Since 19 November, Yemen-based Houthi militants have carried out dozens of attacks against both military and commercial vessels passing through the Bab Al Mandeb strait, a waterway along the fastest shipping route between Western Europe and Asia which connects the Red Sea to the Gulf of Aden. Houthi attacks have emerged alongside the ongoing Israel-Hamas conflict as part of coordinated assaults against Israel by Iran-backed proxy groups in the Middle East. Initially, the Houthis fired cruise missiles and drones towards Israel, but with these attacks swiftly intercepted by Israel, the militant group has shifted to targeting vessels with (sometimes spurious) links to Israel and its Western allies off the Yemen coast. This is the fourth stream of Houthi rebel attacks in the Red Sea since 2015. This time around, their tactics have included hijacking vessels, and the use of drones, anti-ship ballistic missiles, helicopters and speedboats to attack passing vessels. The frequency of recent Houthi attacks, as well as their coordination, suggests that the group’s capabilities have improved. This is likely linked to a period of calm in the Yemen war that has allowed the Houthis to regroup and build their capabilities, and spillovers from Iran’s increased drone and military power.

Implications for the global shipping sector

Given that almost 15 percent of global trade passes through the Red Sea, the Houthi attacks have raised disruption concerns for the global shipping sector. Firstly, with vessels no longer assured safe passage through the Bab Al Mandeb strait, shipping companies have had to divert vessels around South Africa’s Cape of Good Hope. This has added approximately 6,000 kilometres, or 10 days, to what was previously an already 27-day long voyage between Asia and Europe. Secondly, freight rates have substantially increased – the cost of a 40-foot shipping container travelling between Asia and Europe has increased by around two and a half times since December 2023. This reflects higher fuel and labour costs associated with the longer journey, as well as a spike in insurance costs for carriers due to attack risks. Thirdly, increased safety considerations in the Red Sea have brought into question the sustainability of labour conditions in the shipping industry. Employee security and longer voyage durations have resulted in an increased duty of care burden on employers in the sector. Finally, with diverted vessels spending more days in transit, container availability has decreased. This has not yet had a material impact on global supply chains as global trade demand has moderated. However, supply chain disruptions risk emerging if Houthi attacks in the Red Sea persist or escalate.

Egypt’s canal conundrum

Countries dependent on trade via the Red Sea have not been immune to the global shipping disruptions raised by the Houthis. The diversion around the Cape of Good Hope has meant that vessels no longer transit through Egypt’s Suez Canal, the northern entry point to the Red Sea. The Suez Canal serves as a vital source of foreign exchange currency reserves for Egypt, which is currently facing several economic challenges including a hard currency shortage and a growing budget deficit. In March 2021, when the Suez Canal was blocked for six days due to the Ever Given container ship running aground in the canal, Egypt reportedly lost USD 14 million in revenue per day. The current lack of traffic transiting through the canal has raised concerns about government revenue and Egypt’s economic prospects going forward, especially following indications from local officials that the canal’s income fell by almost half on an annual basis in January.

Europe’s extended inflationary pressures

Given that energy and grain shortage risks stemming from Russia’s conflict with Ukraine have dissipated, inflation in the European Union (EU) has moderated from its peak of 10.6 percent in October 2022 to around 3 percent. However, shipping sector disruptions in the Red Sea risk curtailing this disinflationary trend. China is the EU’s biggest import partner, accounting for over 20 percent of the bloc’s imports, most of which are electronic and motor vehicle parts that rely on passage through the Red Sea. The recent rise in shipping costs and increased journey durations are putting pressure on manufacturers in the region. In January, two major car producers, were forced to implement a two-week pause in production at their European plants due to a shortage of parts. Given the region’s reliance on imports from China, other businesses are likely to be facing similar challenges, particularly those dependent on the just-in-time production model. Businesses and consumers in Europe remain at risk of facing goods shortages, heightened cost pressures and operational disruptions reminiscent of challenges faced at the height of the Russia-Ukraine conflict and Covid-19 pandemic if Houthi attacks sustain shipping disruptions along the Red Sea. The resultant inflationary pressures could mean smaller than anticipated interest rate cuts by the European Central Bank, and by corollary lower economic growth prospects for the EU.

Exploring alternatives

The Houthi attacks have prompted companies reliant on shipping through the Red Sea to seek alternative transportation methods. In January, air cargo volumes increased by more than 10 percent compared to volumes reported one year ago. While air freight offers a substantially reduced voyage time, typically less than one day, it costs substantially more, around ten times the cost of sea freight. Cost sensitive businesses have been exploring another alternative to sea routes – trade via rail. The China Europe Railway Express is an extensive network linking Asia to Europe. It offers a shorter journey time between 14 to 25 days, compared to the now 37-day journey of ships diverted around the Cape of Good Hope. As with air cargo, there is a larger price tag associated with rail transfer: the cost of a 40-foot container from China to Europe via rail stood at around USD 7,900 at the beginning of February, over 50 percent more than the USD 5,100 cost of shipping a container via sea. While businesses could be tempted to temporarily overlook the higher cost of rail transfer due to the shorter journey times, security risks loom over this alternative route as containers are required to transit through Russia before reaching final destinations in Europe.

Choppy waters ahead?

As with the Covid-19 pandemic, the Houthi attacks against ships in the Bab Al Mandeb region have exposed the fragility of the just-in-time production system and vulnerabilities associated with global trade. US and UK airstrikes and heightened military operations around the Red Sea have reduced the frequency of Houthi attacks, but the security risks have not been completely removed. As such, seafarers are unlikely to flock back to voyaging through the Red Sea until tensions in the Middle East have sufficiently de-escalated. While global supply chains are likely more resilient than they were during the Covid-19 pandemic, a protracted security crisis along the critical maritime route will weigh on the shipping sector and, as an extension, trade-reliant economic growth.