The Red Sea, a vital trade route handling around 10% of global energy commodities and 12% of maritime freight, has faced over a year of unprecedented disruptions due to regional conflicts. Attacks on vessels by Iranian-supported Houthi militants in Yemen, reportedly targeting over 100 ships in 2023 alone, have forced significant rerouting of vessels around the Cape of Good Hope. As a result, transit through the Red Sea fell by 56%, with container traffic dropping 73%, and LNG traffic down by an astounding 87%. This crisis has pushed freight rates up by 268% in early 2024, impacting energy prices and the broader economy as shipping costs remain significantly elevated. These developments highlight the global trade vulnerabilities, require strategic planning for major shipping players and depending countries and emphasize the urgent need for coordinated security measures.
The security situation has forced most vessels that previously utilized the Red Sea and the Bab-el-Mandeb Strait to reroute around the Cape of Good Hope, South Africa’s southernmost point. This diversion has led to a marked decrease in Red Sea traffic: as of September 2024, total vessel transits through the Red Sea dropped 56% year-on-year, with container traffic falling by 73% and LNG vessel traffic by an unprecedented 87%. Meanwhile, Cape of Good Hope traffic surged, with container ship transits up by 420% and LNG vessel traffic rising 400%, according to data from MarineTraffic.
While the Cape of Good Hope provides a safer alternative, the route extends travel times by 10-12 days on average, resulting in greater fuel consumption and increased operational costs for shipping companies. As a result, freight rates have surged. Drewry’s World Container Index (WCI) reported a 268% increase within seven months, peaking at $6,000 per 40-foot container in July 2024. Although prices later eased as companies adjusted their schedules, they remain substantially elevated, at $3,489 per container, representing a 116% rise from December 2023.
This shift in shipping routes and the subsequent freight rate increases have directly influenced energy markets, contributing to fluctuations in oil and gas prices. The global energy market remains highly sensitive to any developments in the Red Sea, with increased security costs and extended shipping distances impacting prices across various energy commodities. For instance, shipping routes from Ras Tanura in Saudi Arabia to Rotterdam are now 74% longer than usual, increasing the cost and logistics involved in transporting oil. This additional expense is felt downstream, making a push up factor for fuel and consumer prices.
The Red Sea’s security issues have drawn in global and regional powers, with the US, UK naval forces, and more recently Israeli air force coordinating efforts to deter Houthi attacks and ensure safer maritime passage. However, these interventions have had limited success in fully neutralizing the threat, as the Houthis continue to target vessels, impacting energy prices and stoking concerns of a broader regional conflict.
According to Jan Hoffmann, head of trade logistics at the UN Trade and Development, these disruptions underscore the critical role of maritime trade in the global economy, accounting for 80% of all trade volume. The Suez Canal, which once carried much of this trade, is now seeing fewer ships, with some countries particularly affected by the reduced canal traffic. For instance, Sudan depends on the Suez Canal for 34% of its trade volume, while Djibouti, Kenya, and Tanzania similarly rely heavily on this route. Furthermore, Egypt's economy has sustained a significant impact, with reduced traffic via the Suez resulting in plunging state revenues.
The effects of the Red Sea disruptions are expected to be long-lasting. Many shipping companies are assessing the viability of the Cape of Good Hope as a permanent alternative to the Red Sea, weighing the additional costs against security concerns. For energy markets, the instability in the region, combined with factors like the Ukraine war and reduced Panama Canal capacity, continue to fuel price volatility, increasing the urgency of finding stable, cost-effective routes for transporting vital commodities. This situation underscores the importance of stable maritime routes and highlights the need for a coordinated global response to mitigate further disruptions and protect the economic interests of countries worldwide.
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