The Implications of Attacks on Ships in the Red Sea

The recent attacks carried out by Iran-backed Houthi militants on ships in the Red Sea have had a significant impact on global trade. These attacks have caused major shipping lines and oil transporters to suspend their services through the Red Sea, leading to disruptions in the shipment of goods and fuel. As a result, there is a potential for further disruptions and price increases in the future.

In response to these attacks, a coalition of countries including the United States, the United Kingdom, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles, and Spain have come together to create a new force tasked with protecting ships in the region. This is a welcome development for the affected shipping companies, which include MSC, Maersk, Hapag Lloyd, CMA CGM, Yang Ming Marine Transport, and Evergreen. These companies collectively represent around 60% of global trade. In addition to suspending their services through the Red Sea, Evergreen has also announced the temporary suspension of its shipping service to Israel, and Orient Overseas Container Line (OOCL) has stopped accepting Israeli cargo.

The attacks on ships in the Red Sea have had significant implications for Israel’s imports and shipping industry. Approximately 30% of Israeli imports are transported through the Red Sea, with many products being booked months in advance. With the extended voyage times resulting from the attacks, goods with a shelf life of two to three months may become unviable to import from the Far East. This uncertainty has led to importers needing to increase their stock, incurring higher costs. Furthermore, the delays in shipping have impacted the competitiveness of Israeli products in the market, as time to market becomes less competitive. These challenges pose significant difficulties for Israel’s shipping industry and importers.

The attacks on ships in the Red Sea have also affected the oil shipping industry. BP, a major oil giant, has decided to pause all transits through the Red Sea due to the security situation. This decision has further pushed up ocean freight costs, with Asia-U.S. East Coast prices increasing by 5% since the start of the Israel-Hamas war. As companies avoid the Suez Canal, which feeds into the Red Sea, and opt for longer routes around Africa to reach the Indian Ocean, shipping routes have become longer and incurred higher fuel costs. This situation has resulted in a perceived “vessel capacity crunch,” impacting the availability of shipping resources and leading to delays in container and commodity deliveries.

Container shipping represents a significant portion of global shipping, with an estimated value of goods transported amounting to $1 trillion. The disruptions in the Red Sea and the extended time spent on longer shipping routes have led to delays in the availability of shipping resources. Delays are not only affecting container and commodity deliveries but also the return of empty containers to Asia, exacerbating supply chain woes. Moody’s has highlighted these delays, noting that while they may have credit positive implications for the container shipping industry and tanker and dry bulk markets, there is a risk of further disruption to supply chains. Additionally, insurers are widening their high-risk zone due to the attacks, which could result in higher insurance premiums for shippers and consumers.

The shift in shipping routes away from the Suez Canal is likely to have a detrimental impact on Egypt’s already-struggling economy. The country relies on the revenue generated by the Suez Canal, and with a reduction in traffic through the canal, Egypt’s economy will suffer further. This is a significant concern, as the country has already faced challenges in its tourism sector due to the ongoing Israel-Hamas war. Egypt’s role in owning, operating, and maintaining the Suez Canal makes it particularly vulnerable to the implications of the attacks on ships in the Red Sea.

The attacks by Iran-backed Houthi militants on ships in the Red Sea have had wide-ranging implications for global trade. The suspension of services by major shipping lines and oil transporters, rising freight costs, supply chain disruptions, and the economic impact on Egypt are all significant concerns. The creation of an international force to protect ships in the region is a positive step, but the long-term effects of these attacks on global trade and shipping remain uncertain.

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