Red Sea shipping attacks: supply chains under strain

Published on Wed, 28/02/2024 - 16:48

Since November, dozens of merchant ships have been targeted in the Red Sea. Attacks on shipping are imperilling supply chains for many UK and European businesses, affecting the availability and cost of core components and commodities, across a range of sectors for Airmic members and partners, in a shipping crisis that shows few signs of resolution.

Attacks by the Iranian-supplied Houthi government in Yemen began on 19 November with the hijack of a vehicle carrier, Galaxy Leader. Helicopter-borne hijackers captured the ship, took the crew hostage and steered it to Hodeida in Yemen.

Since that first hijack, there have been dozens more attacks, with more than a dozen ships struck by an array of ballistic missiles, small boats and so-called loitering munitions – kamikaze drones fitted with explosives. On 3 March it emerged that the Rubymar, a bulk carrier with a cargo of agricultural fertiliser, has become the first ship to sink as a result of the Houthi attacks. 

The attacks are focused on a vulnerable choke point of the maritime trade artery between Asia and Europe, as shipping passes by Yemen’s coast, entering or exiting the southern Red Sea on the Suez Canal route.

The CEO of Maersk, the world’s largest container shipper, has expressed alarm that the crisis could continue “for a few months at least”, with unfolding consequences, as more marine traffic is routed around Africa.

“This is extremely disruptive because you have close to 20% of global trade that transits through the Bab al-Mandab Strait,” said Vincent Clerc, speaking at the World Economic Forum.

Global consequences

The US-led Operation Prosperity Guardian was formed to try to shield international shipping. Since January, the US and UK have also launched airstrikes on Yemeni miliary targets. However, Houthi attacks are continuing, adding US and UK-linked vessels to their targeting of vessels linked to Israel.

Targeting specific countries through commercial shipping is almost inevitably imprecise. Galaxy Leader’s crew include Filipinos, Ukrainians, Mexicans, Romanians and Bulgarians; its flag state is the Bahamas; it was chartered by a Japanese firm; and its registered owner, Galaxy Maritime, is incorporated in the Isle of Man and is owned by another firm, Ray Car Carriers, which is co-owned by an Israeli businessman – hence its targeting.

The majority of international shipping is still taking the Red Sea route, according to Neil Roberts, secretary of the Joint War Committee (JWC), representing London market marine war insurers.

“Estimates are inconsistent, but probably 60-70% are still going through,” says Roberts. “Some of them consider themselves to be low risk, perhaps because they’re Chinese, Russian, or they’re carrying Iranian oil. However, targeting isn’t perfect by the Houthis, and we consider the risk of being hit by munitions to be the same for any vessel in the area.”

While marine war insurance rates have reportedly more than doubled since November, Roberts emphasises the market is fulfilling its role of supporting vessels transiting difficult areas.

“Rates have risen proportionate to risk. They’re not enough on their own to deter vessels from going through, and they’re not at the level of Black Sea rates, for example. The only thing that deters vessels going through is the danger to crew and vessel as perceived by the owners,” he adds.

Supply chain effects

Some carmakers have already blamed delays in shipping essential components for suspended production, while some retailers have begun to cite supply chain delays due to the crisis.

“This isn’t theoretical anymore,” says Ami Daniel, co-founder and CEO of Windward, a marine analytics provider. According to Windward data, delivery time from China to the UK has doubled. Tesla, Michelin and Volvo have halted production lines, while Ikea and Next have announced inventory shortages.

“The vast majority of car carriers have gone around the Cape of Good Hope, and container vessels and gas carriers are almost completely out. General cargo, dry bulk and tankers have stayed the course more than others, I assume due to lower risk profile,” he adds.

Container ships, by their cargo values, tend to be among the most consequential for corporate supply chains. Box carriers have been among the most immediately affected by the situation, due in large part to an early doubling of the rates for hiring containers going through the Red Sea, with inevitable consequences for global logistics.

“This is a reflection of the ‘just in time’ economy, based on the efficiency of the chain working perfectly,” Roberts says. “Covid showed that was possibly the wrong way to go, and that we needed the ‘just in case’ economy, with some slack in the system, and some storage.”

On 17 December, Maersk led several European container carriers by halting Red Sea container shipping. Since then, the number of box ships transiting the Red Sea has plummeted from more than 100 ships each week to as few as 36, according to Lloyd’s List.

Hansen says: “As some of the major container liners are West European, including Maersk, CMA, MSC and Happag Lloyd, the impact on containers is higher than other segments, even if COSCO continues its transits.”

With more ships opting to go the long way between Europe and Asia, time delays will likely become more of a factor alongside managing shipping costs, emphasises Torbjorn Soltvedt, principal Middle East and North Africa analyst, Verisk Maplecroft.

“Diverted oil and liquefied natural gas (LNG) cargoes have yet to hit fuel and gas prices in Europe, but rises are likely if delays continue. With most tankers bound for Europe now diverting away from the Red Sea, we are already seeing some scheduled LNG cargoes being cancelled,” Soltvedt says.

“The added distance and time are also stretching supply chains, which could lead to a shortage of cargoes. The Red Sea crisis also comes at a bad time for global supply chains, with traffic through the Panama Canal restricted due to low water levels,” he adds.

No end in sight

How long the Red Sea crisis will go on is impossible to know, but the seriousness of its supply chain consequences will depend on its duration, stresses Soltvedt.

“The longer most major shipping liners are compelled to take the longer route around Africa, the more difficult it will be to prevent additional costs from being passed on to consumers,” he says.

“Another important temporal factor is the risk of escalation. The longer the crisis continues, the greater the risk of escalation into a more serious regional conflict with even wider economic implications,” he continues.

Oil and LNG tankers have so far not been struck, which has insulated energy prices from any market shocks. Soltvedt attributes this situation in large part to the March 2023 diplomatic agreement between Saudi Arabia and Iran, but worries that it could change.

“But a more concerted campaign by the Houthis to target tankers remains a threat if relations between Iran and the Gulf states deteriorate,” he says.

The priority for Saudi Arabia, the UAE and Qatar will be to keep the conflict between Hamas and Israel at arm’s length, as they are acutely aware of Iran’s ability to disrupt tanker movements in the wider region, Soltvedt suggests.

“That is why they have been reluctant to join the US-led maritime coalition in the Red Sea. But as the fallout from the war in the region widens, it will become more difficult to maintain a neutral position – and keep oil and gas out of the wider conflict,” he adds.