The Van Trump Report

How Red Sea Hazards are Impacting Global Trade… Including Agriculture

Global supply chains are once again being thrown into chaos as attacks by Houthi rebels on vessels in the Red Sea cause shippers to opt for longer and more expensive routes. The narrow waterway provides access to the Suez Canal, through which as much as 15% of global trade passes, including around 8% of global grain trade, 12% of seaborne-traded oil, and 30% of container trade.

For those not familiar with what’s going on, the Houthis are a rebel group in Yemen that have been engaged in a civil war over the country for nearly a decade. Yemen’s government is backed by Saudi Arabia while the Houthis are supported by Iran. As such, the Yemen conflict is widely viewed as a proxy war between the Saudis and Iran.

The Houthis say their Red Sea attacks are in response to Israel’s military offensive in Gaza, signaling solidarity with the militant Hamas group. According to the White House, since Nov. 19, Houthi fighters have attacked commercial ships in the Red Sea at least 24 times. That includes an attack against a Maersk ship over the New Years’ weekend that has now prompted the Danish shipping giant to divert vessels from the area for the “foreseeable future.”

Maersk is not alone. Other major shippers such as Hapag-Lloyd, Evergreen Line, and MSC Mediterranean Shipping Company are also diverting vessels from the Red Sea. In most cases, ships will now be rerouted around the Cape of Good Hope in South Africa, which can add anywhere from 15 to 25 days or more to the journey. Some cargo ships that are delayed because of rerouting may also be subject to late delivery penalties.

Keep in mind, some of these ships were already on a detour from the Panama Canal, which is operating at reduced capacity due to low water levels. That includes some US grain supplies bound for Asia that are already delayed. Using the Suez Canal adds about 18 days each way compared with Panama, while the Cape of Good Hope adds around 22. These extended trips are also causing a shortage of ship capacity.

Keep in mind, Panama’s dry season runs from January through April so the situation there may be a long way from improving. To add salt to the wound, the Suez Canal Authority recently announced an increase of 5%-15% in transit fees, taking advantage of the increasing number of vessels avoiding the Panama Canal.  

Not surprisingly, the longer trips, lack of ship capacity, and added fees, as well as steadily rising insurance premiums, are driving up global shipping costs. According to logistics company Freightos, the cost to ship a common 40-foot container from Shanghai to New York along major shipping routes climbed to an average of almost $5,000 last week, up from $3,500 in the middle of December. The cost from Shanghai to Rotterdam, Europe’s busiest container port, will be around $2,400, up from $1,800 in mid December.

“The longer voyages for diverted services mean longer lead times for importers and some threat of port congestion,” notes Judah Levine, head of research at Freightos. Levine says so far there have not been reports of backlogs, but the longer the shipping disruptions continue, the greater the risk of supply chain disruptions – and rising consumer prices – grow.

The US is trying to organize a coalition, dubbed “Operation Prosperity Guardian,” that can protect ships traveling through the Red Sea. The US Navy is already patrolling the region and actually fired on and killed the Houthi fighters that attacked the Maersk ship over New Years. A handful of other countries have sent ships, though some are trying to distance themselves from the US-led coalition due to domestic tensions over Israel’s military response in Gaza.  

Iran has also sent a warship to the Red Sea but experts say it would be no match for the US Navy. Instead, military analysts say it is likely an attempt by Iran to project power in the region and designed more for media attention than a challenge to the US. Still, the threat of increased regional tensions has markets on high alert, particularly in crude oil.  

The biggest worry right now is that the Houthis and/or Iran may become further emboldened by growing support in the Arab region. Experts say this could lead to increased Houthi attacks in the Red Sea, in turn requiring a more severe response from the US and risking wider regional tensions, namely with Saudi Arabia. Even worse, it could spur Iran to disrupt shipping in the Strait of Hormuz, the world’s most important oil shipping waterway. The Strait has been blocked twice before, in 1973 and 1979, and sent crude prices soaring more than +300% in both instances. (Sources: Bloomberg, Freightwaves, VOA News, Reuters)

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