The largest shipping corporations in the world may decide to reroute their routes out of the Red Sea, potentially causing significant disruptions to global supply networks.
Following attacks on commercial vessels by Houthi rebels in Yemen in recent weeks, numerous businesses have chosen to stay away from one of the busiest maritime channels in the world.
Although it’s unclear if all of the attacked ships were genuinely going to Israel, the Houthi organization has stated that it supports Hamas and that it is attacking ships that are traveling there.
What took place?
Since the Israel-Hamas war began in October, the Houthis have increased the intensity of their strikes.
The gang, supported by Iran, has been deploying drones and rockets against foreign-owned ships that are passing through the Bab al-Mandab strait, a 20-mile-wide passage that divides Yemen on the Arabian Peninsula from Eritrea and Djibouti on the African side.
This route is typically used by ships traveling northward from the south to access Egypt’s Suez Canal.
However, a number of the biggest shipping companies in the world, such as Mediterranean Shipping Company and Maersk, have redirected ships to a far longer route that goes around Africa’s Cape of Good Hope and then up the west side of the continent due to the attacks and the prospect of additional assaults..
Additionally, BP has stopped sending any oil across the Red Sea, citing a “deteriorating security situation” as the reason.
The lengthier routes will cost businesses millions of dollars and add at least 10 days to shipping delays.
Why does this shipping route matter so much?
Any ship traveling through the Red Sea and Bab al-Mandab Strait must arrive from the Indian Ocean before entering the Suez Canal.
The Suez Canal is crucial for the transit of oil and liquefied natural gas (LNG) since it is the quickest marine route between Asia and Europe.
According to freight analytics company Vortexa, nine million barrels of oil were moved via the Suez Canal every day in the first half of 2023.
Approximately 15% of products imported into Europe, the Middle East, and North Africa, according to S&P Global Market Intelligence analysts, were transported by water from Asia and the Gulf. More than 13% of crude oil and 21.5% of refined oil are included in that.
However, the issue goes beyond oil. Retail items found in stores, such as TVs, clothing, sneakers, and sporting goods, are transported by container ships.
- Shipping companies halt Red Sea voyages due to attacks
- Fears of increased oil costs following attacks in the Red Sea
What effect does it have on customers?
Ships being redirected away from the Red Sea will inevitably disrupt supply chains; however, consumer goods “will face the largest impact,” forecasts Chris Rogers, head of supply chain research at S&P Global Market Intelligence. It is worth noting, however, that the current disruption has come “during the off-peak shipping season.”
Products arriving in stores may experience delays; container ship voyages should take a minimum of 10 days longer because the Cape of Good Hope route adds roughly 3,500 nautical miles.
Additionally, the added distance will cost businesses more. Businesses may decide to pass on the 4% increase in shipping fees over the last week to their customers.
Even so, tariffs are still significantly lower than they were in 2021, when Covid limitations were lifted and freight costs skyrocketed to keep up with demand.
Concerns have also been raised that the disruption would raise oil prices.
An increase in the cost of oil, a vital component of vehicle fuel, can raise both inflation and pump costs. The UK’s inflation rate, which gauges how quickly prices are rising, has been declining and is at 4.6%.
Even if wholesale energy costs increase, any disruptions to LNG imports would not be reflected in domestic bills until April 2024, at the latest.
This is a result of the energy price cap, which established a maximum fee that suppliers are permitted to impose for January.
Is shipping freight by water the only way to go? Mr. Rogers claims that while “trucking from the Gulf to Israel may only offset around 3% of shipping,” delivering products by train would instead involve “crossing Russia,” which is subject to economic sanctions as a result of its invasion of Ukraine.
How is this being addressed?
In response to the attacks, the US launched an international naval operation including participation from the UK, Canada, France, Bahrain, Norway, and Spain to safeguard ships traveling the Red Sea route.
During a virtual discussion with ministers from over 40 countries on Tuesday, US Defense Secretary Lloyd Austin urged additional governments to support efforts to maintain secure shipping in the area.
However, even with heightened security, several shipping companies are hesitant to resume using the route right away.
The extra precautions were welcomed by Maersk and Hapag-Lloyd, whose ships have also been assaulted by Houthi militants. However, they noted that it is difficult to predict when they will resume utilizing the Red Sea, so there may be disruptions for some time.
