The Red Sea, a critical artery for global maritime trade, has recently been thrust into the spotlight due to geopolitical tensions and conflict. Particularly, the rise of Houthi rebel activities targeting shipping routes has created a crisis that threatens the stability of global commerce. The consequences of this conflict are felt across the maritime economy, with increased costs, trade disruptions, and broader economic repercussions. This article explores the scope of the crisis, its direct impact on maritime trade, and the long-term implications for the global economy.
Overview of The Crisis
The current crisis in the Red Sea stems from the conflict between Houthi rebels in Yemen and allied forces, particularly involving Israel and the United States. Since late 2023, the Houthis have increasingly targeted commercial vessels traversing the Red Sea, Bab el-Mandeb Strait, and the Gulf of Aden, which are vital waterways for global trade. These attacks, involving advanced drones and missile strikes, have created a hostile environment for maritime trade, prompting major shipping companies to reroute vessels around Africa’s Cape of Good Hope.
Increased hostilities have led to over 80 vessels being attacked, forcing shipping companies to reconsider their transit through these once-secure waters. While avoiding direct threats, this rerouting has contributed to significant cost escalations and trade delays throughout the global supply chain.
Impact on Maritime Trade and Shipping Costs
Shipping Costs
The Red Sea crisis’s most immediate and noticeable impact has been the shipping cost increase. Companies, wary of potential attacks, have shifted to the longer, more secure route around the Cape of Good Hope. This detour can add up to 12 days to typical voyages between Asia and Europe, translating to additional fuel consumption, increased crew wages, and higher vessel chartering costs. The additional sailing time adds as much as 30% to overall shipping costs, with the rerouting of vessels alone costing companies an additional $1 million per voyage.
Insurance Premium
Moreover, insurance premiums for ships that continue to use the Red Sea and Bab el-Mandeb Strait have skyrocketed. The risk of Houthi attacks has driven war risk premiums up from 0.6% to 2% of the cargo value. For large shipping companies like Maersk, these increased risks have forced them to temporarily suspend operations in the region, further contributing to trade disruptions.
Freight Charges
The impact on trade routes is significant, with over 30% of global container traffic passing through the Red Sea. A sharp decline in vessel traffic through the Suez Canal and Bab el-Mandeb Strait — a reduction of 50% in some cases — has shifted the burden to alternative routes, causing global freight rates to rise. For instance, the cost of shipping between Shanghai and Rotterdam doubled, and rates for shipping from Shanghai to Genoa rose by 350% in early 2024.
Disruptions in the Global Supply Chain
The rerouting of vessels not only escalates costs but also disrupts the supply chain. The additional transit time has created delays in shipments, particularly for time-sensitive goods. Container vessels, which often carry high-value cargo, have been among the most affected, with shipping delays of up to 17 days for Asia-Europe voyages. These delays strain global supply chains, especially for industries reliant on just-in-time delivery models, such as automotive, electronics, and retail.
Source – JP Morgan Report
As vessels are forced to reroute, African ports have seen a sharp increase in traffic, contributing to congestion and further delays. Ports such as Durban and Cape Town in South Africa, which were not fully equipped to handle this surge, are experiencing bottlenecks that prolong shipments even further, complicating the global supply chain. For some African ports, like Maputo in Mozambique, the increase in traffic has created short-term economic windfalls. However, this benefit is offset by the broader disruptions to international trade.
Source – IDSA Report
Increased shipping costs and delays also have inflationary effects on the global economy. The cost of consumer goods is expected to rise as businesses pass on the additional shipping costs to consumers. According to estimates, the disruptions in the Red Sea have raised global core goods inflation by as much as 0.7 percentage points in the first half of 2024.
Source – UNCTAD
The chart below compares fuel consumption between the Red Sea route (pre-crisis) and the Cape of Good Hope route (post-crisis). Red Sea Route (Pre-Crisis) – On average, ships consumed about 2,500 tons of fuel per voyage. Cape of Good Hope Route (Post-Crisis) – due to the longer journey, fuel consumption has increased significantly to around 3,800 tons per voyage.
Source – UNCTAD
Insurance Costs
The chart below illustrates the trend in insurance costs as a percentage of cargo value, comparing pre-crisis and post-crisis periods. Insurance costs were relatively low at around 0.6% of the cargo value during the pre-crisis. However, due to the heightened risks from the conflict, insurance premiums have surged to around 2.0% of cargo value, representing more than a threefold increase post-crisis. This sharp rise in insurance costs is a significant factor in the overall escalation of shipping expenses for companies continuing to use Red Sea routes.
Source – UNCTAD
The Red Sea crisis has led to a considerable increase in shipping costs, with companies being forced to choose between the more dangerous and costly Red Sea route or the longer, more expensive Cape of Good Hope route. Both options carry significant financial and environmental burdens, with fuel costs, insurance premiums, and port fees all contributing to a steep rise in overall costs. As ships have been diverted to avoid the Red Sea, the Cape of Good Hope route has become the primary alternative. While it avoids the conflict zone, this route comes with significant cost increases. A comparison or cost breakdown of both shipping routes has been undertaken and is tabulated below.
| Cost Factor | Red Sea Route (Pre-Crisis) | Cape of Good Hope Route |
| Average Transit Time | 25-30 days | 40-45 days |
| Fuel Costs / Voyage | $ 1.2 Million | $ 1.5 – 1.7 Million |
| Suez Canal Toll | $ 300 – 700 thousand | NA |
| Insurance Premium | 0.6% of cargo value | 1.2% of cargo value |
| War Risk Premium | $ 500 / voyage | $ 5000 -10,000 / Voyage |
| Additional Port Costs | Minimal (no additional bunkering) | $ 50,000 – 100,000 |
| Freight Rates | $ 1,500 – 2,000 | $ 3,500 – 6,000 |
| Total | $ 1.5 – 2 Million | $ 2.4 – 2.9 Million |
Broader Economic Implications
The impact of the Red Sea crisis extends beyond shipping companies and trade routes. Egypt, which heavily relies on revenues from the Suez Canal, has experienced a 40% drop in income from canal tolls due to the diversion of vessels. The broader economic effects are also felt across industries, particularly those dependent on stable and efficient shipping routes.
For oil and gas, the crisis has increased transportation costs, particularly for tankers rerouted around Africa. With the Red Sea playing a crucial role in the transport of Middle Eastern oil to Europe and North America, any disruptions in this region have significant consequences for global energy markets. Increased transit times and higher insurance premiums for oil tankers contribute to volatility in energy prices.
Similarly, the global agriculture industry is impacted. Grain shipments from Asia and Africa, which pass through the Suez Canal, have been delayed, exacerbating global food price inflation. These delays come at a time when global supply chains are already strained due to ongoing geopolitical conflicts, such as the war in Ukraine.
Conclusion
The ongoing crisis in the Red Sea highlights the vulnerability of global trade routes to geopolitical tensions. As shipping companies adapt to new realities, the cost structure of global trade is likely to change. Higher shipping costs, increased insurance premiums, and longer transit times may become the norm, particularly if conflicts in the Middle East persist. Businesses will need to develop more agile and resilient supply chains to navigate these disruptions. This may involve diversifying trade routes, increasing stockpiles of critical goods, or investing in new technologies that can help reduce shipping times and costs. In the long term, companies may need to reassess their supply chain strategies, explore more diversified routes, and invest in greener technologies to offset these escalating costs. The current disruptions highlight the vulnerabilities of global trade to geopolitical tensions, and shipping companies will need to adapt to a new reality of higher operational costs and increased uncertainty
In conclusion, the Red Sea crisis represents a significant challenge to the global maritime economy. The direct costs in terms of increased shipping expenses and insurance premiums are already being felt, but the longer-term economic consequences are likely to be even more profound. As global trade becomes more dependent on secure and stable routes, the crisis underscores the need for international cooperation to protect critical maritime arteries and ensure the smooth flow of global commerce. The attacks themselves are unlikely to be resolved soon. Aside from the Israel-Hamas conflict, which is unlikely to subside soon, the Houthis’ realisation that their attacks attract international attention and distract the Yemeni population from the group’s inability to provide basic services is reinforcing their current course of action.
Title image courtesy: https://www.thesacredcalendar.com/
Disclaimer: The views and opinions expressed by the author do not necessarily reflect the views of the Government of India and Defence Research and Studies
References
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