Vessel attacks and disruptions to shipping traffic continue in and around the Red Sea, with a growing military presence doing little to deter the attacks. Due to the sustained instability, major shipping lines continue to circumvent the region, opting for the longer route around the Cape of Good Hope in South Africa. However, this route has considerably lengthened transit distances, increasing time and costs for ocean freight transport.
Prior to the crisis, roughly 12-14% of all global trade transited through the Red Sea via the Bab al-Mandab Strait, a 20-mile (32 kilometers) wide channel dividing the Arabian Peninsula from East Africa to the Suez Canal. As the number of attacks increased, daily freight capacity passing through the region has fallen more than 65% from its expected value.
Attacks increase in number as costs rise
Missile and grenade attacks on vessels continue in the new year, despite increased military presence and coalition air strikes on the Houthi’s military infrastructure in Yemen since January 12.
Military strikes on targets in Yemen did little to deter the Houthi’s attacks, increasing the prospects of further missile strikes and a drawn-out crisis in the Red Sea. In response to the military air strikes, Houthi officials announced on January 15 that they would expand their campaign and begin to target American and British vessels in the region, not just vessels sailing or connected to Israel.
As the crisis threatens to escalate, the financial costs of using the Red Sea climb. War risk insurance premiums have soared to around 0.75% to 1% of a ship’s value since military strikes on Houthi facilities began. A few weeks ago, insurance costs amounted to around a tenth of the current costs. Some insurers are also increasingly hesitant to insure vessels at all that are linked to Israel, the U.S., and the UK following the latest developments in the region.
Meanwhile, some ocean carriers will no longer offer long-term contracts for Asia-Europe routes until the situation in the Red Sea normalizes, adding further uncertainty to shipping costs in the region.
Petroleum and energy sectors disrupted as attacks escalate
The number of gas tankers moving through the Red Sea has reportedly dropped by 96% compared to December.
On January 16, it was confirmed that Shell plc, one of the world’s biggest oil and gas companies, halted transits via the Red Sea during the previous week amid concerns that a hit on one of its vessels could result in a major oil spill or threaten the safety of crew members.
In addition, at least six other oil tankers have changed direction to avoid the region in the last couple of days. Oil prices increased only 2% from January 8 to January 14, but prices could rise in the coming weeks if supply deliveries face further disruption.
Production impacts begin to spread as crisis continues
Global manufacturers are feeling pressure from the attacks and transport diversions in the Red Sea. Japanese automobile manufacturer Suzuki Motor Corporation halted production at its plant in Esztergom, Hungary from January 15 until January 21 due to supply chain disruptions, while U.S.-based Tesla, Inc. plans to suspend most car production at its factory near Berlin, Germany from January 29 to February 11 amid a component shortage caused by vessels being re-directed around the Cape of Good Hope. Shorter operational halts have been confirmed by Volvo Cars AB and Michelin. The former will stop production in Ghent, Belgium for three days during the week of January 15 due to delayed gearboxes, while Michelin will close four factories across Spain from January 21 until January 22 because of delays in the delivery of raw materials. Michelin already halted production during the weekend of January 13-14 for the same reasons.
Meanwhile, Volkswagen AG, a car manufacturer based in Germany, has reportedly been able to avoid operational disruptions after the company chose to re-route many of its car parts shipments around the Cape of Good Hope soon after the crisis in the Red Sea began. The change added around two weeks to the company’s delivery timeline, according to a spokesperson, which has since been incorporated into production schedules. According to some estimates, around 70% of all automotive components moving from Asia to Europe were shipped through the Red Sea prior to the crisis, leaving the sector particularly vulnerable to disruptions in the region. In Spain, industry association Aecoc also confirmed operational impacts on companies making and distributing food, textile and technology products, but did not disclose any names.
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