The Red Sea crisis has triggered a 20-25% hike in marine insurance premiums, as shipping companies face increased risks of attacks by Houthi rebels in Yemen. The conflict has also disrupted global trade, forcing some vessels to reroute around Africa and adding to inflationary pressures.
What is the Red Sea crisis?
The Red Sea is one of the world’s most important trade routes, connecting Asia and Europe via the Suez Canal. About 12% of global trade passes through the Red Sea, including 30% of global container traffic. However, since late November 2023, the Red Sea has become a hotspot of violence, as Houthi rebels in Yemen have launched attacks on commercial vessels in retaliation for Israel’s bombardment of Gaza. The Houthis are backed by Iran and control the western coast of Yemen, including the Bab-el-Mandeb strait, a narrow passage at the southern end of the Red Sea that is only about 20 miles wide.
The Houthis have used drones, missiles and speedboats to target cargo ships and tankers, causing damage and delays. In some cases, they have boarded or attempted to board vessels. In mid-November, they hijacked a tanker, the Galaxy Leader, in a dramatic operation filmed by body-worn cameras. The attacks have escalated in recent weeks, prompting some of the world’s largest shipping companies, such as Maersk and MSC, to halt or divert their traffic through the Red Sea. The US has also announced a maritime coalition, dubbed Operation Prosperity Guardians, to protect shipping from Houthi attacks.
What are the implications for global trade?
The disruption of the Red Sea trade route has significant implications for global trade and the world economy. Rerouting ships around the Cape of Good Hope on the southern tip of Africa adds about 3,000-3,500 nautical miles (6,000km) to journeys connecting Europe with Asia, adding about 10 days to the duration of the trip. This increases fuel costs, turnaround times and port congestion. According to ING, redirecting ships costs up to $1m in extra fuel for every round trip between Asia and Europe.
The higher shipping costs are likely to be passed on to consumers and businesses, adding to inflationary pressures that are already high due to supply chain bottlenecks and rising energy prices. The Red Sea route also carries a significant amount of oil and gas from the Middle East to Europe and North America, meaning that any disruption could affect energy markets and prices. Moreover, the Red Sea crisis could exacerbate geopolitical tensions in the region, as Iran and its allies clash with Israel and its allies over Gaza and other issues.
How can the crisis be resolved?
The resolution of the Red Sea crisis depends largely on the outcome of the broader conflict in Yemen and the Middle East. The Houthis have said that they will stop attacking ships if Israel stops bombing Gaza and lifts its blockade on the Palestinian territory. However, Israel has shown no sign of backing down from its military campaign against Hamas and other militant groups in Gaza. The US and other western nations have condemned the Houthi attacks and called for a peaceful solution to the Yemeni civil war, which has killed more than 230,000 people since 2015. However, diplomatic efforts have so far failed to end the fighting or bring the warring parties to the negotiating table.
The Red Sea crisis poses a serious threat to global trade and stability. Unless a political solution is found soon, the situation could worsen and have far-reaching consequences for the world economy.