Since the outbreak of the latest Israel-Palestine conflict, tensions in the Red Sea region have escalated, transforming it into a high-risk zone with significant repercussions for commercial shipping and international supply chains.
Recently, multiple ships in the Red Sea fell victim to attacks by Houthi rebels from Yemen. To mitigate risks, several international shipping companies, including Germany’s Hapag-Lloyd, Denmark’s Maersk, the Mediterranean Shipping Company, and France’s CMA CGM, have announced the suspension or rerouting of operations in the Red Sea. According to The Economist, other shipping companies may follow suit.
Approximately 12% of global shipping passes through the Red Sea and the Suez Canal. Since the EU embargo on Russian oil, the transport of diesel and crude oil through the Red Sea has significantly increased, heightening its strategic importance. This escalation of risk in the Red Sea has far-reaching consequences.
To ensure safe passage for merchant vessels in the Red Sea, the United States is coordinating the formation of a multinational escort alliance and has called on the UN Security Council to address the frequent attacks on merchant ships. However, Houthi leaders claim the capability to counter any alliance action in the Red Sea, potentially deployed by the United States.
Under escort, merchant vessels experience a significant reduction in speed, and seeking alternative routes results in longer transit times. Dry conditions hindering the Panama Canal traffic forced shippers to consider longer, more expensive routes.
Data from Vortexa suggests that choosing alternative routes, such as around the Cape of Good Hope in Africa, from the Middle East to Europe, from India to Europe, and from Russia to India and China, could increase transit times by 58% to 129%. The Middle East Gulf to Mediterranean route sees the highest increase, soaring by 129% from 17 to 39 days.
Analysts anticipate that the extended transit times could disrupt the oil and refined oil product markets. In the coming weeks, the flow of crude oil and refined oil products may shift as some oil and shipping companies begin adjusting operations. The corresponding increase in insurance rates and prolonged transportation times will elevate shipping costs and, consequently, product prices.
South Bank analyst Mikkel Emil Jansen suggests that a comprehensive suspension of Red Sea routes by shipping companies could create a “Suez Canal 2.0” scenario with rising rates, extended delivery times, and decreased supply reliability.
While the Suez Canal blockage in 2021 had a brief impact on global shipping and supply chains, the current Israel-Palestine conflict, nearing three months, poses a more prolonged uncertainty, causing greater market unease compared to the Suez Canal incident.
Optimistic analyses propose that Houthi attacks target specific countries, limiting their overall impact on international shipping. Goldman Sachs analysts state that this interruption is unlikely to have a significant effect on crude oil and liquefied natural gas (LNG) prices.
However, concerns persist among market participants that continued disruptions in international shipping in the Red Sea region could adversely affect global supply chains. The movement of essential commodities such as food, fuel, and other vital goods may be threatened, impacting businesses and economies in the Middle East and beyond. If the Red Sea situation expands to affect shipping in the Arabian Sea, the economic cost will be even more significant, as one-third of global oil shipments traverse the Arabian Sea.
