Attacks on the Red Sea mean that shipping companies are faced with difficult choices
The shipping companies that transport goods on one of the world’s busiest trade routes for factories, stores, car dealers and other businesses face an excruciating decision.
They can send their ships through the Red Sea if they are willing to risk attacks from the Houthi militia in Yemen and bear the costs of sharply higher insurance premiums. Or they could sail an additional 6,000 kilometers around Africa, adding ten days in each direction and using significantly more fuel.
Neither option is attractive and both increase costs – expenses that analysts say could ultimately be borne by consumers through higher prices for the goods they buy.
“We are starting to see the weaponization of global supply chains,” said Marco Forgione, director general of the Institute of Export and International Trade, which supports British companies’ efforts to expand in overseas markets.
In recent months, global supply chains had finally recovered after three years of disruptions caused by the pandemic and even a brief blockage of the Suez Canal, which lies on the northwestern side of the Red Sea and handles about 12 percent of global trade. Freight rates had fallen sharply and the long delays that had plagued retailers in the United States and Europe had been resolved.
So far, the problems in the Red Sea have not disrupted global supply chains to the same extent as the pandemic. “But we are moving in that direction,” Mr. Forgione said.
The Houthi attacks continued even after a US-led force massed in the Red Sea to prevent them.
Some companies, including Ikea and Next, the British retailer, have already said they want to avoid the Suez Canal. Taking the long route around Africa could delay the arrival of products.
A key question will be how the container shipping sector handles the annual surge in exports, which typically comes before Chinese factories shut down for weeks during the Lunar New Year holiday next month.
The difficulties vary considerably by type of ship. Oil tankers have been little affected and continue to use the Red Sea as the Houthis appear to have shown little interest in them.
In contrast, the number of specialist car carriers using the Red Sea more than halved last month compared to December 2022, to just 42 voyages, and only one has crossed the sea so far this year, said Daniel Nash, head of Vehicle Carriers at VesselsValue, a London shipping data company.
The first ship attacked by Houthi gunmen in recent weeks was a car carrier, the Galaxy Leader, which was hijacked on November 19 as it returned to Asia for a new shipment of several thousand cars. The 25-member crew, mostly Filipinos, were also kidnapped and appear to have still not been released.
Extended journeys through Africa for car ships traveling from Asia to Europe are currently particularly disruptive to the global automotive industry. Chinese carmakers have rapidly increased exports to Europe, especially of electric cars. Even before the Red Sea troubles, daily charter rates for transoceanic car carriers had skyrocketed to $105,000, up from $16,000 two years ago.
The Red Sea disruption comes as the Panama Canal, which has low water levels due to drought, has reduced the number of ships that can pass through. That had forced many ships to choose a longer route via the Suez Canal to the United States.
Websites that track the shipment still show dozens of ships in the Red Sea, which connects the Suez Canal and the Mediterranean Sea to the Arabian Sea and the Indian Ocean. But the largest companies have significantly or completely reduced their presence.
MSC, the largest container shipping company, said in mid-December that it avoided the Red Sea. Maersk, the second largest, then temporarily halted Red Sea transit, returned to the area in late December and withdrew again this week after one of its ships, the Maersk Hangzhou, was attacked.
CMA CGM, the French shipping company, said in statement that a number of its ships had transited the Red Sea and that it planned a gradual increase in the number of passages through the Suez Canal. “We are continuously monitoring the situation and stand ready to immediately reassess and adjust our plans as necessary,” it added.
Cosco, the Chinese giant, did not respond to a request for comment. A spokesman for Hapag-Lloyd, which has a fleet of more than 250 container ships and is based in Hamburg, Germany, said the company plans to sail through Africa until January 9 and then assess the situation.
An analysis by Flexport, a logistics technology company, found that as of Thursday, 389 container ships, accounting for more than a fifth of global container capacity, had already deviated from the Suez Canal or were in the process of doing so.
“It’s about risk assessment and protecting lives, property and cargo,” said Nathan Strang, director of ocean freight at Flexport. “If you can avoid a situation that poses an existential risk by simply avoiding it, then go for it.”
Interruptions in the Suez Canal transit are rare. But the canal was closed to international shipping for eight years after the 1967 Arab-Israeli war. Its reopening was “the happiest day of my life,” said Anwar el-Sadat, Egypt’s president at the time.
Some container ships still using the Red Sea may be heading to or coming from ports there, such as those in Saudi Arabia. For financial reasons, some smaller container ships also continue to transit the Red Sea on trips between Europe and Asia.
Ships carrying large numbers of containers can bear the extra costs associated with touring Africa, but, Mr Strang said, the longer crossing could destroy the economics of ships carrying 5,000 or fewer containers.
The fastest route from China to ports on the US east coast is via the Panama Canal. But shipping companies that avoided that canal because of the drought now have to sail even longer as they make a detour around the Cape of Good Hope. The Cape trip takes ten days longer, or about 40 percent more, than a trip through the Panama Canal, Flexport calculates.
The cost of shipping a container from China to an East Coast port has risen from $2,300 before the Red Sea attacks to about $3,900, said Zvi Schreiber, the CEO of Freightos, a digital shipping marketplace. When ship logjams were at their worst during the pandemic, costs could reach more than $20,000.
Insurance costs, typically no more than 0.2 percent of a ship’s value per voyage, rose to 0.7 percent for ships planning to enter the Red Sea, the trade institute’s Mr. Forgione said. “That is a very significant increase,” he said.
Mr Schreiber indicated that he expects shipping companies to be able to cope with the current disruption because, after purchasing more ships in recent years, they have sufficient spare capacity to cope with longer journey times.
“Although the shock is large and is likely to become larger,” he said, “the network can cope with it.”
And Christian Roeloffs, co-CEO of Container xChange, an online container logistics platform, said in an email that the current supply chain disruptions from China seemed “relatively modest” compared to what happened when the country imposed lockdowns during the pandemic .
Siyi Zhao research contributed.