How Houthi Red Sea attacks disrupt global trade

Yemen-based Houthi militants' attacks on cargo vessels in the Red Sea, a show of their support for Hamas fighting Israel in Gaza, have surged ocean freight rates, triggering warnings of inflation and delayed goods.

One of the world's busiest waterways, Egypt's Suez Canal, connects the Red Sea to the Mediterranean Sea and ships fuel, food and consumer goods from Asia and the Middle East to Europe. It accounts for 12 percent of global trade, including 30 percent of all container movement, according to Egypt's State Information Service.

As Houthi militants, who are backed by Iran, have stepped up attacks on vessels in the Red Sea since November, hundreds of container ships and other vessels have been rerouted around Africa's southern Cape of Good Hope to avoid the attacks.

This adds up thousands of kilometers, or seven to 20 days of their voyages, driving up the cost of shipments from Asia to Europe and raising the prospect of a renewed inflation shock for the world economy.

As a rough benchmark, avoiding the Red Sea would add around $2 million to a ship's journey in terms of fuel and other costs, Lars Jensen, founder of Vespucci Maritime and former Maersk director said. This means for a full round-trip journey between Asia and Europe, each vessel could have an extra $4 million in costs, he added, which would lead to increases in freight rates.

Asia-to-North Europe rates more than doubled to above $4,000 per 40-foot container this week, with Asia-to-Mediterranean prices climbing to $5,175, according to Freightos, a booking and payments platform for international freight.

Some carriers have announced rates above $6,000 per 40-foot container for Mediterranean shipments starting mid-month, and surcharges of $500 to as much as $2,700 per container could make all-in prices even higher, said Judah Levine, Freightos' head of research.

Higher costs have also stirred worries about a resurgence in inflation, particularly in the eurozone.

Goldman Sachs on Friday raised its forecast for May euro-area core inflation to 2.3 percent, from 2.2 percent, as a result of the jump in shipping costs, and said a prolonged re-routing of cargo away from the Red Sea would likely have a bigger inflation effect.

But Goldman Sachs believed the inflation would not be as severe as in the pandemic era. "Our equity analysts expect that the shock will be neither as bad nor as prolonged as 2020-22 due to increased ship supply, and no port congestion due to lockdowns," it said.

Delivery of products destined for numerous companies had already been delayed due to Houthi attacks, as the Suez route is used by the likes of IKEA, Walmart and Amazon.

Twelve governments, including the U.S., Australia, Canada, Germany, Japan and the United Kingdom, issued a strongly-worded statement earlier this week, warning the Houthis against further attacks.

(With input from agencies)

(Cover: The Maersk Sentosa container ship sails southbound to exit the Suez Canal in Suez, Egypt, December 21, 2023. /CFP)