Houthi Attacks in Red Sea Disrupt Global Container Shipping Market

The Hamas attack on Israel on October 7 triggered not only a bloody conflict in the Middle East but also a disruption in global trade, effectively blocking one of the most crucial maritime routes connecting Asia and Europe. A year after the start of the conflict, which continues to expand across the region, logistics and shipping companies see no prospects of a return to the pre-Israel-Hamas war normalcy.

The Houthis of Yemen, another Iran-backed group, have turned the Red Sea into one of the battlefronts of the war, targeting ships from countries they consider allies of Israel in solidarity with the Palestinian cause, disrupting traffic through the Suez Canal.

This vital maritime route through Egypt handles around 15% of global trade and 30% of the world’s container trade, according to the International Monetary Fund (IMF), but has seen its traffic plummet due to the Houthi attacks.

The group controls the Bab El Mandeb Strait at the southern end of the Red Sea. The first attack, on November 19, involved a coal-carrying vessel that was sunk by explosive-laden drones.

Since then, approximately 80 commercial vessels have been attacked. In response, the United States and the United Kingdom carried out retaliatory operations, further escalating tensions in the strategic waters of the Red Sea.

The unexpected role of the Houthis in the Gaza war has hit global supply chains just as they were recovering from the disruptions caused by the COVID-19 pandemic. In 2021, the rise in shipping costs contributed to a 1.5 percentage point increase in global inflation in 2022, according to the IMF.

Although the current crisis in the Red Sea has not reached the severity of pandemic-caused disruptions, experts warn that rising tensions continue to pose a significant threat.

Between the initial Houthi drone attacks in the Bab el-Mandeb Strait in November and the end of February, trade through the Suez Canal halved, dropping from 38 million tonnes to 16 million tonnes, according to the IMF, impacting the main trade route between Asia and Europe.

“Typically, there would be an average of 60 vessels passing through the Suez Canal per day, and a maximum of about 30 vessels passing through the Panama Canal,” said Jan Hoffmann, a trade expert at the United Nations Conference on Trade and Development (UNCTAD). “But now, for the first time since we have data—at least this century—we’ve had days with more transits through Panama than through Suez due to the crisis caused by the Houthis.”

As a result, most carriers have had to reroute their ships to avoid the Red Sea, opting for the Cape of Good Hope route in southern Africa, adding up to two weeks and between 5,556 and 11,112 kilometers to the journey to Europe.

The IMF estimates that countries with coastal regions on the Red Sea, such as Jordan, Saudi Arabia, Sudan, and Yemen, will face an average 10% decline in exports this year.

The situation is even worse in Egypt, which hosts the Suez Canal, whose transit toll revenue represented 1.2% of its GDP in the 2022/23 fiscal year. The IMF has lowered its forecast for Egypt’s economic growth by 0.6 percentage points since October last year due to the conflict in the region. In addition to the revenue loss, Egypt is expected to face a foreign currency shortage, which could put further pressure on local inflation, according to the World Bank.

According to Vincent Clerc, CEO of Maersk, one of the world’s largest carriers, sending ships via the Cape of Good Hope requires two to three additional vessels for each service network, reducing shipping capacity.

“Currently, every ship that can sail and every vessel that was previously underutilized in other parts of the world has been deployed to try to fill the gaps,” Clerc said. “This has alleviated part of the problem but hasn’t completely solved it.”

“Today, the distance traveled by container ships is 9% greater than it was two years ago,” Hoffmann said. “This means there’s 9% less capacity to meet global demand.”

This situation has caused container freight rates to soar by up to 200% since mid-December 2023, from an already elevated level due to the COVID-19 years, according to the freight market tracker Xeneta.

“Solutions to address the problem of much longer sailing distances have led to significant congestion around key transshipment ports, driving rates even higher in the second quarter,” explained Peter Sand, chief analyst at Xeneta.

Although the increases in freight rates have been relatively larger on routes crossing the Suez Canal, the impacts aren’t limited to the Asia-Europe route and have affected the entire global network, including routes connecting Asia to the U.S. West Coast.

“Without the option to pass through the Suez Canal, after leaving Shanghai and passing through Singapore, the next alternative for ships to reach New York would be to cross the Pacific and go through the Panama Canal,” Hoffmann said, noting that severe droughts caused by climate change, which hit Panama earlier this year, have reduced the canal’s capacity, further limiting alternative options.

“Thus, the combination of risks we’ve seen this year in the Black Sea, the Red Sea, the strikes at U.S. ports, and limited capacity at the Panama Canal—all these factors have led to increased global freight rates everywhere, not just on routes passing through Suez,” added the UNCTAD expert. “This shows how globalized this business is.”

By February this year, freight rates on the route from Asia to the U.S. West Coast had increased by 130% since early November, according to UNCTAD.

The disruptions to global trade networks have also impacted carriers, such as higher fuel consumption, increased operational costs, ship shortages, port bottlenecks, and rising freight rates.

The oil and maritime research team of the London Stock Exchange Group (LSEG) estimates that it costs 35% more for a large container ship to travel from Shanghai to Rotterdam, the Netherlands, via the Cape of Good Hope compared to the Red Sea.

Currently, freight rates remain high, but analysts predict they will decline as ships ordered during the pandemic begin entering service.

“During COVID-19, and shortly after, shipping companies made huge profits and started ordering new vessels,” Hoffmann said. “These new ships are coming into operation now, which is good because everyone was afraid there would be an oversupply of ships. So now, it’s ‘good’ for shipowners that they have to travel longer distances, as this removes capacity from the market and leads to higher freight rates.”

While the sector has managed to adapt so far, available container shipping capacity remains limited due to the longer sailing distances, according to Xeneta’s chief analyst.

“It’s a complex situation that requires a political solution—something we don’t expect to see anytime soon,” Sand said. “The entire global container shipping market has been affected by this and will remain so until the rerouting of trade routes is complete.”

Source: Valor Econômico

Click here to access the original news reporting: https://valor.globo.com/mundo/noticia/2024/10/04/bloqueio-dos-houthis-no-mar-vermelho-afeta-todo-mercado-global-de-transporte-de-conteineres.ghtml

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