Houthi ship attacks are fuelling global inflation

Mark Twain famously said God created war so that Americans would learn geography.

In a far more globalised world of the 21st century, however, geography lessons have found new pupils on other continents too: the knock-on effects of Israel’s war on Gaza are becoming urgent in distant lands for businesses and consumers alike.

Last Monday, a survey of more than 1,000 British businesses showed 55 percent of UK exporters are facing increased cost and supply chain delays because of the Houthi attacks causing disruptions to shipping in the Red Sea.

Meanwhile, exporters from South Asian countries say freight charges have gone up more than 400 percent in some cases as shipping lines have either restricted or outright stopped vessel movement through the Red Sea.

A seawater inlet that separates Asia from Africa, the Red Sea is a major interoceanic passage handling 22 percent of global seaborne container trade.

With the Suez Canal in the north and the Bab el Mandeb Strait in the south, it cuts the distance between Asia and Europe by half. Ships move between the two continents without having to circumnavigate the entire African continent, thus saving fuel and time.

Trade flows hit a major bump following Israel’s invasion of Gaza when Houthis, which have controlled Yemen’s western ports since 2014, started attacking merchant ships passing through the Red Sea. Their declared targets include all ships belonging to Israel and the countries that support it in its brutal war on Gaza.

Following the attacks, US and UK forces have made counter-strikes by air to neutralise the Houthi threat to maritime traffic. The result has been a sudden drop in intercontinental trade that, according to the International Monetary Fund (IMF), has raised the risk of price spikes for certain commodities in 2024.

“Freight charges for a container going from Karachi to Europe have gone up from $700 to $3,600. It’s killing our business,” says Haseeb Ali Khan, senior vice chairman of the Rice Exporters Association of Pakistan (REAP).

The world’s 11th largest producer of rice, Pakistan’s exports constitute eight percent of the global rice trade, according to REAP.

Khan tells TRT World the transit time for Pakistani rice meant for European shores used to be anywhere between 18 and 25 days before the Red Sea crisis escalated. “But now it’s extended to 50 days because ships take the longer route around Africa,” he says.

Major shipping lines like Maersk and Hapag-Lloyd have diverted all their vessels bound for the Red Sea to south – around the Cape of Good Hope at the southern tip of Africa – for the “foreseeable future”.

According to PortWatch, a platform set up by the IMF to monitor and simulate trade disruptions, the economies that have taken the biggest hit are in the Middle East, Europe, Asia, and Africa. The Red Sea trade route is particularly important for oil exports from the Middle East to Europe and from Russia to Asia, it says.

Real-time data from the IMF portal provides a window to the extent of the drop in maritime traffic along the Red Sea trade route. The latest seven-day moving average of daily transit calls at Bab el Mandeb Strait, which is located near the recent attacks in the Red Sea, was 31, down 60 percent from a year ago when 72 ships would pass through that checkpoint every day.

In contrast, the seven-day moving average of daily transit calls at Cape of Good Hope, located at the southern tip of Africa, has gone up more than 100 percent to 83 ships from 40 a year ago.

According to UNCTAD, an intergovernmental UN organisation that aims to promote the interests of developing countries in world trade, as many as 586 container vessels had been re-routed by February 15 since late 2023 while container tonnage crossing the Suez Canal was down by 82 percent.

Heavier fuel consumption

The latest disruptions in cargo traffic are setting back the environmental gains achieved through slow steaming, a practice that involves reducing the speed of a vessel to contain CO2 emissions. Reducing the speed of a big ship by 10 percent results in a 27 percent reduction in its emissions.

However, re-routing a large number of maritime traffic between Asia and Europe around the southern tip of Africa means increasing the average ship speed to cover longer distances. Research shows container ships consume 2.2 percent more fuel to achieve a single percentage point increase in speed. As a result, freight costs are going up steadily.

According to Drewry’s World Container Index, which measures average container freight rates on major trade corridors, weekly spot charges on the Shanghai-Rotterdam route increased 158 percent from a year ago to $4,221 per 40-foot container on February 22.

Rajesh Jain, who works as India-based trader for US trading house Westplains Agro Commodities, tells TRT World the rise in freight charges has been between 70 percent and 80 percent per container.

It’s going to fuel inflation around global economies as the average increase in the cost of major agricultural commodities is expected to be $30-35 per tonne, Jain says.

The IMF expects the continued attacks in the Red Sea along with the ongoing war in Ukraine risk producing “fresh adverse supply shocks” to the global recovery, with increases in food, energy, and transportation costs.

Fleet capacity to the rescue

As many as 478 container ships are scheduled for delivery in 2024, beating the 2023 record by 41 percent. It means the container fleet capacity is expected to grow by 10 percent in 2024. Analysts attribute it to the vessel-ordering spree of 2021 and early 2022.

A recent research paper on the ramifications of the Red Sea crisis for vessel operations says a typical North Europe–Asia shipping service requires 11 to 12 vessels to guarantee a weekly frequency.

Assuming the average vessel speed remains unchanged, the additional sailing time associated with the Cape of Good Hope route diversion means at least two vessels must be added to maintain the weekly schedule.

“On the positive side, the re-routing allows carriers to absorb some of the fleet overcapacity that has entered the market since the second half of 2022,” the paper says.