The Red Sea plays a crucial role in facilitating East-West trade, particularly in the oil industry. Ships navigate through the Suez Canal, located north of the Red Sea, to reach Western countries via the Mediterranean. The Suez Canal serves as the shortest and fastest maritime route between Asia and Europe, handling approximately 12 percent of global trade. Additionally, the Bab el-Mandeb Strait, situated in the southern part of the Red Sea, connects to the Indian Ocean and the Arabian Sea, facilitating 40 percent of international trade. As a result, around 52 percent of global trade is at risk when disruptions occur in the Red Sea.
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The shipping industry, which is vital for international trade, faces challenges at various points worldwide. One major concern is the instability caused by Houthi attacks on ships in the Gulf of Aden and the Red Sea, a crucial route for vessels transiting the Suez Canal. Consequently, the safety of this significant maritime artery is now in question, raising doubts about the feasibility of trade in the region.
Suez Canal traffic disrupted
The heightened risk of attacks has led shipping companies to reconsider using the Red Sea route through the Suez Canal. Between December 15 and 19, 2023, thirteen shipping companies announced the suspension of their services to and from Israel or through the Red Sea. This reorientation of shipping routes has resulted in longer travel times and increased costs.
Expensive and time-consuming shipping
Shipping expenses have surged by 200 percent, and further increases are expected as the conflict in the region continues. According to Bloomberg, the diversion of ships in the Red Sea has caused a 173 percent rise in container freight prices. Targeting ships also poses a prominent threat to trade and navigation. The security of the Bab el-Mandeb Strait is crucial for various aspects of the economy, including gasoline prices and security services. Insurance companies have played a major role in driving up shipping costs for companies crossing the Red Sea. Insurers have significantly increased insurance prices for cargo passing through the Red Sea and the Bab el-Mandeb Strait. Typically, insurance rates amount to 0.6 percent of the cargo’s value, but they may now reach 2 percent. Additionally, cargo insurers impose an additional war risk tax, further raising the shipping costs for goods using the Suez Canal route.
Re-routing
As an alternative to the Red Sea route, diverting ships around the Cape of Good Hope increases the travel time for journeys between Europe and Asia by 30 to 50 percent. This change in route has immediate economic consequences and creates logistical challenges for shipping companies in the medium term. For instance, Maersk, a major shipping company, has already started making arrangements to redirect its vessels through the Cape of Good Hope several months in advance. The Maersk Moscow 409E, scheduled to sail from the Netherlands to Malaysia on March 12, 2024, has already received instructions to take the Cape of Good Hope route. This change extends the journey by approximately 17 days compared to the usual route.
However, despite the challenges, the Red Sea crisis has not completely halted trade in the region. Ships carrying low-value cargo and displaying greater risk tolerance continue to follow their normal itineraries. Live data from MarineTraffic shows a significant but reduced number of cargo vessels and tankers sailing through the Bab el-Mandeb Strait into the Red Sea and the Suez Canal.
According to IMF data as of January 22, 2024, the seven-day moving average of traffic through the Bab el-Mandeb Strait decreased by 46 percent compared to the same period in the previous year. In contrast, Suez Canal traffic increased by 63 percent, and traffic around the Cape of Good Hope rose by 70 percent. The increase in diverted ship traffic leads to higher fuel and labor costs, while the average volume of goods reaching their destination decreases.
Most affected countries
The redirection of ships has negatively impacted Egypt’s Suez Canal revenues. By January 12, 2024, revenue had dropped by 40 percent compared to the previous year. Additionally, the situation is exacerbated by the fact that canal fees are denominated in foreign currency, and the Egyptian government faces challenges in acquiring it due to rapid inflation.
Governments worldwide are actively engaged in diplomatic and strategic efforts to protect their shipping interests. India, heavily reliant on the Suez Canal for exporting goods to the Mediterranean, is particularly vulnerable to the Red Sea crisis. The Indian Ministry of Commerce and Industry reported that approximately 80 percent of their merchandise exports to Europe pass through the Red Sea region. European exports account for 15 percent of India’s total merchandise exports.
Freight shipping costs: High-value goods vs. lower-value goods
The redirection of shipping routes and subsequent price increases affect different sectors of the shipping industry in distinct ways. Bulk carriers, which transport less valuable goods such as raw materials, are not as significantly impacted as cargo vessels that carry higher-value goods. The Baltic Dry Index, which tracks the cost of transporting various raw materials, provides insights into the macroeconomic impact of shipping delays. While the index rose above $3,000 in early to mid-December, the shipping cost dropped to $1,503 as of January 22, approaching normal levels.
Conversely, cargo shipping, which handles more valuable goods and is more likely to avoid the Red Sea route, has experienced sustained price increases. The Drewry’s World Container Index, which tracks the average transportation cost of a 40-foot container on cargo ships, has soared from $1,521/40 feet on December 14, 2023, to $3,777/40 feet as of January 18, 2024. Flights from Asia to Europe, which typically pass through the Red Sea, have witnessed the most significant price hikes.
While the costlier shipping of high-value goods has been significantly impacted by the shift to the Cape of Good Hope due to increased insurance expenses, the transportation of low-value goods through bulk carriers persists in the Red Sea. Consequently, freight rates for high-value cargo using alternative routes have continued to rise, while rates for bulk carriers have reverted to normal levels. Furthermore, the Red Sea crisis remains intertwined with the ongoing conflict in the Middle East, suggesting that a resolution is unlikely in the foreseeable future.
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