Global trade in crisis as Maersk, other shippers suspend Red Sea operations

• 10% of trade affected 

A significant portion of global trade, estimated to be around ten percent, is under threat due to the suspension of sea shipments through the Red Sea. This is as a result of the decision by major shipping companies, such as A.P. Moller-Maersk and Hapag-Lloyd, to cease operations in the region. 

In a worrying development for global trade, Maersk, the world’s largest shipping company, has announced that it has instructed all of its vessels due to pass through the Bab al-Mandab Strait, a maritime choke-point in the southern Red Sea, to “pause their journey until further notice”. 

According to recent reports, the Houthi rebels in Yemen have intensified their attacks on ships passing through the Red Sea during the ongoing conflict between Israel and Hamas. These attacks have raised concerns about the security of oil, grain, and consumer goods shipments through the Red Sea, a vital waterway for global trade. Vessels linked to Israel have been specifically targeted, but the threat to trade has expanded to other countries, with container ships and oil tankers flagged to countries such as Norway and Liberia also being attacked or caught in the crossfire.

The increasing risk of attacks on vessels has highlighted the vulnerability of this major shipping route, which is crucial for the flow of goods between Europe, the Middle East, Africa, and Asia. The attacks could have a significant impact on the global economy, causing disruptions in supply chains and driving up the price of essential commodities.

The disruption to global trade caused by the Houthi attacks has been compounded by the fact that many major shipping companies have halted their transits through the Bab al-Mandeb. Maersk, which is one of the largest shipping companies in the world, has paused all traffic through the waterway, and Hapag-Lloyd has followed suit. The impact of these disruptions is magnified by the fact that these companies control a significant portion of the global container freight market, with Maersk accounting for 15 percent and Hapag-Lloyd for seven percent.

The decision by major shipping companies to suspend transits through the Bab al-Mandeb Strait is a worrying sign that the risks of passing through this vital waterway are beginning to outweigh the benefits. For many companies, the cost of insuring against the risk of attack and the risk to the safety of their crews is no longer worth the time and cost savings of using the Bab al-Mandeb narrow strait through which about 10 percent of global seaborne oil flows. This is a particularly worrying development for oil exporters who rely on the strait for a significant portion of their revenues, and who may now be forced to look for alternative routes to transport their oil.

The comments made by Luv Menghani of Dubai based  BluePeak Commodities and Shipping highlight the indiscriminate nature of the attacks by the Houthis, and the broad impact that they are having on global trade. 

Menghani notes that the Houthis are not just targeting ships that have a direct connection to Israel, but are also attacking container ships and tankers that have no obvious ties to Israeli trade. The result is that a large number of ships are being affected, causing disruptions to global trade and supply chains.

According to the US Energy Information Administration (EIA), the Bab al-Mandeb Strait, a narrow waterway connecting the Red Sea to the Arabian Sea, is a vital shipping route for oil and LNG. In the first half of 2023, approximately 8.8 million barrels per day of oil passed through the strait, along with 4.1 billion cubic feet per day of LNG. Given the narrow width of the strait and its strategic importance, any disruption to shipping could have serious consequences for the global energy market.

Data provided by S&P Global Commodities at Sea shows that, as a result of the conflict, some shipping companies have opted to re-route their ships via the Cape of Good Hope rather than the Suez Canal. Two such examples are the MSC Diana and the Zenith Lumos, both of which transferred their cargo in Tangier and Algeciras, respectively, before continuing their journey. This trend is a result of the growing security concerns associated with passing through the Red Sea, and is likely to continue if the conflict continues to escalate.

The data also show that on the westbound route, three Maersk and MSC vessels have diverted via the Cape of Good Hope, rather than using the Red Sea and Suez Canal as they have done historically. This indicates that the shift away from the Suez Canal is not isolated to a few instances, but is becoming more widespread. The decision by Maersk and Hapag-Lloyd to announce their stance on the issue is likely to lead other shipping companies to follow suit, further disrupting global supply chains.