Attacks in the Red Sea add to global shipping woes

“The impact will be bigger on container ships, followed by tankers and lastly, dry bulk” goods, said John Kartsonas, managing partner of Breakwave Advisors.

“The overall trade numbers through the Suez Canal are relatively small as a percent of global trade, but it is the duration of any disruption that matters,” said Kartsonas, who’s also a partner in the Breakwave Dry Bulk Shipping exchange-traded fund
BDRY,
and the Breakwave Tanker Shipping ETF
BWET.

Global benchmark Brent crude traded on ICE Futures Europe saw its February contract
BRNG24,
+0.18%

BRN00,
+0.18%
climb by $1.40, or 1.8%, to settle at $77.95 a barrel on Monday, while January West Texas Intermediate crude
CL.1,
+0.03%

CLF24,
+0.03%,
the U.S. benchmark, tacked on $1.04, or 1.5%, to settle at $72.47 on the New York Mercantile Exchange.

Houthi militants, an Iranian-backed rebel group in Yemen, have been launching attacks on commercial shipping in the region in recent months, in the wake of Israel’s war with Hamas, an Islamist group also backed by the Iranian regime.

For now, however, the impact on shipping in the Red Sea is “small because it is too early,” said Kartsonas. “If that persists for weeks or months, we should start feeling the impact on higher freight costs, potential delays in deliveries of goods and commodities, and overall higher delivered prices.”

Shipping halt

Energy giant BP PLC
BP,
+0.89%

BP,
+1.61%
on Monday said it halted transits through the Red Sea, joining many of the world’s biggest shipping companies following attacks out of Yemen by Iran-backed Houthi militants.

Container shipping giant A.P. Moller-Maersk
MAERSK.A,
+2.05%

MAERSK.B,
+3.09%
and Hapag-Lloyd AG
HLAG,
+7.95%
stopped their ships from using the southern entrance of the Red Sea after attacks on their vessels, according to The Wall Street Journal.

Red Sea ‘chokepoints’

The Suez Canal and the SUMED pipeline, both of which connect the Red Sea to the Mediterranean Sea, and the Bab el-Mandeb Strait connecting the Red Sea to the Gulf of Aden, are “strategic routes for Persian Gulf oil and natural gas shipments to Europe and North America,” according to the U.S. Energy Information Administration.

Total oil shipments via these routes accounted for about 12% of total seaborne-traded oil in the first half of 2023, and liquefied natural gas (LNG) shipments accounted for about 8% of worldwide LNG trade, the government agency said.

The disruptions to transportation through the Red Sea are “not a crisis since an alternative route exists,” even as that alternative adds 15 days to the journey, said Manish Raj, managing director at Velandera Energy Partners. “Surely, shipping rates and insurance costs have gone up, but there is no collateral damage.”

He pointed out that while Maersk has suspended its tankers on the Red Sea route, the shipping company does not actually transport any crude oil — it transports refined oil products. Given that, it’s a bit misleading to reference the Maersk stoppage of tankers as a potential risk to crude-oil supplies, he said.

There may be a timing impact, but the issue does not alter supply or demand, and “hence is benign in the long run,” said Raj.

“The problem would be much bigger if Iran decides to join in on the action and block the Strait of Hormuz, for which there is no alternative route,” he said. The Strait of Hormuz is a waterway that links the Persian Gulf with the Gulf of Oman and the Arabian Sea.

Read an archived story on the importance of the Strait of Hormuz

U.S., international reaction

The U.S. is working with allies in the Middle East and elsewhere to create an international coalition to defend against attacks by the Houthi rebels on merchant shipping in the Red Sea, Defense Secretary Lloyd Austin said Monday.

“These attacks are reckless, dangerous and violate international law,” Austin said during a press conference in Israel. “We’re taking action to build an international coalition to address this threat.”

“I would remind this is not just a U.S. issue. It’s an international issue requiring an international response,” Austin said, adding that he would be convening a meeting of ministers “in the region and beyond” on Tuesday “to address the threat in a meaningful way in the future.”

The U.S., British and French navies have all announced that they have shot down Houthi missiles or drones in the Red Sea in recent weeks, and the U.S. has reportedly been engaging allies including Jordan, Saudi Arabia and Egypt as it seeks to build a maritime protection force as well as China.

For decades, the U.S. has led the Combined Maritime Forces, a multinational naval partnership of nearly 40 countries which have contributed forces and other assets to protect trade from terrorism and piracy in the region, and the planned initiative could be an extension of this existing coalition.

“We’re going to make sure we’re doing everything that we can to ensure freedom of navigation in the area,” Austin said Monday.

Alternative routes

Meanwhile, there are other issues involved with shipping routes that may be used as alternatives to passage in the Red Sea.

Transits via the Cape of Good Hope in South Africa adds “at least 10 days and over 15% to shipping costs,” said Chris Rogers, head of supply chain research, global intelligence and analytics, at S&P Global Market Intelligence.

“Land-based shipments by rail require crossing Russia, while trucking from the Gulf to Israel may only offset around 3% of shipping,” he said in emailed commentary.

Traffic via the Panama Canal, which connects the Atlantic Ocean with the Pacific Ocean, is “already restricted…reducing the route as an alternative route and vice versa,” said Rogers. That has forced all major shipping to use “Cape routes or transloading strategies,” such as rail from the U.S. West Coast to the East Coast.

The Panama Canal is operating at about 55% of capacity, allowing 22 vessels a day instead of the typical 38 to 40. A drought during the May-December “wet season” has severely reduced water levels, noted economists Kieran Tompkins and Caroline Bain of Capital Economics, in a note. Also, vessels are required to lighten their loads so that they do not sit so deeply in the water.

That’s led to a jump in freight rates (see chart above), with traders forced to choose between paying high premiums for a slot through the canal or embarking on long, expensive journeys around Africa or Latin America or through the Suez Canal, with the latter exposing them to potential Houthi attacks, the economists noted.

“We think the main impact will be in the form of some redirection of trade flows as U.S. exports to Asia or Latin America’s exports to Europe become more costly. However, goods cannot always be sourced from close to home,” they wrote.

—William Watts contributed.