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The cost of shipping goods through the Red Sea has surged since Yemen's Houthi rebels began attacking commercial vessels in late November, and this continuing disruption may lead to higher inflation globally, industry analysts have said.
Charges for transporting a 40-foot container from China to Europe through the key waterway have surged to about $4,000 at present, according to the Drewry World Container Index, which tracks container freight rates on eight major routes to and from the US, Europe and Asia.
That is a 248 per cent jump from $1,148 from November 21, the week the attacks began, and a 140 per cent increase from $1,667 on December 23, data from London-based Drewry showed.
Some of the world’s largest shipping companies have been forced to suspend Red Sea routes and redirect their vessels.
Container xChange
These include Europe-based MSC, Maersk, CMA CGM and Hapag-Lloyd, and Asia-based Cosco Shipping, HMM and Evergreen Line, as well as oil and gas tanker operators.
The alternative route for East-West trade involves passage around the Cape of Good Hope at the southern tip of Africa, which increases the travel time between Europe and Asia.
"This strategic shift not only increases sailing times by 10-14 days but also adds additional fuel costs," Rahul Sharan, senior manager for bulk research at Drewry, told The National.
Some of the companies have imposed surcharges to cover additional expenses.
Choppy waters
The rise in freight charges is not only due to the issues in the Red Sea.
A "panic" in China, owing to fears of insufficient shipping capacity to transport products before the Chinese New Year holiday, has also been pushing prices up, Mr Sharan said.
In addition, higher ancillary costs such as surcharges and insurance have also increased, so "logistically, this becomes a difficult situation", Christian Roeloffs, co-founder and chief executive of Hamburg-based Container xChange, told The National.
"The cost of war risk insurance has doubled in the past week and we do expect this to further go up," he said.
"The higher rates could put as much as $760,000 on the cost of each voyage for a brand-new $130 million VLCC [very large crude carrier] and push the million-dollar mark for an ultra-large boxship."
Container rates on the Asia-Europe trade have been affected the most, said Rico Luman, senior economist of transport, logistics and automotive at Amsterdam-based ING Research.
"Particularly sailings to Mediterranean ports are significantly longer. Port-to-port container rates on the Asia-Europe trade was up 130 per cent compared to early November."
The Houthi attacks are part of the rebels' pressure campaign to stop Israel's bombardment of Gaza.
The assaults have significantly increased the risk for shipping companies while also escalating concerns about the security and welfare of seafarers.
A senior US official said last week that 25 Houthi attacks had been carried out since November 18 on merchant vessels transiting the southern Red Sea and Gulf of Aden.
The US last month also formed Operation Prosperity Guardian, a new international mission focused on countering attacks on commercial vessels in the Red Sea.
"If left unchecked, the deteriorating security situation has major implications for global supply chains, including delayed shipments, increased transit times, and higher costs on energy and non-energy trade between Europe, the Middle East and Asia," said Pat Thaker, editorial director for the Middle East and Africa at the Economist Intelligence Unit.
The closure of the Red Sea route or any disruptions will have significant repercussions, especially for international shipping companies, said Ali Abouda, chief financial officer of Dubai Financial Market-listed Gulf Navigation.
"The Bab El Mandeb is a key route for maritime trade, especially for oil shipments from the Middle East to Europe and the US," Mr Abouda said.
"The closure could lead to delays, increased shipping costs and potential shortages of goods."
As shipping companies reroute their vessels around the southern tip of Africa, this could result "in congestion at alternative routes which will impact the supply chain and affect industries that rely on just-in-time delivery systems", he added.
It would also lead to heightened security risks in the region and insurance providers may increase premiums to account for the perceived higher likelihood of incidents due to the geopolitical tensions.
Alternative routes may also be associated with higher risks and, consequently, higher premiums, Mr Abouda said.
Gulf Navigation owns and operates mid-range chemical vessels and a mixed pool of offshore vessels. The fleet trades mainly in the Far East and increasingly in North America.
"Crossing the Red Sea is rare but when the vessels do cross the area, the company will put all necessary measures in place and assess the situation beforehand."
Crucial channel
The Red Sea, one of the world’s major trade arteries, carries an estimated 9 million barrels a day of oil shipments, representing about 10 per cent of global demand, while the route covers almost one-third of global container traffic and around 12 per cent of global goods trade.
On the energy front, continued attacks by the Houthis have escalated concerns about supply disruption in the oil market.
Bab Al Mandeb, on the southern edge of the Red Sea, is a route for oil tankers and cargo ships sailing between the Arabian Gulf and Asia, as well as to Europe through the Suez Canal.
About 12 per cent of the world's seaborne oil trade and 8 per cent of liquefied natural gas passes through the strait.
While the price of Brent, the benchmark for two thirds of the world's oil, has been fluctuating since the attacks began due to fears of supply disruption, it remains below $80 on demand concerns.
Analysts at Fitch forecast the price of Brent to hover around $85 a barrel in 2024.
However, "should more shippers divert vessels around the Red Sea beyond our expectations, extending the costs and travel time for fuel and crude, the impacts to prices could be more significant than estimated and warrant an increase to our 2024 forecast", they said.
At the close of trading on Monday, Brent slid 3.3 per cent to settle at $76.12 a barrel, while West Texas Intermediate, which tracks US crude, fell 4.1 per cent to $70.77 a barrel.
"At a regional level, a prolonged Houthi campaign against shipping in the Red Sea would severely risk the sustainability of oil and gas exports from major regional producers, such as Iraq, Libya and Algeria, which have more limited recourse to increasing pipeline exports compared with Saudi Arabia and the UAE, constraining revenue gains in the short term during a period of elevated hydrocarbons prices," Ms Thaker said.
Meanwhile, Egypt, which received about $9.4 billion in Suez Canal tolls from shipping companies in the fiscal year 2022-2023 that begins in July, is "anxious to protect this crucial source of income", she said.
About 1,500 ships passed through the Red Sea every month last year.
Beyond shipping
The global economy is unlikely to face any major impact right now because of the Red Sea crisis but "it drags yet again on trade conditions, so it’s a reminder for shippers to build resilience and work on contingency plans", Mr Luman said.
Other industries are also being affected. Europe's car industry, for instance, could experience "far-reaching" implications if the disruptions are sustained, Fitch analysts said.
Total vehicle sales in the continent are expected to cool down in 2024, with a projected 3.5 per cent growth this year compared to 2023's estimated 17.6 per cent, as manufacturers grapple with delays in new car deliveries, which have been building up since 2020.
"We expect the shipping disruptions around the Red Sea to add to the headwinds facing vehicle sales in the Europe region over 2024, especially dragging on the supply of more affordable electric vehicles from Mainland China and vehicles from the Asia region overall," Fitch analysts said.
The cost of shipping will surge if the situation is not contained and the consequences of the closure of the key shipping route "will have a great impact on the global economy which will be very difficult to handle", Mr Abouda said.
Overall, this could escalate into a global inflation concern, said Scott Livermore, chief economist at Oxford Economics.
“If the Red Sea were to remain closed to shipping for several months and shipping freight costs stayed around twice the level of mid-December, this could add 0.7 percentage points to global CPI [consumer price index] inflation by the end of 2024," he told The National.
Mr Livermore, however, expects the current crisis to be “short-lived" and says "the recent spike in sea freight prices will reverse".
Inflation has been falling in the last few months on easing supply bottlenecks and as the impact of tightening monetary policy by central banks takes effect.
However, protracted disruption to Red Sea trade routes and broader losses would mean "supply delays and higher costs at a time when inflation has already spent nearly three years above central bank targets", said Simon Williams, HSBC's chief economist for Central and Eastern Europe, the Middle East and Africa.
