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Seaing Red

In a challenging scenario, shipping companies traversing one of the world’s most vital trade routes are confronted with a difficult choice. They must decide between risking Houthi militia attacks in the Red Sea and paying higher insurance premiums, or circumventing Africa, adding 10 days and significantly more fuel to their journey. Both options increase costs, which analysts predict will ultimately impact consumers through higher prices for goods.

Delays, Delays, Delays

This predicament arises as global supply chains, which recently recovered from pandemic disruptions and a Suez Canal blockage, face a new threat. Marco Forgione of the Institute of Export and International Trade warns of the emerging “weaponization of the global supply chains.” The Red Sea, critical for 12 percent of global trade, is now a focal point of concern.
The Houthis’ continued assaults in the Red Sea persist despite a U.S.-led force’s efforts to safeguard the area. Major retailers like Ikea and Next anticipate delays due to rerouting around Africa, which could be especially significant ahead of the Lunar New Year, a peak time for exports from China.

The maritime industry is experiencing varied impacts. Oil tankers continue using the Red Sea, seemingly untargeted by Houthis. Conversely, car-carrying ships are drastically affected, with a notable decrease in Red Sea transits. The hijacking of the car carrier Galaxy Leader exemplifies the heightened risks.

Disruption in the Red Sea coincides with challenges at the Panama Canal, where drought-induced low water levels have restricted vessel passage, forcing some ships to opt for the longer Suez Canal route. Major shipping companies like MSC, Maersk, and CMA CGM have either reduced or entirely avoided Red Sea transits. China’s Cosco and Germany’s Hapag-Lloyd are also adapting their routes in response to the situation.

A History of Disruption

Expert analysis shows that over a fifth of global container capacity has been diverted from the Suez Canal. Nathan Strang of Flexport emphasizes that avoiding existential risks by rerouting is a pragmatic choice. Historically, the Suez Canal has seen disruptions, such as an eight-year closure following the Arab-Israeli war of 1967. Currently, some smaller container vessels continue using the Red Sea for financial reasons, but larger ships can absorb the extra costs of the African detour. However, the longer passage could undermine the economics for smaller ships.

The journey from China to the U.S. East Coast now takes considerably longer, affecting shipping costs and container transport economics. The price of transporting a container from China to an East Coast port has risen significantly, and insurance costs for Red Sea travel have more than tripled.

Despite these challenges, the shipping industry is showing resilience. With increased fleet capacity, companies are managing longer travel times. Experts note that the industry, having coped with pandemic-related disruptions, is adapting to these new challenges, though the impact remains significant.