How The Conflict in The Red Sea Is Crippling Global Shipping

What Makes the Red Sea Conflict-Affected Area So Crucial?

Like any chokepoint, the southern Red Sea is a strategically located shipping channel with high traffic. However, unlike some of its cousins around the world, this narrow section lying south of the Suez Canal is one of the most densely packed on the planet. More importantly, it serves as the main waterway linking Europe to East Africa and Asia.

Approximately 12-15% of global trade passes through the Red Sea. This proportion includes up to 30% of global container shipping, making it responsible for the flow of billions of dollars worth of international trade annually.

Any problem with such a shipping terminal will likely cause critical delays, direct ripples in the international supply chain, and ultimately inflation.

The narrow strait at the southern end of the Red Sea stretching between Djibouti and Yemen—Bab el-Mandeb—has been the target of Houthi rebel attacks on cargo ships and tankers since late 2023.

About the Houthi Rebel Group

The Houthi movement, officially known as Ansar Allah, is a Yemeni rebel group that has controlled much of northern Yemen since 2014. Their dominance over the region around the Red Sea has allowed them to continue attacking ships in the crucial waterway, paralyzing operations around the Bab el-Mandeb strait.

The Iran-backed rebel group declared war on Israel in late October 2023, claiming solidarity with Hamas in the Gaza Strip. They initially targeted vessels they believed were linked to Israel, but later spread to those with no ties to Israel.

How Is the Conflict in The Red Sea Affecting Overseas Shipping?

The Houthis’ actions have drawn military responses from various nations and created what is now popularly known as the Red Sea Crisis. This conflict has disrupted international shipping by forcing ships to take longer routes, increasing costs, transit times, and operational complexities.

The disruption affects the transport of critical goods, including oil, manufactured products, and raw materials; leading to global supply chain issues.

That said, here is a look at how the crisis threatens the commercial shipping world.

Rerouting and Increased Costs

The conflict in the southern Red Sea has forced cargo vessels to avoid the Suez Canal altogether. Major shipping lines including industry giants like Maersk and Evergreen have rerouted most of their freight around the Cape of Good Hope in southern Africa.

Reports indicate that 80% of the global container ship fleet on the Suez route has diverted to the longer route around the Cape of Good Hope.  

The new trade route is a lengthy detour that adds approximately 3,500 nautical miles to the journey between Asia and Europe. Sailing around the entire African continent instead of going through the dangerous Bab el-Mandeb Strait increases transit times by 7-10 days.

This comes with extensive financial implications across different areas of international trade. Some of the costs directly increased by the longer shipping routes include the following:

a)      Fuel Costs

Longer routes mean increased fuel consumption. And with vessels traveling around Africa instead of the Red Sea, they naturally cover more distance, burning more fuel on the extended journey.

Increased fuel consumption significantly increases the financial expenditure on fuel, driving operating costs per journey through the roof. For large container ships, fuel can account for up to 60% of total operating costs.

A report from maritime research firm Drewry estimated that for a round trip from Asia to Northern Europe, the additional fuel cost for a large container ship taking the Cape route could be around $1 million.

b)      Crew Wages

Extended journey times associated with longer voyages result in higher labor costs as crew members spend more time at sea. As a result, each voyage inevitably costs more in wages for shipping companies.

Extended time at sea can also attract overtime pay and additional benefits to compensate for the increased time away from home.

The new security concerns in the Red Sea may also lead shipping companies to respond by implementing additional security measures. This could include investing in security technology or hiring additional security personnel, swelling the operational costs even further.

c)      Charter Rates

Charter rates for available ships have surged with vessels tied up for longer periods on extended voyages.

As ships spend more time in transit, there’s a reduction in the overall available capacity in the market as fewer ships remain for cargo transport.

Global shipping giants like Maersk estimated their available capacity to be down between 15 and 20% in the second quarter of 2024. This reduced capacity associated with scarcity drives up the rates for chartering vessels.

The Baltic Dry Index, which tracks the cost of shipping raw materials, saw a 6.4% increase in the first quarter of 2024, occasioned by the escalation of attacks in the Red Sea. This surge in the BDI was a significant indication of rising charter rates.

As the conflict continues raging on, these rates are expected to rise even further, with shipping companies like CMA CGM announcing new FAK (Freight All Kinds) rates from the Gulf region to Europe to be effective from August.

Skyrocketing Insurance Premiums

The high-risk conditions of the Red Sea Crisis means that players in the shipping industry are operating in a more volatile environment. This situation means that Marine insurers are taking on added risks, which they are now factoring into their insurance premium calculation.

This condition has dramatically increased insurance premiums for vessels traversing the Red Sea. Some insurers have even declared the region a “war risk area,” leading to the following new developments.

·         War risk insurance premiums shoot to 0.7% of a vessel’s value

War risk insurance covers damage due to acts of war, including invasions, insurrections, rebellions, and hijacking. When an area is designated as high-risk, these premiums can increase dramatically, which is the situation currently seen in the southern Red Sea.

London’s syndicate of leading insurers, reinsurers, and underwriters—the Joint War Committee (JWC) started by expanding the ‘high-risk zone’ in the Red Sea and directing their members to charge higher premiums to maintain positive claim-loss ratios.

This move saw war risk premiums shoot to 0.7% of a vessel’s value for a single transit, representing a 14-fold jump in costs. War risk insurance premiums for Red Sea transit before the crisis were a nominal 0.05% of a ship’s value.

·         Premiums increase for cargo insurance

In addition to insuring the vessel itself, the cargo on board a ship also requires insurance. The heightened risk in the conflict-affected region has led to increased premiums for cargo coverage as well.

The International Union of Marine Insurance reported that cargo war risk premiums for Red Sea transits increased by 300-400% in the immediate aftermath of the escalation of the crisis.

·         Some insurers refuse coverage altogether for Red Sea passages

While most insurers are focusing on sustaining positive claim-loss ratios, others are taking a more risk-averse approach. They are opting not to deal with the extreme risk altogether, completely withdrawing coverage for vessels transiting through the Red Sea.

This withdrawal leaves shipping companies to seek alternative, often more expensive, insurance options.

Lloyd’s of London, one of the world’s largest insurance marketplaces, announced in January 2024 that several of its syndicates had temporarily suspended war risk coverage for Red Sea transits.

Disruptions in Global Supply Chain

The rerouting of vessels has led to significant delays in cargo deliveries as they take longer on transit. As a result, various markets have seen potential shortages of goods as delayed shipments can lead to stock-outs in retail and manufacturing sectors.

Some reports show that industries such as automotive, electronics, and fast fashion are experiencing delays of up to three weeks for components and finished goods from Asia.

The situation is particularly dire for time-sensitive or perishable goods. Just-in-time manufacturing processes, in particular, are hard hit by the disruptions.

Many modern manufacturing processes rely on just-in-time (JIT) inventory systems, where components arrive precisely when needed. With new delays in shipping times emerging, such finely-tuned systems can find themselves in disarray.

Congestion at Ports

Seaports around the world are experiencing increased congestion as shipping schedules are thrown into disarray. This is the direct result of vessels arriving outside their scheduled windows.

The irregular arrival of ships due to rerouting and delays can overwhelm port capacity, leading to bottlenecks in unloading and processing shipments.

Europe’s largest seaport, Rotterdam, reported a 15% increase in average wait times for container ships in the first quarter of 2024, attributed largely to the Red Sea crisis.

With the increased congestion due to the irregular flow of cargo, ports are bound to experience additional strain on their infrastructure and manpower.

Final thoughts

The Red Sea conflict has exposed the interconnected nature of the global economy and the critical role that secure shipping lanes play in maintaining economic stability worldwide.

While the situation remains fluid and industry players continue to find ways to navigate the new reality, international shipping customers must brace to bear the brunt while the industry works on long-term solutions to ensure the safety and efficiency of maritime trade.