Houthi attacks in the Red Sea begin to reshape maritime flows

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Just as global supply chains finally returned to normal, a rebel group in Yemen began attacking container ships and oil tankers passing through the Red Sea.

Continued attacks by the Houthis, an Iranian-backed militant group, have increased global shipping costs, caused cargo shippers or their customers to opt for longer alternative routes from Asia to Europe and the United States, and have raised alarm bells about the economic costs of a broader conflict.

According to Moody’s, nearly a fifth of U.S. cargo arrives at East Coast ports after transiting the Red Sea and Suez Canal. Solar panels, electric vehicle batteries, toys, and vacuum cleaners are among the products that make that journey. But for now, economists don’t anticipate a major impact on the prices American consumers pay unless the violence worsens.

Amid uncertainty about how long the attacks will last, manufacturers and retailers are already feeling the economic fallout. Automakers Tesla and Volvo said in recent days they would idle their plants in Germany due to parts shortages related to the outage. British oil company Shell has stopped all shipments through the Red Sea, according to a report from the Wall Street Journal.

“This is a sign that the situation is getting worse, not better,” said Lars Jensen, chief executive of Vespucci Maritime in Copenhagen. “This shows that military intervention has done nothing to alleviate the situation.”

Over the past four years, global supply chains have weathered the coronavirus pandemic, changing consumer purchasing patterns, record inflation, and an unexpected war in Europe. In recent months, a severe drought has limited access to the Panama Canal and forced some cargo to be transported across the isthmus by rail rather than by ship.

Now, a worsening conflict in the Middle East threatens routine trade.

Another cargo ship was attacked in the Red Sea on Tuesday, while a second major oil company began moving its tankers away from the waterway, a sign that US military strikes against Houthi rebels in Yemen have done little to quell the threat to world trade.

The Greek bulk carrier Zografia was hit by a missile a day after a US-owned ship, the Gibraltar Eagle, was hit in a similar attack. In another incident that occurred around the same time on Tuesday, four small boats approached within 400 meters of a ship in the Red Sea, north of Eritrea, but were chased away by small arms fire, according to a Maritime Trade report from the United Kingdom. Operations.

No one claimed responsibility for the latest attacks, which came after a third round of US military actions against Houthi targets in Yemen.

The attacks are beginning to extend beyond the Red Sea to the Gulf of Aden, which flows into the Arabian Sea and the Indian Ocean. This threatens maritime access to Djibouti, the commercial gateway for Ethiopia’s 120 million people, and complicates the task facing US and allied military planners.

Three months into the war in Gaza, the maritime danger zone extends hundreds of kilometers from its original location in the Red Sea, said Ami Daniel, chief executive of Windward, a London-based maritime intelligence company. Naval forces protecting global trade are now dangerously depleted.

He hopes that as a result, the Suez Canal, which handles 10 to 15 percent of the world‘s oil trade, will be effectively closed to international shipping. Shipping a ship through the Suez Canal will now cost between $3 million and $5 million, including increased insurance, security, and hazard pay costs for the crew. The detour around the Cape of Good Hope in southern Africa, which adds seven to nine days to the trip from Asia, could cost only $2 million for the same type of ship, he said.

Monday’s attack on the Gibraltar Eagle “renders the Suez Canal irrelevant,” he said.

If attacks in the Red Sea continue, some U.S. East Coast shippers could opt to bring their goods through West Coast ports before loading them onto freight trains for the journey east, analysts said. .

The Houthis began attacking ships in the Red Sea after the outbreak of war between Israel and the Hamas terrorist group in early October. The Houthis say the attacks are retaliation for the Israeli military offensive in Gaza, which has killed nearly 24,000 civilians, according to the Hamas-run Gaza Health Ministry.

Since the outbreak of fighting in the Middle East, the cost of shipping a standard container from China to Europe has soared to more than $4,700 from less than $1,000, according to the Freightos index. That’s a dramatic increase, but it falls short of the pandemic-era peak of around $15,000 two years ago.

Shipping costs have not increased further because the industry has a lot of excess capacity.

In response to supply chain issues during the pandemic, cargo carriers such as Maersk and Hapag-Lloyd ordered dozens of new container ships. That additional capacity is allowing the industry to absorb the current disruption by reallocating vessels to the longer shipping routes around the Cape of Good Hope.

“It is expensive and takes more time. But physically it can be done,” Jensen said.

While skyrocketing freight rates are bad news for companies transporting goods from Asia to Europe or the United States, it is also good news for freight forwarders who have been feeling the financial impact of heavy investment spending in amid slow demand.

Maersk’s profit in its most recent quarter fell to $521 million from $8.9 billion during the same period a year earlier. Quarterly revenue fell by almost half. In November, Maersk said it had cut its workforce last year by 7,000 people and planned cuts of an additional 3,500 jobs this year.

When Maersk and other container shipping lines report their next batch of financial results in a couple of weeks, the numbers should look much better, Jensen said. Thanks to strong demand, they have been able to increase rates above any increase in their own insurance and fuel costs.

For now, the fighting in the Red Sea is considered unlikely to have an immediate impact on the US economy. Higher shipping costs will likely translate into higher prices, especially in Europe. But Gregory Daco, chief economist at EY Parthenon, said the current situation is unlikely to increase the annual U.S. inflation rate of 3.4 percent by more than 0.1 percentage point.

“It would take a prolonged or intensified situation for shocks to seep into inflation visibly,” he said.

Companies that have been reducing bloated inventories could reverse course and start ordering more products to protect against supply disruptions, according to Phil Levy, chief economist at Flexport, a logistics provider. Such a change could make it difficult for the Federal Reserve to complete its victory over inflation.

Under different circumstances, the decision by major oil companies like Shell to halt shipping through the Red Sea would have a major impact. But the demand and supply of energy are ample. With the Chinese economy struggling and US oil production at a record level, the impact of the Houthi attacks is limited.

A barrel of Brent crude cost $78 on Tuesday, down from $85 the day before Hamas attacked Israel.

A similar pattern is playing out with liquefied natural gas, even though the Red Sea is a major shipping route for the product, which is exported in large volumes from Qatar.

Europe has a lot of LNG in storage, so the loss of some shipments is much less disruptive than it was two years ago.

“Energy prices just aren’t performing like they did after Russia invaded Ukraine,” said Margaret Kidd, program director and associate professor of supply chain instruction and logistics technology at the University of Houston. “If our economy was going crazy and the Chinese economy was going crazy, this would be different. But that’s not what’s happening.”

However, if the attacks continue indefinitely, they could eventually drive up oil and gas prices and bring down the global economy.

The Houthis say they are attacking ships linked to Israel or its American and British allies. Asian shippers bound for local ports deliver their cargoes unmolested, Jensen said.

In December, BP said it would suspend oil tanker shipments through the disputed waterway. Shell CEO Bernard Wael, speaking at the World Economic Forum in Davos on Tuesday, confirmed that his company had suspended shipments to the Red Sea. Oil markets have taken the news in stride.

(c) 2024, The Washington Post