Red Sea Crisis Explained: How Shipping Came To A Standstill Again

Major shipping lines have stopped moving goods through the Suez Canal after Houthi rebels in Yemen attacked commercial vessels in the area.

The Houthis claim this is in response to the Israel – Gaza conflict and since mid-November have been targeting cargo ships with drones and missiles. One tanker, the Galaxy Leader, was even boarded and successfully hijacked.

While no one has yet been killed, shipping groups like Maersk, MSC and Hapag Lloyd have taken the decision to reroute traffic, or in some cases, direct ships to safer waters and wait there.

The consequence of this is that carriers will be facing greater running costs which will ultimately reflect in freight rates.

The significance of the Red Sea

Approximately 12% of global trade passes through the Red Sea, including 30% of global container traffic. Billions of dollars of traded goods and suppliers pass through the area every year making it one of the world’s most densely packed shipping channels.

To the north of the Red Sea sits the Suez Canal, a waterway that connects Europe to Asia and East Africa. To the south there is a narrow strait of water known as the Bab el-Mandeb strait. It is just 20 miles wide and sits between Djibouti and Yemen.

It’s from here where the Houthi rebels have been launching attacks. They hold the west of Yemen, including its Red Sea coast, and are aligned and supplied by Iran, despite claiming political independence.

The attacks on containerships

Initially the Houthis launched long-range ballistic missiles at Israel but it was proving ineffective. Since mid-November, however, the group switched their focus to attacking commercial shipping vessels.

And despite the rebel group initially saying that only ships travelling to Israel would be targeted, the threat to trade has grown as vessels flagged to other countries with no connection to Israel have been attacked.

In response the US has increased patrols in the area and have successfully repelled attempts to board other cargo ships. Similarly, US, French and British warships have shot down Houthi drones and missiles.

The impact on shipping

By 18th December 2023, BP halted all shipments of oil and gas through the Red Sea and seven out of the 10 biggest shipping companies had suspended operations in the Red Sea. Instead ships are being diverted around the Cape of Good Hope, on the southern tip of Africa, increasing their journey time by approximately two weeks.

Insurance risk premiums for sailing through high-risk areas are also rising. This risk premium paid by shipping companies was just 0.07% of the value of a ship at the start of December, but has risen to about 0.5% to 0.7% in recent days.

It is not clear when commercial shipping groups will feel confident enough to allow their vessels to pass through the Bab el-Mandeb strait again. Mohammed al-Bukhaiti, a member of the Houthi leadership, has claimed his group will confront any coalition formed by the US.

While the direct military threat is limited, there are concerns the situation could escalate if a successful Houthi strike results in fatalities.

How this affects you

The situation is similar to that of the grounding of the Ever Given, the ship that blocked the Suez Canal for six days in 2021.

Shippers are being told that, with carriers reportedly reviewing contracts, introducing surcharges and increasing rates, customers would have to accept rising FAK rates, while they continue to book on lower contract rates.

With the rerouting of shipping lanes, transit times will be also getting longer. Several weeks, if not months, of supply chain disruption look likely, with ships and containers in the wrong places in the build-up to Chinese New Year, which starts on 10 February.