The Red Sea, a vital waterway for global trade, has become a hotspot of conflict and instability in recent weeks. Yemen-based Houthi rebels have launched several attacks on commercial vessels, forcing many shipping companies to reroute their cargo around the Cape of Good Hope in South Africa. This has led to a surge in freight rates, which could have far-reaching implications for the world economy and the fight against inflation.
The Houthi rebels, who control most of northern Yemen, have been fighting a Saudi-led coalition since 2015. The conflict has escalated into a humanitarian crisis, with millions of people facing famine and disease. The Houthis have also targeted Saudi Arabia and its allies with missiles and drones, some of which have reached as far as Riyadh.
In the past month, the Houthis have intensified their attacks on maritime targets in the Red Sea, a narrow strait that connects the Indian Ocean and the Mediterranean Sea. The Red Sea is a crucial route for oil and gas shipments from the Middle East, as well as for goods from Asia and Europe. According to the Suez Canal Authority, about 10% of global trade passes through the canal, which links the Red Sea and the Mediterranean.
On Monday, the U.S. Central Command said that a U.S.-owned commercial vessel, the Gibraltar Eagle, was struck by a Houthi missile near the Bab-el-Mandeb Strait, a chokepoint at the southern end of the Red Sea. The vessel suffered minor damage and no casualties, but the incident raised alarm among the shipping industry and the international community.
The Gibraltar Eagle was the latest victim of the Houthi attacks, which have also hit vessels from Saudi Arabia, the United Arab Emirates, and Egypt in recent weeks. The Houthis have claimed responsibility for most of the attacks, saying they are a response to the Saudi-led blockade and airstrikes on Yemen. The rebels have also threatened to target more ships and ports in the region, including the Suez Canal.
The impact on shipping costs and supply chains
The Houthi attacks have prompted many shipping companies to avoid the Red Sea and take longer routes around the Cape of Good Hope in South Africa. This adds about two weeks and 5,000 nautical miles to the journey, increasing the fuel consumption and operational costs of the vessels.
As a result, the ocean freight rates have soared to unprecedented levels, reaching up to $10,000 per 40-foot container, according to some market sources. This is more than six times higher than the average rate of $1,550 per 40-foot container in 2023, when the global shipping industry was in a slump due to the pandemic and the oversupply of vessels.
The spike in freight rates has also affected the availability and prices of goods, especially in Europe and North America, where the demand for imports has rebounded strongly after the lockdowns. The shortage of containers, port congestion, and labor issues have further exacerbated the situation, creating bottlenecks and delays in the supply chains.
The Red Sea crisis could have a domino effect on the global economy if it is not resolved soon, according to some analysts. A prolonged disruption of trade could jeopardize the recovery from the pandemic and the fight against inflation, which has already reached multi-year highs in many countries. The higher shipping costs could also erode the profits of the exporters and importers, as well as the consumers who have to pay more for the goods.
The outlook for the shipping industry and the Red Sea security
The Red Sea crisis could also have a lasting impact on the shipping industry, which has been undergoing a transformation in the past year. The industry, which was hit hard by the pandemic and the oversupply of vessels in 2023, saw a remarkable turnaround in 2022, thanks to the surge in demand for goods and the shortage of containers. The shipping companies, which had suffered losses and bankruptcies in 2023, enjoyed record profits and cash flows in 2022.
However, the situation changed again in 2024, as the freight rates started to decline due to the easing of the supply-demand imbalance and the arrival of new vessels. The Red Sea crisis, however, could reverse this trend and boost the revenues and margins of the shipping companies, especially the Vessel-Operating Common Carriers (VOCC), which own and operate the vessels.
Alan Baer, CEO of logistics company OL USA, told CNBC that the higher rates in 2024 could add multiple billions to the bottom line of the VOCC, even if the crisis lasts for just another two or three weeks. He added that if the crisis goes on for three to six months, the profits will again approach 2022 levels, as the operating expenses should be lower than what the carriers experienced during the 2021 and 2022 chaos.
However, the Red Sea crisis also poses significant risks and challenges for the shipping industry, which depends on the stability and security of the waterways. The industry has called for more protection and cooperation from the international community to ensure the safety of the vessels and the crews. The United Nations, the United States, and the European Union have condemned the Houthi attacks and urged for a peaceful resolution of the conflict in Yemen.
The Red Sea crisis is a reminder of the fragility and importance of the global shipping industry, which connects the world and facilitates trade and development. The industry, which has shown remarkable resilience and adaptability in the face of the pandemic and the geopolitical tensions, will have to navigate through the uncertain and volatile waters of the Red Sea and beyond.
