Global trade is under immense strain as rising shipping costs and geopolitical events create significant challenges. The importance of the Red Sea shipping route cannot be overstated, but for over six months, Houthi militias from Yemen have been targeting ships in the region due to their ties to Israel. These attacks coincide with Israel’s ongoing conflict with Hamas in Gaza.

Read also: Container Rates Surge Amid The Red Sea Crisis

For example, on June 20, the Houthis sank a coal ship with a drone strike, citing their support for the Palestinian cause. In response, US and British military vessels have targeted militia positions in Yemen, and international coalitions, including the EU’s naval mission Aspides, are working to secure maritime traffic.

Escalating Shipping Costs

The conflict has led to higher freight costs and increased expenses for insuring commercial trade goods. The risk of losing a vessel, especially in the Red Sea, has caused shipowners to face higher insurance premiums. Additionally, many are avoiding the Suez Canal for safety reasons, opting instead to navigate around the Cape of Good Hope, which increases travel times and fuel consumption.

The Drewry World Container Index reported a 7% increase in shipping prices for a 40-foot container within the third week of June, marking a 233% rise compared to the same time last year.

Adapting to New Routes

Simon MacAdam, an analyst at Capital Economics, noted that shipping companies are adapting by finding new routes. However, costs are rising again as importers move up orders to ensure sufficient stock throughout the year, exacerbating price spikes.

Increased Demand for Ships

Jan Hoffmann, a trade expert at UNCTAD, explained that longer travel routes require more ships to maintain supply. The average travel distance for a container in 2024 is 9% longer than in 2022, necessitating more vessels and personnel, which drives up freight prices. Additionally, increased shipping speeds are leading to higher greenhouse gas emissions.

Challenges in the Panama Canal

In Central America, low water levels in the Panama Canal are limiting its use. This has forced US shippers to integrate a “land bridge” into their sea routes, transporting goods across the US by rail or road. For bulk commodities like wheat or liquefied natural gas, this is economically unviable, leaving shippers with no choice but to take the long and dangerous route around Cape Horn.

Future Outlook

While there is some hope for the Panama Canal as water levels have slightly recovered and the La Niña weather phenomenon could ease the situation further, the Red Sea remains a dangerous route. Around 70% of trade in the region is being rerouted around Africa. Prolonged disruptions could overwhelm shipping companies and further increase freight rates, as building new ships takes years and higher capacities cannot be achieved overnight.

The ongoing geopolitical tensions and their impact on global trade highlight the fragility of international supply chains and the need for adaptive strategies to navigate these turbulent times.

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