing shipping dynamics.

It's important for the Nigerian government to take a comprehensive and multi-faceted approach in addressing the challenges posed by the disruptions in global shipping routes, which have serious economic, security, and environmental implications. Additionally, close collaboration with the private sector and international partners is crucial for effective mitigation strategies.

Joy Dimka is a Senior Legal Officer at the Nigerian Shippers' Council.