The Red Sea crisis puts 40% of Asia-Europe trade at risk. The Houthi attacks have direct consequences on global trade, which fell by 1.3%. And this is the analysis of Boston Consulting Group (BCG) photographs the situation and develops 4 resolution scenarios.
The Houthi attacks on ships in the Bab el-Mandeb Strait, while not targeting the cargo of the boats, are surprisingly effective, resulting in a greater US and British military response. The offensives underway in recent weeks are endangering a critical point for trade and the global economy: 12% of global trade and 40% of Asia’s trade with Europe are concentrated in the Red Sea, as well as 30% % of global container traffic.
It’s about a critical choke point for global maritime tradeee its instability poses significant risks to shipping companies, international trade flows and global supply chains. To understand how the situation will evolve in the coming months, Boston Consulting Group (BCG) has formulated 4 scenarios based on the progress of the conflict in Palestine.
An unprecedented crisis
“The ongoing geopolitical tensions in the Red Sea, which follow previous crises due to the pandemic and the conflict in Ukraine, have highlighted how stability is now the exception and not the rule in the international maritime transport sector.” He claims Gabriele Ferri, Managing Director and Partner of BCG, responsible for the Travel, Transportation and Infrastructure division. “The current difficulties, however, represent an unprecedented opportunity to radically rethink resilient strategies in a context where turbulence is the norm, and to cultivate cultures and processes within the organization that allow greater flexibility and speed of implementation.”
Causes and consequences on trade and the global economy
The attacks had major impacts on global trade, decreased by 1.3%, severely affecting international trade flows and supply chains. Furthermore, between January and February 90% of container ships on the Asia-Europe routemainly large, were diverted to the Cape of Good Hope, a change that created a increase of approximately 30% of containers on this trade route. Another consequence concerns transit timeswhich today provide approximately 10 days more for Asia-Northern Europe routes and 15-20 days for routes entering the Mediterranean.
The effects of these impacts manifest themselves first and foremost in exosi freight rateswhich in January reached a peak of three times pre-crisis levels, now falling, but not yet reached pre-war levels.
The four future scenarios
The first is the Rapid Resolution: optimistic scenario, which suggests a rapid conclusion of hostilities and minimal long-term impact on shipping routes and global trade. It presupposes effective diplomatic interventions and the immediate cessation of attacks, leading to the restoration of safe passage through the Bab el-Mandeb Strait.
The second is Managed Escalation: it involves a controlled increase in regional tensions but with effective international and regional responses that prevent a total crisis. Shipping companies adapt by rerouting routes and increasing security measuresleading to higher shipping costs and longer delivery times but avoiding a complete halt in trade.
The third is Protracted Conflict: a scenario in which persistent hostilities lead to long-term disruptions in the Bab el-Mandeb Strait, forcing a permanent change in shipping routes. This significantly affects shipping times and costs, redesigning global trade models, with particularly negative impacts on Europe-Asia trade flows.
The fourth is Regional War: the most serious scenario involves a large-scale regional conflict, which drastically affects not only the Red Sea but also international stability and security more generally. The implications for global shipping are profound, with widespread diversion of routes around Africa, skyrocketing shipping costs and severe strains on global supply chains.
Strategic responses for each scenario
If the crisis continues beyond the first quarter of this year, shipping companies will be faced with immediate decisions. They must balance higher freight rates with higher costs due to longer routes, as well as the possibility that customers may not want to bear the same volumes of demand.
In scenarios 2 and 4, with forecasts of the crisis continuing beyond March, the model estimates that shipping companies will be able to offset only half of the impact of the hijacking on the Cape of Good Hope, deploying 25 to 30% more capacity (measured in TEU miles/week) and with freight rates that could potentially triple or even quintuple compared to pre-crisis levels. They could achieve this by adding ships, through cascading either chartering or increasing the speed of their ships.
Cargo owners could accept longer delivery times, however, more realistically they would be inclined to reduce their demand or find alternative transportation. Effectively, a prolonged crisis would increase rates and damage customer profitability, especially those with high-value, low-volume goods. Companies will therefore need to develop a broader product offering to provide alternative options to their customers. Examples would be routes to Europe via the India-Middle East-Europe Economic Corridor (IMEC) or Umm Qasr in Iraq.
If the crisis were to last until 2025 (scenario 3), load owners will instead have to reorganize production flows and modify their production networks, as well as the supply chain. They may also increase prices where possible to preserve margins, although it may result in lower volumes.
In scenario 4, where the entire region becomes unsafe for shipping, the IMEC and Umm Qasr options would be ruled out and companies would have to get creative. Many cargo owners may resign themselves to the Cape of Good Hope route, but others will seek faster and cheaper routes that could develop through investment.
Adaptations are needed
The crisis has prompted a strategic reassessment within the industry, highlighting the need for greater preparedness, flexibility and diversification of routes and operations. The analysis therefore highlights the need for companies to adapt to a “new normal” of geopolitical instability, including increasing operational flexibility, strengthening security measures and engaging in diplomatic efforts to safeguard maritime trade routes.