The Red Sea, historically renowned for connecting nations and facilitating trade, is now at the epicentre of a crisis that could have ramifications on the global economy. The escalation of Houthi attacks disrupting vital shipping routes has thrown the region into turmoil. At the heart of the crisis lies the strategic trade corridor of the Red Sea, a crucial passageway that feeds into the Suez Canal—the world's busiest and most pivotal trade artery. This maritime thoroughfare witnesses the daily transit of ships laden with commodities such as oil, grain, and various consumer goods. Any disturbance in this region reverberates across global commerce.
The staggering economic value associated with the Red Sea route is immense. Approximately $700 billion worth of trade flows through this region on a daily basis. Annually, the Suez Canal accounts for 12% of global trade passing through the Red Sea. The recent surge in Houthi attacks poses a substantial threat. Prolonged conflict leading to a halt in canal usage could result in severe economic losses, disrupting supply chains and impacting industries and consumers worldwide.
The intensified attacks by Houthi rebels are intrinsically linked to the ongoing Israel-Hamas conflict. Backed by Iran, the Houthis target vessels they perceive as associated with Israel. These actions stem from geopolitical tensions and a quest for regional influence, transforming the Red Sea into a battleground for power struggles.
The longer and more expensive alternative route around the Good Hope Cape near Africa is an option but is not very viable as vessels travelling from Asia to Israel take a notably longer route around Africa, spanning approximately 7,000 nautical miles and lasting between 10 to 14 days, as opposed to the quicker passage through the Suez Canal. Additionally, this alternative route results in increased fuel expenses
Another issue is rising war risk premiums. Shipping companies, compelled to cover higher risks in conflict zones, impose elevated premiums, subsequently affecting product costs. Consequently, consumers may experience increased prices for goods transported through the canal, thereby altering import-export dynamics.
Normally, ships are required to inform their insurers when navigating through high-risk zones and to make an extra payment as a premium. At the beginning of December, this additional risk premium, paid by shipping companies, stood at a mere 0.07% of a ship's value. However, it has surged to approximately 0.5%-0.7% recently. Recently, a consortium of prominent marine insurers expanded the designated high-risk area in the Red Sea, leading to more vessels being subject to this premium. Consequently, the expenses associated with shipping goods through the Red Sea have escalated by tens of thousands of dollars per week.
The Suez Canal Authority recently announced an increase of 5%-15% in transit fees, taking advantage of the increase in vessel traffic as more ocean carriers avoid the Panama Canal, reported the Freight Waves.
Oil prices experienced a slight surge on December 18 due to clashes in the Suez Canal. The benchmark Brent crude oil rose by 0.8%, reaching $77.18 per barrel, as major shipping companies including BP, Maersk, MSC, Hapag Lloyd announced their decision to avoid the route.
The India Impact
From an Indian perspective, the crisis has implications:
Coal Imports: India imports around 20 million tonnes of non-coking coal via the Red Sea, primarily from the US and Russia. The logistical hurdles caused by the crisis may affect this crucial supply.
Energy Security: India’s energy security relies on stable sea routes. Any disruption in the Red Sea jeopardizes our access to oil and gas. As a growing economy, India closely watches developments in this region.
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