Major shipping companies redirect traffic away from Red Sea

Multiple major shipping companies (MSC, Maersk, CMA CGM, Hapag-Lloyd), as well as oil company BP, have redirected ships away from the Red Sea due to the threat posed by Houthi rebels from Yemen, who have both seized vessels and shot ballistic missiles at cargo ships since the outbreak of the Israel-Hamas war in October. Now, some ships travel around Africa, which increases the route by as much as 40% to and from the Mediterranean Sea. Also, oil prices have grown following the announcement by BP on Monday, 18 December. So far, the impact on the Suez Canal traffic has been low. However, with the Panama Canal still drought-constrained, an industry-wide move to avoid the Red Sea would snarl global maritime shipping.

Additionally, considering the reliance by Egypt on the finances generated by the Suez Canal, a drop in traffic could have a significant impact on the country’s economy.

While the international response has so far been primarily by commercial companies, any Houthi threat to shut the Red Sea could trigger a much more forceful response by the international community.

Yesterday, the Defence Secretary Lloyd Austin announced a US-led security operation for the Red Sea, but it is currently unclear what it will entail precisely.

Thus, disruptions to global shipping are likely to continue as Washington-led efforts are unlikely to give immediate results.

The Houthi rebels promised to continue their military operations in the Red Sea after the United States announced a multinational naval operation, called Prosperity Guardian, to combat attacks against commercial ships and ensure freedom of navigation.

The Iranian-backed group targets alleged Israeli-linked vessels to protest military actions in the Gaza Strip. The Houthi’s spokesperson said “our war is a moral war, and therefore, no matter how many alliances America mobilizes, our military operations will not stop”.

US, Canada, Italy among others will be involved. Despite the threat to local economies, only Bahrain is participating in the effort as a regional player, as the Houthis are purportedly acting in support of the Palestinians.

As international players work to combat Houthi assaults, private companies are suspending their operations in the area. Seven out of the 10 biggest shipping companies by market share halted their operations in the Red Sea and Gulf of Aden, some stopped accepting Israeli cargo altogether. Other players are likely to follow suit.

Egypt, which is not part of the naval operation, earned a record USD 9.4 billion from ships transiting the Suez Canal last year, representing about 2% of its GDP.

But the only official reaction has been a statement from the Suez Canal Authority saying that it was monitoring the situation.

The need to reroute shipping puts supply chains at risk of collapse ahead of the holiday season, considering already existing issues with the Panama Canal and the poor state of South African ports where many ships were redirected, and placing companies under growing economic stress. Insurance risk premiums for sailing through high-risk areas have grown by as much as 700%. In addition, oil prices grew by 8% since mid-December as Houthi attacks intensified and could continue to grow.