GLOBAL TRADE DOWNSLIDES AT THE RED SEA CRISIS

The ongoing conflict known as the Red Sea crisis, or the United States-Iran proxy war, commenced on October 19, 2023. This conflict arose when the Houthi movement in Yemen launched a series of attacks, specifically targeting Southern Israel and the vessels in the Red Sea that were allegedly associated with Israel.

Who Are the Houthis: The Houthis are a group aligned with Iran, are situated in Yemen and claim that their attacks are a direct reaction to Israel’s assault on Gaza, which is one of the Palestinian territories. The Houthis are a political and religious organization that supports the Zaidi sect, a minority within Yemen’s Shia Muslim community. They identify themselves as members of the Iranian-led “axis of resistance” against Israel, the United States, and the broader Western world. Previously, the group was referred to as Ansar Allah, meaning “Partisans of God.”

The implications of this conflict on the logistics industry global trade:  The Red Sea serves as a crucial pathway for international trade, with approximately 12% of global trade passing through it. This translates to billions of dollars’ worth of goods and represents around 30% of the world’s container shipping. The Red Sea is renowned for its strategic location, bordered by the Suez Canal in the north and the narrow Bab el-Mandeb Strait in the south. It is a bustling waterway, facilitating the transportation of goods between Asia, Europe, and other regions. Notably, 40% of trade between Asia and Europe typically relies on this route, including the transportation of vital resources like oil, diesel fuel, palm oil, grain, and various other manufactured products. Given its indispensable role in import and export activities, any disruption or conflict in the Red Sea region inevitably impacts global trade.

In December, the volume of containers passing through the Red Sea experienced a significant decline, dropping by more than half to approximately 200,000 compared to the 500,000 recorded in November. This represents a 66% decrease from the average seen between 2017 and 2019, prior to the pandemic. The Kiel Institute for the World Economy in Germany, which compiles trade indicators, has provided this data. As a consequence of the ongoing crisis, major shipping container companies are opting to avoid the Red Sea and instead navigate their vessels around Africa and the Cape of Good Hope. This diversion adds an estimated one to two weeks to the duration of voyages, according to analysts. Furthermore, insurance and fuel costs have risen as a result. These new cost increases are reigniting tensions between importers and ocean carriers, following the surge in shipping rates during the pandemic when freight demand exceeded the available supply of ships, leading to record profits for carriers. However, despite the recent price hikes, prices still remain significantly lower than those observed during the pandemic. Importers who negotiate longer-term contract rates are also feeling the impact of these high costs. Additionally, some shippers are facing additional challenges due to restrictions at the Panama Canal, where a drought has limited the number of vessels that can pass through the waterway. Shipping executives explain that the increased pricing and surcharges are a direct consequence of the higher operating costs associated with longer voyages and reduced capacity, as ships spend longer periods at sea.

The delays resulted in a 1.3% decrease in global trade during December, indicating that goods remained stranded on vessels instead of being unloaded at ports.

Next Steps: The United States is spearheading a security campaign aimed at safeguarding ships in the Red Sea, with the participation of the United Kingdom, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles, and Spain. The Houthis lack a navy to establish a blockade, resorting instead to intermittent attacks and a single assault carried out by a helicopter. Currently, the primary focus is on the eastern region, as it poses a direct and imminent danger to shipping. However, countries in the Horn of Africa and along the western coast will also be closely monitoring the situation.

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