Houthi attacks in the Red Sea threaten the world economy: here’s what’s at risk

Attacks on container ships and oil tankers have reshaped navigation flows, increasing transport costs: analysts’ forecast

Attacks by Yemen’s Houthis on container ships and oil tankers passing through the Red Sea begin to reshape shipping flows globally. And this comes just as global supply chains were finally returning to normal. Continued attacks by the Iranian-backed Houthis do rising transportation costs globally and forcing shipping companies and their customers to choose alternative routes longest from Asia to Europe and the United States. The increase in shipping costs, notes the ‘Washington Post’, will probably be reflected in an increase in prices, especially in Europe more than in the United States.

According to Moody’s, nearly a fifth of U.S. goods arrive at East Coast ports after passing through the Red Sea and Suez Canal. Solar panels, electric vehicle batteries, toys and vacuum cleaners are among the goods making this journey. But for the moment, economists do not expect a significant impact on the prices paid by consumers Use, unless the violence worsens. However, manufacturers and retailers are already feeling the economic repercussions of the uncertainty over how long the attacks will last.

In recent days, car manufacturers Tesla and Volvo said they would close plants in Germany due to a shortage of spare parts caused by supply interruptions. The British oil company Shell has stopped all its shipments across the Red Sea, as the Wall Street Journal reported yesterday. “This is a sign that the situation is getting worsenot improving”, comments Lars Jensen, managing director of Vespucci Maritime in Copenhagen. “It shows that the military intervention did nothing to alleviate the situation”.

Over the past 4 years, global supply chains have faced the coronavirus pandemic, changing consumer purchasing patterns, record inflation, and an unexpected war in Europe with the invasion of Ukraine on February 24th 2022 by Russia. In recent months, the ‘Washington Post’ notes, a severe drought limited access to the Panama Canal, forcing some goods to cross the isthmus by rail rather than ship. Now, the worsening of conflict in the Middle East threatens trade even more and U.S. military strikes against Houthi rebels have so far done little to quell the threat to global trade.

Yesterday the Greek-owned, Maltese-flagged vessel ‘Zografia’ was hit by a missile in the Red Sea after a US-owned vessel, the Gibraltar Eagle, was hit in a similar attack the day before. In a separate incident on Tuesday, four small boats came within 400 meters of a ship in the Red Sea, north of Eritrea, but were driven away by small arms fire, according to a United Kingdom Maritime Trade Operations report . No one has claimed responsibility for the latest raids, which followed the third US military raid against Houthi targets in Yemen.

The attacks, the Washington Post notes, are starting to spread beyond the Red Sea to the Gulf of Aden, which leads to the Arabian Sea and the Indian Ocean. This threatens Djibouti’s access to the sea, a commercial gateway for Ethiopia’s 120 million inhabitants, and complicates the task of US military strategists and their allies. Three months after the start of the war in the Gaza Strip, the maritime risk zone now extends for hundreds of miles from its original location in the Red Sea, noted Ami Daniel, the CEO of Windward, a maritime intelligence company based in London.

The naval forces that protect global trade are now dangerously small. Daniel predicts that the Suez Canal, which handles 10-15% of the world’s oil trade, will effectively be closed to international traffic. Passing a ship through the Suez Canal will cost $3 million to $5 million, including increased insurance costs, security and hazard pay for the crew. Rerouting around southern Africa’s Cape of Good Hope—which adds seven or nine days to the journey from Asia—could cost up to $2 million more for the same type of vessel, he explained.

If attacks in the Red Sea continue, some U.S. East Coast shippers may choose to get their goods through West Coast ports before loading them aboard freight trains for the journey east, analysts said. Since fighting broke out in the Middle East, the cost of shipping a standard container from China to Europe has risen from less than $1,000 to more than $4,700, according to the Freightos index. That’s a notable increase, but it’s lower than the pandemic-era peak of about $15,000 two years ago. Shipping costs have not increased further because the industry has ample spare capacity. In response to the supply chain crisis during the pandemic, shipping companies such as Maersk and Hapag-Lloyd have ordered dozens of new container ships. This additional capacity, notes the US newspaper, “is allowing the sector to absorb the current disruption by reassigning ships to the longer shipping routes around the Cape of Good Hope”. “It’s expensive and takes longer. But physically it can be done,” Jensen said.

While soaring transportation costs are bad news for companies moving goods from Asia to Europe or the United States, it’s good news for freight companies that have felt the financial burden of huge investments in the face of weak demand. Maersk’s profits in the latest quarter fell to $521 million from $8.9 billion in the same period a year earlier. Quarterly revenue fell by nearly half. In November, Maersk said it reduced its workforce by 7,000 last year and planned a further 3,500 job cuts this year. When Maersk and other container shipping companies report their next financial results in a couple of weeks, the numbers should be better, Jensen said. Thanks to strong demand, they were able to raise rates above any increase in their insurance and fuel costs.

For the moment, underlines the ‘Washington Post’, it is considered unlikely that the clashes in the Red Sea will have an immediate impact on the US economy: the increase in shipping costs will likely be reflected in an increase in prices, especially in Europe. But Gregory Daco, chief economist at Ey Parthenon, said the current situation was unlikely to raise the U.S.’s 3.4% annual inflation rate by more than 0.1 percentage point. “It would take a prolonged situation or escalation of events for the repercussions to have a visible impact on inflation,” he said.