The continuing attacks by the Houthis, a militant group backed by Iran, have increased global shipping costs, caused cargo carriers or their clients to opt for longer alternate routes from Asia to Europe and the United States and raised alarms about the economic costs of a wider conflict. (The Washington Post)
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.
The continuing attacks by the Houthis, a militant group backed by Iran, have increased global shipping costs, caused cargo carriers or their clients to opt for longer alternate routes from Asia to Europe and the United States and raised alarms about the economic costs of a wider conflict.
Almost one-fifth of U.S. freight arrives at East Coast ports after transiting the Red Sea and Suez Canal, according to Moody’s. Solar panels, electric vehicle batteries, toys and vacuum cleaners are among the goods making that trip. But for now, economists do not anticipate a major impact on the prices that U.S. consumers pay - unless the violence worsens.
Amid uncertainty over how long the attacks will last, manufacturers and retailers already are feeling the economic fallout. Automakers Tesla and Volvo said in recent days that they would idle plants in Germany because of a parts shortage linked to the disruption. British oil major Shell halted all of its shipments through the Red Sea, the Wall Street Journal reported Tuesday.
“This is a sign that the situation is getting worse, not better,” said Lars Jensen, chief executive of Vespucci Maritime in Copenhagen. “It shows that military intervention has done nothing to alleviate the situation.”
Over the past four years, global supply chains have weathered the coronavirus pandemic, shifting consumer buying patterns, record-high 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 instead of ship.
Now, a worsening conflict in the Middle East threatens routine commerce.
Another cargo carrier was attacked in the Red Sea on Tuesday, while a second major oil company began steering its tankers away from the waterway, a sign that U.S. military strikes on Houthi rebels in Yemen have done little to quell the threat to global trade.
The Greek bulk carrier Zografia was struck by a missile one day after a U.S.-owned vessel, the Gibraltar Eagle, was hit in a similar strike. In a separate incident that occurred around the same time Tuesday, four small boats came within 400 meters of a ship in the Red Sea north of Eritrea, but were driven off by small-arms fire, according to a report from the United Kingdom Maritime Trade Operations.
No one claimed responsibility for the latest raids, which followed a third round of U.S. military action against Houthi targets in Yemen.
The attacks are beginning to spread beyond the Red Sea to the Gulf of Aden, which leads to the Arabian Sea and the Indian Ocean. That threatens the sea approach to Djibouti, the trade gateway to Ethiopia’s 120 million people, and complicates the task facing U.S. and allied military planners.
Three months after the start of the war in Gaza, the maritime danger zone extends hundreds of miles from its original Red Sea location, said Ami Daniel, CEO of Windward, a maritime intelligence company based in London. The naval forces protecting global trade are now stretched dangerously thin.
He expects that the Suez Canal, which handles 10 to 15 percent of the world’s oil trade, will effectively be closed off to international shipping as a result. Sending a ship through the Suez Canal will now cost $3 million to $5 million, including higher insurance charges, security and danger pay for the crew. Diverting around southern Africa’s Cape of Good Hope - which adds seven to nine days to the trip from Asia - could cost just $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 the Red Sea attacks continue, some U.S. East Coast shippers could opt to bring their goods in via West Coast ports before loading them aboard 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 terrorist group Hamas in early October. The Houthis say the strikes are in retaliation for Israeli’s military offensive in Gaza, which has killed almost 24,000 civilians, according to the Gaza Health Ministry, which is run by Hamas.
The Houthis say they are targeting vessels linked to Israel or its U.S. and U.K. allies. Asian shippers bound for local ports are delivering their cargoes unmolested, Jensen said.
In December, BP said it would pause oil tanker shipments through the contested waterway. Shell’s CEO Bernard Wael, speaking at the World Economic Forum in Davos on Tuesday, confirmed that his company had suspended Red Sea shipments. Oil markets have taken the news in stride.
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 risen further because the industry has plenty of spare capacity.
In response to supply chain snags 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 reassigning vessels to the longer sea routes around the Cape of Good Hope.
“It’s costly and it takes longer. But physically, it can be done,” Jensen said.
While soaring freight charges are bad news for companies moving goods from Asia to Europe or the United States, they are good news for cargo carriers that have been feeling the financial pinch of heavy investment spending amid sluggish demand.
Maersk’s profits in its most recent quarter slumped to $521 million from $8.9 billion during the same period a year earlier. Quarterly revenue fell by nearly half. In November, Maersk said it had trimmed its workforce last year by 7,000 people and planned an additional 3,500 job cuts 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, said Jensen. Thanks to strong demand, they have been able to raise rates above any increase in their own costs for insurance and fuel.
For now, the Red Sea fighting is considered unlikely to have an immediate impact on the U.S. economy. Higher shipping costs will probably filter through to higher prices, especially in Europe. But Gregory Daco, chief economist for EY Parthenon, said the current situation is unlikely to increase the 3.4 percent annual U.S. inflation rate by more than 0.1 percentage points.
“It would take either a prolonged or escalated situation for the disruptions to filter through to inflation in a visible manner,” he said.
Companies that have been whittling down bloated inventories could reverse course and begin ordering more goods to protect themselves against supply disruptions, according to Phil Levy, chief economist for Flexport, a logistics provider. Such a shift could make it harder for the Federal Reserve to complete its victory over inflation.
Under different circumstances, the decision by large oil companies such as Shell to halt shipping through the Red Sea would have a major impact. But energy demand and supplies are ample. With the Chinese economy struggling and U.S. oil production at a record high, the impact of the Houthi attacks is limited.
A barrel of Brent crude cost $78 Tuesday, down from $85 the day before Hamas attacked Israel.
A similar pattern is playing out with liquefied natural gas, despite the Red Sea being a major shipping route for the product, which is exported in large volumes from Qatar.
Europe has plenty of LNG in storage, so the loss of some shipments is far less disruptive than it was two years ago.
“Energy prices are just not doing what they did after Russia invaded Ukraine,” said Margaret Kidd, program director and instructional associate professor of supply chain 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 is not what is happening.”
Yet if the attacks continue indefinitely, they could eventually push oil and gas prices up and push the global economy down.
