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The Economic Fallout of Red Sea Tensions

The Economic Fallout of Red Sea Tensions

This article was published in MMJ Issue 10.

The Red Sea, vital for international trade by linking Asia, the Middle East, and Europe, has been choked by conflict since November 2023, sending shockwaves through supply chains and pushing prices. In December, the Yemeni Houthis initiated attacks on ships en route to Israel, declaring their intention to intercept any vessel heading to Israel if the conflict persisted towards Palestinians.

In response, the UN Security Council swiftly passed a resolution urging the Houthis to halt their attacks. Subsequently, the Operation Prosperity Guardian was established in the Red Sea, led by the United States and the United Kingdom, initiating military action against the Houthi military group.

Consequently, vessels are steering clear of the Red Sea, leading to a decrease in traffic at the Suez Canal and severe impediments and disruptions to global trade.

Alternative routes and corresponding costs, monetary and otherwise

When Moller-Maersk, the world’s largest operator of container ships, announced on January 5 that it was
rerouting its vessels around Africa’s Cape of Good Hope, it influenced other shippers to follow suit. This detour leads to increased costs and higher prices.

Historically, vessels travelling from Shenzhen, China, to Rotterdam, Europe’s largest container port, take about 31
days via the Suez Canal’s 10,000 nautical miles. However, if the route goes around southern Africa, the distance increases to over 13,000 nautical miles, taking at least 41 days.

Further, rerouting a ship around Africa adds roughly 10 days and $1 million in fuel costs for each one-way voyage between Asia and Europe. And with the increase to fuel, so do emissions. An average container vessel (150,000 metric tons of cargo) opting for the African route raises emissions to nearly 55,000 tonnes- 14,000 tonnes of CO2 more via the Suez Canal. This also hinders the IMOs commitment to reduce emission from shipping.

Delays leading to supply chain disruptions
There is a delicate balance between different elements in the supply chain. This balance is particularly crucial in the interaction between containers and ships. Ports, with limited berths and size-specific constraints, book berths months in advance for efficient operations. When ships reroute, delays occur, causing congestion at ports. This disrupts supply chains and transport options, overwhelming alternative ports and creating backups at berths and congestion in/out of the ports.

Italy has been gaining a share of sea traffic from the Suez Canal to European markets in recent years. About 40% of Italy’s international maritime trade, totaling around 154 billion euros ($168 billion) in 2022, relies on this route, as per think tank SRM.

See Also

Container Price Surges
There is a surge in container rates, with the FBX index reaching 2,606 points, marking a 105% increase since December 5, 2023. Short-term rates between Asia, Europe, and the US are going up due to reduced capacity from Red Sea threats. Spot rates from Shanghai to Europe surged by 237%, hitting USD 2,870/TEU. Rates to the Mediterranean increased by 187%, and those to the East Coast of America rose by 61%.

Fuel transportation hindrances
Suez Canal disruptions are affecting oil tankers transporting Middle Eastern oil to European refineries. Notably, one-third of the world’s oil is carried by Greek-owned ships. The overall traffic of oil-laden tankers through Bab al-Mandab from January 13 to 17, saw a 58% decrease compared to the 2023 average. This follows a 38% fall in traffic observed between January 6 and January 10, before the strikes occurred, as reported by Mary Melton of analytics firm Vortexa.

Insurance on the rise
According to insurance industry sources, war risk premiums have increased to about 1% of a ship’s value, up from approximately 0.7% last week, even with various underwriter discounts applied. Projections suggest that rates will continue to rise, resulting in hundreds of thousands of dollars in additional costs for a seven-day voyage.

Hopes Remain High
In the face of these challenges, the industry remains optimistic due to encouraging indications of rising demand for commodities and the potential rebound in consumer spending. IMO Secretary-General Arsenio Dominguez emphasised that seafarers are innocent victims in the Red Sea’s volatile situation. He highlighted the crucial need to uphold freedom of navigation for global trade and goods’ maritime flow. Dominguez also called for caution to avoid
escalating tensions in the Red Sea and the broader region. However the consequences are yet to be fully analysed as we wait for the conflict to conclude.

Author: Irasha

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