The world of global trade is currently facing a challenging situation as a result of recent events in key maritime passages like the Red Sea, Suez Canal, and Panama Canal. These developments are primarily attributed to missile attacks by Houthi militants, causing significant disruptions and impacting major shipping companies.
The Red Sea’s pivotal role in shaping India’s trade dynamics cannot be overstated, influencing the formulation of trade-related policies. Political stability and security in the region, particularly around the Suez Canal, are imperative for maintaining uninterrupted trade flows. Recent disruptions, such as the attacks last Friday, underscore the potentially far-reaching impact on India’s trade routes, leading to potential economic consequences in the medium to long term.
India’s trade through the Red Sea encompasses the export of petroleum products, chemicals, pharmaceuticals, engineering goods, and textiles. Simultaneously, the country predominantly imports crude oil, gold, precious metals, electronics, coal, and minerals through this critical maritime route.
The Israel-Palestine War has played a pivotal role in the unfolding events. The conflict has led to the halting of operations at vital maritime points, resulting in a ripple effect that is felt across various sectors of global trade. The consequences are far-reaching, affecting not only shipping companies but also industries dependent on smooth trade routes.
One of the immediate effects is the elongation of shipping routes. The disruptions caused by the conflict have forced shipping companies to seek alternative paths, leading to a 40 per cent increase in the length of routes. This, in turn, is driving up operating costs, creating a domino effect that is expected to persist into 2024. Longer routes mean more fuel consumption and increased time in transit, contributing to higher operational expenses.
Major players in the shipping industry, including CMA CGM, Hapag-Lloyd, Maersk, and Mediterranean Shipping Co., have responded swiftly to the challenges. These companies have temporarily halted transits through the Suez Canal, a key passage connecting the Mediterranean Sea to the Red Sea. Additionally, the Panama Canal has seen restrictions on MPV (multipurpose) shipping, leading carriers to explore alternative routes.
Christian Roeloffs, CEO of Container xChange, an online platform for container logistics, shed light on the situation. According to him, the escalating conflict in the Red Sea, where Houthi rebels have targeted commercial vessels. In his view, the aftermath of these attacks has prompted container liners to redirect their vessels, avoiding the Suez Canal and choosing alternative routes. This strategic shift is causing significant delays in East-to-West trade journeys.
The closure of the Panama Canal for MPV shipping until at least May further adds to the complexity of trade routes. He says carriers are now considering routes via the Cape of Good Hope and the Strait of Magellan as alternatives. This redirection of shipping paths is not only impacting schedules but also raising concerns about the overall efficiency of global trade.
What will be the consequences?
According to Christian Roeloffs, the consequences of these disruptions are not limited to the shipping industry alone. Various sectors are expected to bear the brunt of increased costs. Europe-bound energy supplies, palm oil, and grains, in particular, will see a surge in costs. The increase in operating expenses for shipping companies is likely to be passed on to consumers, affecting the prices of everyday goods.
The potential impact on container shipping is significant. Vessel schedules are at risk of disruptions due to route changes and heightened security measures. Delays in shipments through both the Suez and Panama Canal could affect delivery timelines, creating a domino effect on supply chains.
Moreover, war risk premiums are expected to rise, affecting carriers and potentially leading to increased freight costs. Alternative routes, such as the longer Cape of Good Hope, may incur higher operational expenses, adding to the financial burden on shipping companies.
Closure of Panama Canal?
In his view, theclosure of the Panama Canal is also anticipated to shift market dynamics, influencing routes and cargo volumes, particularly in the Trans-Pacific trade. The West Coast is expected to regain market share as carriers adjust their strategies to navigate these challenges.
The impact on Europe’s energy supply, palm oil, and grain, which heavily rely on the Suez Canal Waterway, is a cause for concern, he says.
The Houthi attacks have triggered a series of challenges for global trade in 2024. The adaptation to alternative routes, the potential rise in costs, and the shifting dynamics of key trade routes are all aspects that demand careful consideration and strategic planning from the industries involved.
Meanwhile …
After leaving the mission in the Philippines prematurely, Carrier Strike Group 1 led by the ‘USS Carl Vinson’ is moving towards the Middle East (currently stopped in Singapore).
Based on reports in the public domain if the war escalates between the Houthis and the US, it will lead to the complete closure of the Suez Canal. This means that the goods to reach Europe through the shipping lanes will bypass all of Africa. This will lead to a major price rise for the goods.
According to reports in the public domain: The US has announced plans to build a military coalition in the Red Sea in response to Yemeni attacks on ships bound for Israel in retaliation for the regime’s brutal war on the Gaza Strip.
The coalition, called ‘Operation: Guardians of Prosperity,’ includes England, Bahrain, Canada, France, Italy, Netherlands, Norway and Spain. Saudi Arabia and the UAE declined to engage in the operation.
At least 12 shipping companies have already suspended transit through the Red Sea due to safety concerns. Shipping companies have diverted from the Suez Canal, causing higher shipping and insurance costs.