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aerial view of a large container ship in the Red Sea

Red Sea, how is this crisis affecting maritime trade

Manufacturing Wholesales Distribution & Logistics Travel & Transportation Commodities Energy & Utilities

A Stormy Sea

The past weeks have proven to be hotter than ever in the Middle East, as evidenced by the Houthi attacks. Following the eruption of the conflict between Hamas and Israel, the tension escalated further in one of the world's most crucial trade zones, the Red Sea. This area needs no introduction—it connects the Gulf of Aden and, consequently, the Arabian Sea with the Suez Canal, providing a vital alternative for global trade. This route facilitates the flow of goods between Asia, Africa, and Europe. The particularly affected area is the Bab el Mandeb Strait, approximately 40 km wide and 130 km long, separating the Horn of Africa from the southern tip of the Arabian Peninsula. This strait practically serves as the southern entrance to the Red Sea. Due to its strategic location, Bab el Mandeb attracts the global interests of many countries. Therefore, numerous nations will suffer from the issues and slowdowns in the described area. However, certain powers, such as China and Russia (despite some attacks on the latter's ships), seem "pleased" to see the Houthi causing problems for the West, especially Europe, which currently finds itself metaphorically with a noose around its neck and the only option being to resolve the impasse through pipeline supply from Saudi Arabia. But let's delve deeper and examine the data at our disposal.

A Sea of Data

Numbers almost never lie, and to date, they only confirm the importance of the Red Sea. Approximately 12% of global maritime oil trade passes through this sea, not to mention refined products and semi-finished goods. Moreover, 8% of global wheat, 8.5% of LNG, and, in general, 30% of global consumer goods transit through this region. In the last year alone, the area has gained even more significance due to the conflict in Ukraine. The sanctions imposed by European countries led to a redirection of Russian oil from the Black Sea to Asia. The data supports this claim; before the attack, the average barrels passing through was about 250k, although it may seem strange to speak of an average of barrels. However, today this figure has almost reached 1.7 million barrels per day, representing a steep increase in activity with a consequent rise in the Russian market share in Asia at the expense of Arab countries, which had to absorb European demand. Additionally, there has been an increase in the passage of minerals and raw materials, including the famous green minerals, from Africa to China. Finally, the drought affecting the Panama Canal, where numerous vessels destined for the eastern coast of the United States have been diverted through the Suez Canal, has generated increased traffic along this waterway. For these reasons, we highlight that Q8 has just commissioned the construction of the largest refinery in the Middle East.

What Effects Can We Expect from the Crisis

After the direct attack on the Galaxy Leader, a container ship connected to an Israeli businessman, labeling the act in support of Hamas' cause (which had been at war for 100 days) against Israel, the tension in the strait has skyrocketed. Some shipowners, like Maersk, initially underestimated the Houthi threat, probably unaware of the persistence and resistance history of this Yemeni minority. Shortly after the attack, transit had been restored thanks to the escort provided by American ships, but by December, a halt had to be placed on the route, and alternatives had to be evaluated. Over time, this situation led to other ships being targeted or threatened, causing delays and a highly tense atmosphere for maritime transport, as well as a political deadlock. These events are naturally impacting global trade and reshaping international transportation strategies/routes. The most direct effects at the moment are the increase in transportation costs and delays in goods delivery. More and more ships are opting to use the old Pre-Suez route, as evidenced by the significant number of vessels heading south, along with a significant increase in oil prices at the port of Durban, the main stop for the route discovered by Bartolomeo Diaz in 1487 and first navigated by Vasco da Gama 10 years later.

What's the Difference Between the Two Routes and Price Variation?

The difference between the two routes is at least 6/7 days of navigation, along with the costs associated with prolonged navigation (and more). The benchmark for container rates is soaring, as in the case of the route from Shanghai to Rotterdam, which has even tripled its cost due to these threats and the uncertain climate. Clarkson's estimates indicate an increase in demand for about 5/6% of nautical miles for petroleum products post-invasion. Currently, with the redirection, an increase of about 2.5% is estimated for the year (maximum increase for container ships and car carriers). Most of the costs will be passed on to the end consumer with a time lag.

Final Considerations

Delays in maritime routes have a domino effect, following the same principle as doctor's appointments: when the first one of the day is late, the domino effect increases exponentially. Therefore, continuous delays in ships could echo throughout the year. Trying to estimate the impact, for example, on the price of oil, we see a range between 70-80 euros if the conflict remains confined to its current area. Note that, given the geography of the strait, if an attack were to damage an oil tanker and cause an oil spill, the strait could be closed for a long time, significantly impacting global trade. If the conflict were to extend to the Persian Gulf, the range could reach 105. Currently, we do not detect increases of greater intensity, as in 2019, 5 million barrels were removed from the market, and the price rose a maximum of 20 dollars.

About 12% of global maritime oil trade passes through the Red Sea.

Alessandro Barbieri

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