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The global supply chain and shipping industry have endured a lot in recent years. And 2024 is off to a rough start.

COVID-19 wreaked havoc on every level of international trade and shipping. Manufacturers were unable to receive essential supplies to create products, and even if they did, they often lacked sufficient workforce to create their goods. 

Rising shipping costs and heavy reliance on “just in time” inventory systems plagued global trade. 

The ongoing trade war between the United States and China continues to hamper international trade, and the Russia-Ukraine war created substantial issues with commodity trading and shipping in the Black Sea.

In 2021, the “Ever Given” cargo ship became stuck in the Suez Canal for six days, causing delays that cost over $10 billion in trade a day. 

And now, the global shipping industry is severely impacted by the spillover effects of the Israel-Palestine war. 

Suffice to say, it has been a rough 3-4 years for the international and shipping industries.

What is happening in the Red Sea?

In response to Israel’s invasion of the Gaza Strip, and the United States continued economic and military support for Israel, the Iranian-backed and Yemen-based Houthi militants have conducted numerous attacks on civilian cargo ships.

According to Al Jazeera, “The Houthis aren’t going to stop what they’re doing, until the Israeli offensive in Gaza concludes,” Gregory Brew, an analyst at the Eurasia Group, told Al Jazeera, “and even then they are likely to continue for some time after.”

The Houthi militants first conducted an attack on 19 November 2023 and have since launched 27 attacks, ranging from suicide drones to anti-ship cruise missiles. 

In response to the Houthi attacks on cargo ships, the US and UK launched a joint military mission, targeting Houthi militants in Yemen.

The initial outbreak of the Israel-Palestine war and the subsequent impact reaching the Red Sea has led to major changes in the international shipping industry, as the Red Sea and Suez Canal account for nearly 30% of all cargo ship traffic.

To date, 12 shipping companies, in addition to numerous corporates, have suspended activities in the Red Sea, instead choosing to reroute their journeys around the Cape of Good Hope in South Africa.

Vincent Clerc, Maersk’s chief executive told the Financial Times that their ships will avoid the Red Sea for the foreseeable future. He added, “In the short run, it could cause significant disruptions at the end of January, February and into March.”

Beyond geopolitics: How will this impact global trade?

We are already seeing the immediate implications of the Houthi attacks and the joint US-UK military action on the night of 11 January. 

Clarksons Research shows that the number of cargo ships in the Red Sea has decreased by 90% compared to rates in 2023.

John Miller, chief economic analyst for Geneva-based Trade Data Monitor said, “China-Europe seaborne is the world’s most important trading relationship, and that’s what’s imperilled by threats in the Red Sea.” 

This naturally will drive up the costs of global shipping significantly in the short run, and preliminary data shows that this is already taking effect.

The journey around the Cape of Good Hope will roughly add 10 days, 13,000 km and $1 million in costs per journey, but companies like AP Møller-Maersk and Hapag-Lloyd have deemed it necessary. 

Increased fuel usage and days will create significant environmental ramifications, alongside the clear economic impact.

Anne-Sophie Fribourg, Vice President of Global Ocean Freight at Zencargo said, “In the short term, we’re seeing a significant 25% reduction in capacity. Rerouting vessels via the Cape of Good Hope has increased transit times by 10-20 days, depending on the size of the vessels. At Zencargo we’re observing rate increases ranging from 90% to 300% compared to just a month ago, a significant surge. All of this disruption is going to lead to more delays and more congestions in ports whilst the crisis is ongoing.”

Speaking on the environmental impact of the new routes, Adam Hearne, CEO and Co-founder of CarbonChain said, “CarbonChain’s analysis of a common shipping route, Shanghai to Rotterdam, shows that an average (median) bulk carrier could see an emissions increase of around 30% by rerouting via the Cape of Good Hope, compared to the Suez Canal route. 

“With shipping responsible for 2-3% of global emissions, this escalation poses yet another challenge to the industry’s decarbonization targets, which it’s already off track to meet (per the IEA). It doesn’t just affect ship operators, but businesses trading goods via these routes, who are facing rising fuel costs as well as pressure to tackle their supply chain emissions.”

Prior to the first Houthi attack, in October 2023, container prices sat at $1,004 (Shanghai-Rotterdam) and $1,344 (Shanghai-Genoa). In January 2024, they are $3,577 and $4,178.

The rise in costs has already hit specific commodities as well, according to the BBC, Brent Crude oil prices have hit $80 per barrel. 

Oil companies Shell and BP have announced that all shipments through the Red Sea are paused until further notice.

Prime Minister Rishi Sunak voiced his concern over the “major disruption to a vital trade route and [higher] commodity prices”.

Not only will commodity prices and general costs of shipping increase, but insurance premiums will almost certainly rise, which will both be absorbed by the companies and passed along to the end customers. 

In the rarer cases where some companies choose to continue operations in the Red Sea, insurers will either refuse coverage or significantly increase premiums. 

But when the more likely situation arises, that companies will need insurance to cover the trip around the Cape of Good Hope, costs will likely increase as well.

Insurance brokerage and risk management firm, Arthur J. Gallagher & Co. said, “In this circumstance, directors and officers in industries beyond just shipping could be exposed to risk in several ways that their management liability insurance policies could respond to.

If there is significant disruption to a company’s supply chain, the decrease in cargo shipments passing through the Red Sea area may result in a decrease in a company’s revenue. If the company experiences financial difficulties as a result – especially if suppliers, customers or shareholders believe that the directors and officers failed to adequately address the situation or take necessary precautions to mitigate risk and ensure operational stability – key stakeholders may hold the D&Os responsible for mismanagement or negligence.

For shipping companies, there is also an added layer of complexity surrounding hijacking and ransom demands in the Red Sea area. If the company’s cargo or vessels are targeted by pirates or face ransom demands, the directors and officers may be held accountable for any perceived failures in security measures or crisis management. Again, claims could be made against the policy for alleged negligence or inadequate response to such threats.”

The longer journey increases the vessel’s exposure to mechanical issues, weather conditions and piracy, which is more common along the Eastern and Western waters of Africa than in the Red Sea.

Robert Besseling, Founder and CEO of Pangea-Risk said, “The detour around Africa, involving longer routes through the Horn of Africa and the South Atlantic, leads to increased fuel consumption and extended transit times, contributing to inflation and higher emissions. These increased shipping costs are expected to gradually impact the global economy, exacerbating an already delicate recovery.

While US-led airstrikes might temporarily impact the Houthis’ capabilities by reducing its weapons and materiel stockpiles, they would not fundamentally degrade their power. Any decrease in weapons supply is likely to be brief, as Iran, the primary supporter, is expected to replenish these resources. 

In the next two to three weeks, it is anticipated that Houthi attacks on vessels will persist, albeit potentially at a reduced rate and intensity, as the group reorganises and formulates its forthcoming strategies.”

Further escalation? We have to wait and see

On Monday, a United States cargo ship, the Gibraltar Eagle, was struck with an anti-ship missile. Initial reports show that no one was injured and there is limited damage to the goods. On Tuesday, Greek-owned vessel, the Zografia, was hit with another missile.

We are still waiting to see the long-term impact of the Red Sea crisis, and if there will be further escalations in the United States and United Kingdom’s retaliatory strikes. The longer that these problems persist, the more severe the shipping impacts will be.

Some of the supply chain issues have already been felt by major global companies. On 12 January, Tesla announced a manufacturing pause due to the Red Sea attacks. According to the electric vehicle company, this could lead to 5,000-7,000 cars not being built.

On Tuesday, Volvo announced a pause in production in their Belgian factory, as they are unable to receive a shipment of gearboxes due to Red Sea turbulence. Michelin, a global tire company, has already experienced two production pauses, as they were unable to access the necessary raw materials.

The ramifications are quickly piling up.

If the problems are sustained, Tesla’s pause in production will not be an isolated event, and trade finance providers might start adjusting their strategies accordingly. 

Ultimately, the continued attacks by the Houthi militants and response by Western militaries will certainly have an impact on global shipping and trade, the only question is to what extent. If the Red Sea tensions lead to a larger regional conflict, then these concerns mentioned today will only intensify.