Shipping left in a lurch as Israel-Palestine war spills over the Red Sea

Israel’s persistent bombings of the Gaza Strip, and repeated delays for the UN Security Council to vote on more aid to Gaza, have had a spillover effect on the Red Sea, where Yemen's Houthi militants vow to carry on assaulting commercial ships.

PHOTO: Aerial view of a harbor in the Red Sea. Getty Images

“Any escalation in Gaza is an escalation in the Red Sea,” Houthi major general Yusuf al-Madani was quoted saying by media outlet Al Jazeera.

Meanwhile, Israel bombarded a refugee camp near Gaza City on Wednesday, according to Associated Press. This came a day after Israel bombarded the Gaza Strip.

Israel has said that it will continue its air raids over Gaza after its military forces discovered a vast tunnel network under Gaza used by the Palestinian Hamas group, and as little to no progress has been made in negotiations with Hamas to free Israeli hostages.

This has spurred Yemen-based militant outfit Houthis to start attacking Israel and, in turn, commercial vessels in Red Sea. The Houthis have said that they have only been targeting Israeli-linked ships, but they have since attacked several ships with no links to Israel.

The crisis has compelled several shipping companies to either reroute their vessels around Africa via the Cape of Good Hope or keep them in safe locations until the Red Sea situation improves.

Operation Prosperity Guardian

This has persuaded the US to retaliate by bringing together a multinational task force to protect ships called "Operation Prosperity Guardian". The original members of the task force were the UK, Canada, France, Italy, Spain, Netherlands, Norway, Seychelles and Bahrain.

The major shipping nations Denmark and Greece have since joined, as well as the EU through its joint European Naval Force.

However, the Houthis have vowed to counter any US-led task force until Israeli aggression stops.

Meanwhile, a UN Security Council vote on a bid to bolster aid to people on the Gaza Strip has been delayed three times, and has been hinging on diplomatic negotiation between the US and Egypt.

Global trade disruptions

The Red Sea is a crucial shipping route leading to the Suez Canal and, according to BIMO, around 12% of global trade passes through this waterway. This represents 30% of container traffic on ships carrying over $1 trillion/year worth of goods.

This spillover of Israel-Palestine conflict into Red Sea has spurred several companies to reroute their vessels on the longer route around the Cape of Good Hope.

The list of major container lines now includes Mediterranean Shipping Company (MSC), Maersk, CMA CGM, Hapag-Lloyd, Wan Hai Lines, Ocean Network Express (ONE), Yang Ming Marine Transport, Evergreen and HMM.

Vehicle carrier firm Wallenius Wilhelmsen and tanker firms Euronav and Frontline have also decided to avoid the Red Sea passage for now, while oil supermajor BP has temporarily ceased all operations in the region.

Meanwhile, Belgium’s Compagnie Maritime Belge (CMB) has opted to avoid the region until further notice. Hong Kong-based OOCL has stopped accepting cargoes to and from Israel for now.

This growing list of companies avoiding the Red Sea can lead to a bigger crisis that has the potential to impact global markets. The longer route will increase the cost of shipping goods and commodities.

Most vessels defy the threat

However, “it should be recognised that this is not a general avoidance of the region, and that shipping companies are continuing to transit the Red Sea,” John Stawpert tells ENGINE. He is a senior manager of environment and trade at the International Chamber of Shipping.

Lead freight analyst at Kpler Matthew Wright had observed a similar pattern. Most vessels are still sailing through the Red Sea despite continued Houthi attacks, he told ENGINE on 19 December.

Riskier and costlier Red Sea

Ships that still opt for Red Sea voyages will face rising war risk insurance premiums, which in turn will have a knock on effect on freight rates.

A war risk premium is an additional cost or insurance premium that is applied to various financial instruments to account for the increased risks associated with the outbreak of war or geopolitical conflicts. This premium reflects a greater likelihood of losses or disruptions during times of war, providing a financial cushion for potential damages.

War risk premiums have risen to 0.5-0.7% of a ship's value, up from 0.07% in December, causing seven-day voyages to cost thousands more, according to Reuters.

The Red Sea attacks have presented shipping companies with tough decisions, as they consider whether to sail the longer and costlier route around Africa or risk the Red Sea route.

By Tuhin Roy

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