Red Sea crisis to affect consumers worldwide as shipping costs set to rise

Longer routes could possibly lead to better margins for shipping companies, analysts say

Taiwan's Evergreen said on Monday that it had temporarily stopped accepting cargo bound for Israel and instructed its ships to go around the Cape of Good Hope. AFP

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Consumers around the world are expected to be hit by the rising costs of Red Sea freight journeys as the threat of attacks by Yemeni rebels forces shippers to divert their vessels, industry experts have said.

The situation has also gone beyond the acceptable risk of doing business and has escalated amid concerns about the security and welfare of seafarers.

This has prompted many shipping companies to suspend journeys through the key waterway, with the automotive and consumer goods sectors expected to be among the hardest hit.

Albert Jan Swart, a sector economist for transport and logistics at ABN Amro Bank, told The National that the situation was very serious due to the security risk, in particular to seafarers.

“I would expect higher sea freight rates as avoiding the Red Sea will lead to higher costs due to longer travel time,” he said.

“Sailing around Africa will also lead to increased demand for vessel capacity. This will lead to higher rates and, possibly, a better margin for shipping companies as well.

“Financial markets also expect this. Maersk stock rose almost 8 per cent last Friday after reports of an attack on a Maersk vessel.”

AP Moeller Maersk and Hapag-Lloyd suspended their Red Sea operations on Friday after their vessels became the targets of Houthi missiles.

They were joined by other major shipping companies, including CMA GGM and the Mediterranean Shipping Company.

The four companies collectively control about half of the global container shipping market.

Germany's Hapag-Lloyd, which originally said it was halting Red Sea journeys until Monday, said it would avoid the Red Sea and Suez Canal for now and, instead, reroute its vessels through the Cape of Good Hope as the risks remained “unacceptable”.

Taiwan's Evergreen said on Monday that it had temporarily stopped accepting Israeli cargo. It instructed its vessels to avoid passing through the Red Sea until further notice and directed them to go around the Cape of Good Hope.

British oil company BP also stopped all its operations through the Red Sea, which it called a “precautionary pause under ongoing review” due to the “deteriorating security situation”.

Analysis of more than 300 industrial categories and 6,000 products indicated that 14.8 per cent of all Europe, Mena imports were shipped from Asia and the Gulf by sea, according to S&P Global Market Intelligence.

That included 21.5 per cent of refined oil and 13.1 per cent of crude oil. Among industrial material imports, 24 per cent of organic chemicals and 22.3 per cent of flat-rolled steel destined for Europe and the Mena region were shipped from Asia and the Gulf.

“Just 8.6 per cent of total Asia and Gulf imports came from Europe and Mena by sea, though the automotive industry may face an outsize impact with 41.3 per cent of vehicles and 20.8 per cent of parts shipping on that route,” said Chris Rogers, head of supply chain research in global intelligence and analytics at S&P Global Market Intelligence.

The transport of goods with a short shelf life will be difficult on the longer alternative routes that vessels must now take and consumers will bear the brunt of the impact from the current disruptions.

“Shipments of perishable goods including … milk products may not be able to endure the longer routes,” Mr Rogers from S&P Global Market Intelligence said.

“Consumer goods will face the largest impact, although current disruptions are occurring during the off-peak shipping season.”

Mr Rogers highlighted the difference between a short-term shock and a long-term realignment.

“In the short term, ports will need to deal with a dearth of imports followed by a surge as the 'global fleet' bunches up as a result of the pauses and onward sailing,” he said.

“Consumer goods will face the largest impact, though current disruptions are occurring during the off-peak shipping season.”

Christian Roeloffs, co-founder and chief executive of leasing company Container xChange, said shipping lines had been instructing their vessels to use the Cape of Good Hope, “adding quite a significant delay and time to their East to West trade journeys”.

“An additional 40 per cent longer route, causing heavy upward pressure in the operating costs, is expected to persist as the shipping time extends anywhere between one to four weeks.”

Alternative routes are compromised either practically or economically, according to S&P Global Market Intelligence.

“Transits via the Cape of Good Hope add at least 10 days and over 15 per cent to shipping costs. Land-based shipments by rail require crossing Russia while trucking from the Gulf to Israel may only offset around 3 per cent of shipping,” Mr Rogers said.

The Houthi attacks come at a time when the world’s other major waterway – the Panama Canal – is being severely restricted by drought.

Traffic via the Panama Canal is already limited and its restricted role as an alternative route is forcing all major shipping lines to opt for the Cape of Good Hope route or use transloading strategies such as transporting goods through rail between countries.

The crisis would lead to rising costs for the sector and consumers, as well as potential delays during the busy Christmas season, said Zarir Irani, managing director of Dubai-based shipping surveyor Constellation Marine Services.

“You might not get that big Christmas gift that you ordered online on time, but it will definitely reach [you],” he said in a Dubai Eye interview on Tuesday.

Mr Irani said companies in the sector would bear the financial brunt.

“Insurance costs have already doubled, and it’s just going to be more costly to transit these waters,” he said.

“The rising attacks would force shipping companies to consider how best to navigate the situation amid rising tensions. The immediate short-term supply chain disruption is what is the worry.”

Commercial vessels may even consider “turning back”, he said.

Swissquote Bank senior analyst Ipek Ozkardeskaya agreed.

“Considering that around 12 per cent of global trade goes through the Suez Canal, and the deviation around Africa adds between six to 14 days to shipments, the Red Sea disruptions delay the shipment of goods but also increase the price of shipping the goods.”

The share prices of big shipping company stocks have increased as they stand to increase their prices.

Crude oil and natural gas prices came under renewed positive pressure as energy companies began to announce that they would avoid transiting through the Red Sea.

While the Red Sea has yet to close to shipping, insurance rates have risen and more ship operators may choose to avoid the route.

However, the impact of the crisis on global supply chains “should be relatively minor”, compared with the Ever Given incident, Mr Swart said.

The Ever Given ran aground in March 2021 and blocked traffic through the Suez Canal for six days, severely disrupting the flow of goods.

“Christmas supplies have already arrived. Wholesalers, retailers and manufacturing firms are still unwinding excess inventories at the moment, so I do not expect severe shortages or extremely high freight rates like during the pandemic,” he said.

The Houthis have stepped up their attacks despite warnings from the US and the formation of Operation Prosperity Guardian, a multinational security initiative involving 10 countries including the US, the UK, Bahrain and Seychelles, aimed at de-escalating the situation.

“Now the world powers are also in the Red Sea and you’ll see more and more engagement to deter these attacks and hopefully things will go back to normal,” said Sultan bin Sulayem, group chairman and chief executive of Dubai-based global ports operator DP World, on Dubai Eye.