The Red Sea is one of the most important waterways in the world, connecting Europe, Asia and Africa through the Suez Canal. However, since late 2023, the region has been plagued by escalating violence and instability, as Houthi rebels in Yemen have launched attacks on commercial vessels in retaliation for Israel’s bombing of Gaza.
The attacks have disrupted shipping operations, increased costs and risks, and threatened global trade and supply chains. In this blog post, we will explain the background and implications of the Red Sea crisis, and how it is affecting shippers and consumers around the world.
A Vital But Volatile Trade Route
The Red Sea is a narrow sea that lies between Africa and Asia, stretching from the Gulf of Suez in the north to the Gulf of Aden in the south. It is about 2,250 km long and 355 km wide at its widest point. The sea is divided into two parts by the Sinai Peninsula: the Gulf of Suez, which leads to the Suez Canal, and the Gulf of Aqaba, which leads to the port of Eilat in Israel.
The Red Sea is a vital route for container shipping and international commerce, as it links the Indian Ocean with the Mediterranean Sea via the Suez Canal. According to Statista, in January 2023, 123.5 million metric tons of goods were transported via the Suez Canal in Egypt and over 22,000 ships passed through the canal in 2022. About 12% of global trade by volume travels through this route, highlighting its significance in the world economy.
However, the Red Sea is also a hotspot of geopolitical conflicts and tensions, involving several countries and actors in the region. The main source of instability is the ongoing civil war in Yemen, which began in 2014 when Houthi rebels seized control of the capital Sanaa and other parts of the country from the internationally recognized government of President Abd Rabbuh Mansur Hadi.
The Houthis are a Shia Muslim group that are backed by Iran, while the Hadi government is supported by a Saudi-led coalition of Arab states that have been conducting airstrikes and imposing a blockade on Yemen since 2015.
The Houthi Threat and Escalation
The war has created a humanitarian catastrophe in Yemen, with millions of people facing famine, disease and displacement. It has also spilled over into neighboring countries, especially Saudi Arabia, which has been targeted by Houthi missiles and drones. Moreover, it has affected maritime security and trade in the Red Sea, as the Houthis have repeatedly attacked commercial vessels passing through or near Yemeni waters.
The situation worsened in late 2023, when Israel launched a military campaign against Hamas in Gaza, following a series of rocket attacks from the Palestinian enclave. The Houthis declared their solidarity with Hamas and vowed to retaliate against Israel by targeting its shipping interests in the Red Sea. Since mid-November 2023, they have stepped up their attacks on cargo ships and tankers using drones, missiles and naval mines. Some of these attacks have resulted in damage or hijacking of vessels, while others have been intercepted or avoided by naval forces
The Most Notable Incidents
- On November 15, 2023, Houthi rebels seized a Greek-flagged tanker near Bab al-Mandab Strait, which connects the Red Sea with the Gulf of Aden. The tanker was carrying 50,000 tons of crude oil from Saudi Arabia to India. The Houthis claimed that they captured the vessel because it was heading to Israel, but later released it after negotiations with Greek authorities.
- On November 21, 2023, Houthi rebels fired two missiles at an Israeli-owned cargo ship near Port Sudan. The ship was carrying vehicles from India to Israel. The missiles missed their target but caused panic among the crew and nearby vessels.
- On December 4, 2023, Houthi rebels attacked a Singapore-flagged container ship near Djibouti with an explosive-laden drone. The ship was carrying goods from China to Europe. The drone hit the ship’s bridge but did not cause significant damage or casualties.
- On December 9, 2023, Houthi rebels fired a missile at a US-flagged tanker near Bab al-Mandab Strait. The tanker was carrying liquefied natural gas from Qatar to Japan. The missile was intercepted by a US Navy destroyer that was escorting the tanker.
- On December 18, 2023, Houthi rebels attacked a British-flagged tanker near Bab al-Mandab Strait with a naval mine. The tanker was carrying chemicals from Saudi Arabia to India. The mine exploded near the tanker’s hull but did not breach it or cause injuries.
These and other attacks have prompted several shipping companies, such as Maersk, MSC, CMA CGM and Hapag-Lloyd, to suspend or divert their services in the Red Sea, citing safety concerns and rising insurance costs.
Some of them have opted to reroute their vessels around the Cape of Good Hope in South Africa, which adds about 10 days and 5,000 km to the journey between Asia and Europe. Others have chosen to use alternative ports in the region, such as Oman, Saudi Arabia or Egypt, which may also entail additional costs and delays.
Global Impacts, Ripples Across Industries
The Red Sea crisis has significant implications for the shipping industry and global trade, as well as for regional and international security and stability. Some of the main impacts are:
Increased costs and risks for shippers and carriers
The attacks on commercial vessels in the Red Sea have increased the costs and risks of shipping goods through this route. According to analysts, the fleet capacity that moved through the Suez Canal fell more than 60% in the three-week period from December 18 to January 7, compared to the corresponding period last year. The number of TEUs (twenty-foot equivalent units) fell from 3.3 million to just short of 1.3 million as carriers increasingly opted for safe passage.
The alternative route around the Cape of Good Hope, while safer, is longer and more costly, leading to increased fuel bills and higher insurance premiums. According to Xeneta, ocean freight shipping rates between the Far East and North Europe have increased by 124% since the crisis escalated in mid-December 2023. Rates between the Far East and US East Coast have increased by 45% and rates into the Mediterranean have increased by 118%.
The scenario may deteriorate in the upcoming weeks as shipping companies hurry to dispatch orders from China before factories shut down for the Lunar New Year holiday.
Disruption of global supply chains and trade flows
The Red Sea crisis has disrupted global supply chains and trade flows, affecting various sectors and markets. The Red Sea is a key route for transporting oil and gas, as well as agricultural products, metals, chemicals and consumer goods. According to CNBC, about 4% of global oil supply passes through the Red Sea every day, mainly from Saudi Arabia and other Gulf countries to Europe and Asia.
The attacks on tankers have raised concerns about potential oil spills or shortages, which could affect energy prices and security. Moreover, the delays and diversions of container ships have affected the availability and delivery of various goods, such as electronics, clothing, food and medical supplies. This could lead to higher prices, lower quality and reduced consumer choice in different markets.
Escalation of regional conflicts and tensions
The Red Sea crisis has escalated regional conflicts and tensions, involving several countries and actors in the Middle East and beyond. The attacks by Houthi rebels have provoked responses from Saudi Arabia, Israel, the US, the UK and other countries that have interests or allies in the region. Saudi Arabia has intensified its airstrikes on Houthi targets in Yemen, while Israel has conducted covert operations against Iranian assets in Syria and Iraq.
The US and the UK have launched a series of strikes against Houthi targets in Yemen aimed at stopping further attacks and protecting trade through the crucial shipping route. They have also announced a maritime coalition to defend shipping against attacks, which includes France, Germany, Italy, Japan, South Korea and India. Iran has condemned these actions as interference in Yemen’s internal affairs and warned of retaliation if its interests are threatened. The situation remains volatile and unpredictable, with potential for further escalation or de-escalation depending on diplomatic efforts and developments on the ground.
The Impact On Oil Prices, A Double-Edged Sword
One of the most visible effects of the Red Sea crisis is the impact on oil prices, which have surged to their highest levels since October 2022. Crude oil prices hit $80 a barrel on January 12, as fears grew about the economic impact of disruption to international trade through the Red Sea.
The rise in oil prices reflects both supply-side and demand-side factors. On the supply side, there is a risk of reduced oil exports from Saudi Arabia and other Gulf countries that use the Red Sea route to ship their oil to Europe and Asia. According to Moneycontrol, Saudi Arabia exports about 7 million barrels per day (bpd) of crude oil through this route, while other Gulf countries export about 2 million bpd. Any disruption or delay in these shipments could create a supply crunch in the global oil market.
How Can Shippers Cope With The Red Sea Crisis?
Shippers can cope with the Red Sea crisis by taking several measures to navigate the challenges it presents. The crisis has significantly disrupted shipping operations, leading to a surge in shipping costs and delays. To cope with these disruptions, shippers can consider the following strategies:
- Rerouting and Planning: Shippers may need to reroute their vessels to avoid the Red Sea and explore alternative shipping routes to mitigate the impact of the crisis.
- Adjusting Freight Rates: Shipping companies may need to adjust freight rates in response to the increased shipping costs and disruptions caused by the crisis
- Preparing for Capacity Shortages: Shippers should prepare for potential capacity shortages and plan for longer transit times due to the rerouting of vessels.
- Monitoring the Situation: It is essential for shippers to closely monitor the evolving nature of the crisis and its geopolitical complexities to make informed decisions about their shipping operations.
- Addressing Supply Chain Disruptions: Shippers should proactively address potential supply chain disruptions, such as shortages of cargo containers and equipment, by seeking alternative sources and transportation methods.
- Collaboration and Communication: Collaboration with shipping partners and effective communication with customers about potential delays and cost adjustments are crucial for managing the impact of the crisis on shipping operations.
