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Red Sea Attacks Leave Shipping Companies With Difficult Choices


Jan 6, 2024
Red Sea Attacks Leave Shipping Companies With Difficult Choices


The shipping companies that move goods on one of the world’s busiest trade routes for factories, stores, car dealerships and other businesses face an excruciating decision.

They can send their vessels through the Red Sea if they are willing to risk attacks by the Houthi militia in Yemen and to bear the cost of sharply higher insurance premiums. Or they can sail an extra 4,000 miles around Africa, adding 10 days in each direction and burning considerably more fuel.

Neither option is appealing and both raise costs — expenses that analysts said could ultimately be borne by consumers through higher prices on the goods they buy.

“We are beginning to see the weaponization of the global supply chains,” said Marco Forgione, director general of the Institute of Export and International Trade, which supports British corporate efforts to expand in overseas markets.

In recent months, global supply chains had finally recovered after three years of disruptions caused by the pandemic and even a brief blockage of the Suez Canal, which lies at the northwestern end of the Red Sea and handles some 12 percent of global trade. Freight rates had fallen steeply, and the long delays that had bedeviled retailers in the United States and Europe had been resolved.

So far, the problems in the Red Sea have not disrupted global supply chains to the same extent that the pandemic did. “But we are heading in that direction,” Mr. Forgione said.

The Houthi attacks have continued even after a U.S.-led force was assembled in the Red Sea to prevent them.

Already, some companies, including Ikea and Next, the British retailer, have said that avoiding the Suez Canal. Taking the long route around Africa could delay the arrival of products.

A crucial question will be how the container shipping industry handles the annual surge of exports that typically occurs before China’s factories are idled for weeks at Lunar New Year, which is next month.

Difficulties vary considerably by types of vessel. Oil tankers have been little affected and are continuing to use the Red Sea, as the Houthis appear to have shown little interest in them.

By contrast, the number of specialized car-carrying ships using the Red Sea more than halved last month from December 2022, to just 42 trips, and only one has transited the sea so far this year, said Daniel Nash, head of vehicle carriers at VesselsValue, a London shipping data firm.

The first vessel attacked by Houthi gunmen in recent weeks was a car carrier, the Galaxy Leader, which was hijacked on Nov. 19 while returning to Asia for another load of several thousand cars. The 25-member crew, mainly Filipinos, was also kidnapped and still does not seem to have been released.

Longer voyages around Africa for car-carrying vessels traveling to Europe from Asia are particularly disruptive right now for the global auto industry. Chinese automakers have been rapidly increasing exports to Europe, especially of electric cars. Even before the Red Sea troubles, daily charter rates for transoceanic car carriers had skyrocketed to $105,000, from $16,000 two years ago.

The Red Sea disruption comes as the Panama Canal, which has low water levels caused by drought, has slashed the number of vessels that can pass through. That had forced many ships to choose a longer route to the United States via the Suez Canal.

Websites that track shipping still show scores of vessels in the Red Sea, which connects the Suez Canal and the Mediterranean Sea to the Arabian Sea and the Indian Ocean. But the largest companies have reduced their presence significantly or entirely.

MSC, the largest container shipping company, said in mid-December that it was avoiding the Red Sea. Maersk, the second biggest, temporarily halted transits of the Red Sea then, returned to the area in late December and pulled back again this week after one of its vessels, the Maersk Hangzhou, was attacked.

CMA CGM, the French shipping company, said in statement that some of its vessels had traveled through the Red Sea and that it was planning for a gradual increase of passages through the Suez Canal. “We are monitoring the situation constantly, and we stand ready to promptly reassess and adjust our plans as needed,” it added.

Cosco, the Chinese giant, did not respond to a request for comment. A spokesman for Hapag-Lloyd, which has a fleet of over 250 container ships and is based in Hamburg, Germany, said the company planned to go around Africa until Jan. 9 and then assess the situation.

An analysis provided by Flexport, a logistics technology company, showed that as of Thursday, 389 container vessels, accounting for over a fifth of global container capacity, had already diverted from the Suez Canal or were in the process of doing so.

“It’s about risk assessment, and protecting life and property and cargo,” said Nathan Strang, director of ocean freight at Flexport. “If you can avoid a situation that is putting you at existential risk by just avoiding it, go for it.”

Interruptions in transits of the Suez Canal are uncommon. But the canal closed to international shipping for eight years after the Arab-Israeli war of 1967. Its reopening was “the happiest day in my life,” said Anwar el‐Sadat, Egypt’s president at the time.

Some container vessels still using the Red Sea may be headed to or coming from ports there, like those in Saudi Arabia. For financial reasons, some smaller container ships are also continuing to transit the Red Sea for trips between Europe and Asia.

Ships carrying large numbers of containers can shoulder the added costs of going around Africa, but, Mr. Strang said, the longer passage could destroy the economics of vessels carrying 5,000 or fewer containers.

The quickest route to ports on the U.S. East Coast from China is through the Panama Canal. But shipping companies that avoided that canal because of the drought must now sail for even longer as they detour around the Cape of Good Hope. The Cape journey takes 10 days longer, or some 40 percent more, than traveling through the Panama Canal, Flexport calculates.

The cost of transporting a container to an East Coast port from China has soared to around $3,900 from $2,300 before the Red Sea attacks, says Zvi Schreiber, the chief executive of Freightos, a digital shipping marketplace. When the shipping logjam was at its worst during the pandemic, the cost could be over $20,000.

Insurance costs, usually no more than 0.2 percent of the value of a vessel per journey, jumped to 0.7 percent for ships planning to enter the Red Sea, said Mr. Forgione of the trade institute. “That’s a very significant increase,” he said.

Mr. Schreiber said that he expected shipping companies to be able to handle the current disruption because, after buying more ships in recent years, they had plenty of spare capacity to deal with longer travel times.

“Although the shock is big, and will probably end up being bigger,” he said, “the network is coping with it.”

And Christian Roeloffs, co-chief executive of Container xChange, an online container logistics platform, said in an email that the current supply chain disruptions from China appeared “relatively modest” compared with what happened when the country imposed lockdowns during the pandemic.

Siyi Zhao contributed research.


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