Maritime Attacks and Trade Route Adjustments: Navigating Challenges in the Red Sea

Amidst maritime attacks by Yemen's Iran-aligned Houthis on the Red Sea, container ships have been affected, leading traders to adjust routes and prices. This situation has raised concerns about potential disruptions to international commerce, reminiscent of the challenges faced during the COVID pandemic. In response, a U.S.-led international force has commenced patrolling waters near Yemen, while major shipping companies such as Hapag Lloyd, MSC, Maersk, BP, and Frontline have announced plans to avoid the Red Sea route and instead reroute their vessels via the Cape of Good Hope in southern Africa.

Containers are seen on the Maersk's container ship Maersk Gibraltar at the APM Terminals in the port of Algeciras, Spain January 19, 2023. REUTERS/Jon Nazca/File Photo

Despite these changes, there are still ships operating in the Red Sea, with some employing armed guards for protection. Notably, several container ships that had passed through the Suez Canal and were en route to various destinations, including Singapore, Malaysia, and the United Arab Emirates, are currently anchored in the Red Sea between Sudan and Saudi Arabia. Additionally, data reveals that four MSC container ships in the region have turned off their transponders since December 17, likely to avoid detection.

Maersk's logo is seen in stored containers at Zona Franca in Barcelona, Spain, November 3, 2022. REUTERS/Albert Gea/File Photo

To safeguard their positions, some vessels are resorting to pinging false locations when approaching the Yemeni coastline. Denmark's Maersk temporarily halted all container shipments through the Red Sea after a recent "near-miss incident" involving their vessel Maersk Gibraltar. It is worth noting that several Maersk vessels are among those currently at anchor in the Red Sea.

In response to the situation, Maersk has decided to reroute vessels scheduled to sail through the southern Red Sea and the Gulf of Aden, diverting them around Africa instead. The Iran-backed Houthis, in their support of Palestinians in Gaza, have expanded their involvement by attacking ships in crucial shipping lanes and even launching drones and missiles towards Israel, which is over 1,000 miles away from the Yemeni capital, Sanaa.

The impact on global trade will depend on the duration of the crisis; however, immediate consequences include increased insurance premiums and longer shipping routes. Vortexa, a freight analysis firm, reports a 25% rise in the price of Suezmax tankers transporting crude oil from the Middle East to Europe within a week.

Goldman Sachs suggests that the disruption to energy flows in the Red Sea is unlikely to have significant effects on crude oil and liquefied natural gas (LNG) prices, as vessels can be redirected. However, the investment bank estimates that a prolonged redirection of the total daily oil flows of 7 million barrels (both northbound and southbound) would lead to a $3-4 increase in spot crude prices relative to long-dated prices.

While some Asian buyers of naphtha, a petrochemical feedstock imported from Europe, continue to use the Red Sea route, others anticipate longer delivery times and increased shipping fees due to rerouting via the Cape of Good Hope, which could take an additional 7-14 days. In response, some oil tanker owners are considering adding a Cape of Good Hope option to their shipping contracts as a precautionary measure.

Alibaba's Cainiao logistics arm expects slightly longer delivery times and increased shipping fees, but overall, they anticipate minimal impact on their business due to the rerouting measures.