Draft:Response of the shipping industry to the Red Sea crisis

• Comment: The lead is completely missing, did you forget to finish it? ABG (Talk/Report any mistakes here) 00:01, 17 December 2024 (UTC)

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Background

The flow of the maritime shipping industry is essential to the world economy, as around 80% of global goods are shipped by sea.. In recent years, the maritime sector has come under increasing pressure from external events impacting shipping capacity, such as extreme weather patterns, natural disasters, accidents, vessel groundings, and geopolitical crises. Despite this, their impact on how disturbances impact shipping networks has received limited attention.

The Red Sea region is critical to the shipping industry's ability to transport goods across the globe. The route connects Europe with Asian markets by transiting the Middle East and carries 30 % of the yearly container ship traffic as well as transporting 12% of global trade. Before the crisis, the yearly value of shipments transiting the Red Sea rested at around $700 billion, which included as much as 8,7% of the global oil barrel shipments. In addition, the route is vital for Chinese cargo carriers since around 95 % of the goods exchanged through sea routes between Europe and China transit the Red Sea and other bottlenecks in the Middle East.

The crisis is not the first time shipping on the Red Sea has been interrupted. For example, the Yom Kippur War of 1973 left shipping companies little choice but to suspend supply lines. Over the years, service has been halted temporarily several times when the safety of navigation could not be upheld. A notable example of disruption was the blockade of the Suez Canal by the grounded cargo ship Ever Given in March 2021. Despite only lasting six days, the inability to transport goods through this chokepoint had an enormous impact on both shipping companies and the flow of global supply chains. The incident indicated the potential consequences of a more prolonged disturbance.

Shipping industry responses

Houthi rebels began to attack cargo ships passing through the Red Sea in October 2023, declaring that the aim of targeting cargo ships was discouraging carriers from shipping to Israel and subsequently cutting the state off from maritime supply routes. However, vessels from several countries travelling to diverse destinations unrelated to Israel have been targeted. By December 2023, the security situation on the Red Sea was deemed volatile enough that shipping companies could no longer conduct business safely in the region. Major shipping groups like BP, Maersk, Cosco, Hapag-Lloyd, MSC, and Evergreen Line responded by suspending their Red Sea voyages entirely. This caused a noticeable drop in traffic levels. In January 2024, less than half as many ships trafficked the Red Sea compared to the same period in 2023. The impact was also visible in the Suez Canal toll revenue, which was reduced from $804 million in January 2023 to $428 million by January 2024. The decline persisted for months, and by March 2024, only around 40 ships crossed the Red Sea daily, compared to more than 100 before the crisis.

Cape of Good Hope route

As major shipping companies could no longer utilise the Red Sea route, an alternative route was required to keep maritime supply chains rolling. The response from the shipping industry has been to reroute traffic to sail along the African coast and around the Cape of Good Hope. Carrying goods around the Cape of Good Hope requires significantly more resources, as the route is 29% longer than the Red Sea transit. The prolonged journey increases fuel consumption and adds roughly 17% to the sailing time. Since shipping companies need to maintain the same weekly schedule and pace of moving cargo, the rerouting also increases the number of vessels required by 17,3% compared to the Red Sea voyage.

Continued use of Red Sea routes

While rerouting was preferred by most shipping groups, not all companies suspended their Red Sea routes. Most larger companies rerouted, but some smaller or regional companies have continued transporting cargo on the Red Sea throughout the crisis. The only major carrier to continue shipping through the Red Sea was CMA GCM, whose vessels were escorted through the area by the French Navy to reduce the risk of attack. However, by February 2024, the route was deemed too risky even with a military escort, and CMA GCM suspended their Red Sea operations. Many shipping companies that remained in the Red Sea sought alternative ways to protect themselves from attacks. For example, some vessels have altered their Automatic Identification System (AIS) destination data field to view prompts such as 'VL NO CONTACT ISRAEL' or 'ARMED GUARDS ON BOARD' to discourage attacks from the Houthi

Economic impacts

The need to reroute vessels around the Cape of Good Hope has created instability for the shipping industry and the global economy. Delivering goods on time has become challenging due to the reroute, and the shipping industry has had difficulties honouring contracts requiring them to pass Red Sea ports. The cost of shipping has skyrocketed, resulting in higher freight rates. These price increases throughout the chain have also resulted in shipping companies not honouring longer-term contracts, forcing clients to renegotiate their cargo shipping at higher rates. Freight rates are expected to remain high for the foreseeable future. Opinions differ on whether the price increase can be wholly attributed to the Red Sea crisis. Some scholars argue that the current rate increases are more modest than the increases during COVID-19, corresponding closer to the costs for the shipping industry. However, while shipping companies have been forced to raise freight rates to cover their costs, their increases have been much higher than warranted. This indicates that the Red Sea crisis has resulted in significant profits for major shipping companies and that the lack of competitive pricing among major shipping companies points to a broader problem of lack of proper competition within the shipping industry.

In addition to the increasing freight rates and shipping costs, marine insurance premiums have skyrocketed since the Red Sea crisis began. While increases are visible globally, they are particularly high in the Red Sea region, where premiums have increased to reflect the heightened risk of carrying cargo across these waters. In addition, some insurance companies have waived their liability for damages sustained due to Houthi attacks, further increasing the financial risks for shipping companies. It has also created challenges for port stations in the Red Sea and the Mediterranean, which, due to the reduced traffic, lose income from vessels that would typically sustain livelihoods in the region. While these challenges have been taxing for the industry as a whole, they have also created particular difficulties for smaller shipping companies. Smaller companies lack large fleets and cash reserves, allowing larger shipping groups to readjust their business and absorb cost increases. In the long run, this could lead to smaller companies failing to keep operations running and thus being outcompeted by larger shipping groups.

Future plans

The Red Sea crisis has created uncertainties for the future of maritime supply chains. It has shown that regional political instabilities have global consequences for how shipping groups conduct business. When or if the shipping industry can conduct business as usual on the Red Sea is still uncertain. Many within the industry took a pessimistic view. They foresaw in early 2024 that disruptions would continue at least until the end of the year, a prediction that has proven accurate as of December 2024. Most companies that do not trade regionally or have binding commitments to use the route still consider the Red Sea a "no-go zone" as of October 2024. As of September 2024, the daily average number of ships passing the Suez Canal was less than half of the number passing during the same period last year.

The Red Sea crisis is neither the first nor the last time a crucial maritime supply line is disrupted. An increasingly uncertain business climate pushes shipping companies to explore alternative ways to keep operations going. Two notable examples are the northern sea route and the IMEC project. The first option aims to redirect traffic between Northern Europe and East Asia through the Northern Sea, a route 40% shorter than the Red Sea alternative. This route presently has sparse traffic compared to other shipping lanes, but companies like Maersk and Cosco are researching whether the North Sea route could be a viable option for the future of shipping. While the route is shorter, it also requires expensive ice-class vessels, which could eat away at the potential profits from cutting the distance. The Russian navigation stations along the way also pose additional cost and complexity, and regional ports are unprepared for major container traffic. Due to these challenges, the route may not prove a viable alternative for several years. Since it would also cause environmental destruction to marine life in the North Sea, some major carriers like Maersk have pledged not to develop the route further.

The other notable potential route to circumvent the Red Sea in the future is the IMEC project. It is a $20 billion effort to connect India with the Middle East and Europe, pushed by leaders of G20 countries to compete with the Chinese Belt and Road Initiative. The supply line would combine sea and railway traffic and is 40% shorter than the Red Sea voyage.. However, scepticism has been raised on whether the project can be transformed into reality since it would require significant infrastructure investment in a volatile region and the transshipping of goods at several points of the route. In addition, alternative means of shipping may function at lower quantities but could presently not match the volumes of container ships, which are necessary to maintain the global flow of goods. Despite the projects above holding promise for the future, the choice to circumvent the Cape of Good Hope instead the voyage of the Red Sea remains the only realistic alternative for shipping companies at present