Global trade: Major disruptions in Red Sea traffic pose significant risks for global trade and supply chains

Event

Since November, the Houthis, a Yemen-based militia backed by Iran, have attacked several vessels in the Red Sea, allegedly in retaliation for the Israeli military operations in Gaza. Prior to the conflict, the Houthis had already targeted ships transiting via the route, however, the attacks recently increased in frequency. While the Houthis first declared that they were only targeting ships with Israeli links, on 9 December, they signalled that they would now target all ships directed to or from Israel. Contrary to the militia’s declarations, not all targets seem to have links with Israel. In response to increased maritime risks in the Red Sea, especially around the Bab el-Mandeb Strait (strait separating Yemen from Eritrea and Djibouti), the USA – which already has a naval military presence in the region – communicated that it had formed a naval coalition with some international partners to dissuade attacks and protect maritime traffic.

Impact

While the outbreak of the Hamas-Israel conflict and the related regional tensions had already led to a significant rise in ‘insurance premiums’ for ships transiting via the Red Sea since last October, a growing number of companies have now temporarily halted ship transit through the strait of Bab el-Mandeb, the Red sea and the Suez Canal for security reasons. Most notably, major container shipping companies – AP Moller-Maersk A/S, Hapag-Lloyd AG, CMA CGM SA and MSC – and some oil companies have taken that measure.

Prolonged halts could have a major impact on global trade. Indeed, it is estimated that about 30 percent of global container traffic transits through the Suez Canal route. The container shipping companies mentioned earlier account for a major share of this traffic. More importantly, this waterway is the main route of maritime freight between Europe/MENA and Asia. The most viable alternative is via Africa through the Cape of Good Hope, but it adds many days and increases shipping costs. There are additional alternatives but those are less obvious. For instance, land transport between Europe and Asia, including rail freight, is made difficult and long due to the countries that need to be crossed where security is at risk and sanctions may apply. Air transport is an uneconomic alternative for most products. For transport between Asia and the Americas, water shortages due to drought make the Panama Canal route a less likely alternative.

Sectors dealing with perishable goods (food and livestock) will be the most affected, but many other sectors could be impacted as well. Indeed, most palm oil and rice and a significant share of imported consumer goods (electronic goods, toys among others), capital goods, metals (steel products in particular) and chemicals destined for Europe and MENA transit via the Suez Canal route. As dry bulk cargo companies have taken measures as well, the freight of those products, including grains and raw minerals, will also be impacted.  

Some oil companies, notably BP, have also paused shipments through the Red Sea, hence crude oil, LNG and refined energy products should also be affected. While crude oil prices have been on a downward trend since last September on the back of concerns related to demand, crude oil prices have started to rise again over the last few days. If all shipments from the Middle East to Europe through the Suez Canal were to be stopped and diverted, oil and gas prices could jump even more significantly. Global prices would even skyrocket if the conflict escalates to the Hormuz Strait, as that is the only way for exports of oil from Iraq, Kuwait and Qatar.

Moreover, the current disruption of the Suez Canal could increase the MENA region’s economic repercussions from the Hamas-Israel conflict, especially for Egypt. Even before the conflict outbreak, the country was facing significant liquidity and economic challenges. The increasing disruption risks for key sources of current account receipts (tourism and Suez Canal receipts) will only aggravate liquidity pressures.

For the time being, the announcement of the creation of a naval force by the USA has not reversed the shipping companies’ decisions to pause or divert traffic through the Suez Canal, given the still high uncertainty and perceived security risk. As a result, operational freight costs are expected to increase for businesses that usually use maritime transport via that route and delayed deliveries of goods are expected.

Analysts: Andres Hernandez Cardona – A.HernandezCardona@credendo.com; Florence Thiéry – f.thiery@credendo.com