Red Sea Crisis-Global Trade Update

December 26, 2023

The Association of Trade Compliance Professionals is committed to the demonstration of corporate informed compliance as a value-added element of our services for our clients. We would like to update our valued clients on the current issue in the Red Sea that has become a global supply chain crisis.

The Red Sea crisis is a current and developing issue that has and continues to affect global supply chain cost, facilitation, and transit times. Members of the global trade industry must consider the risk of shipping in their planning and forecast decisions forward as we enter the last week of 2023 and plan for 2024 trade.

Supply chain delays are not new to the industry; however, the root cause of this current situation is much different than the legacy issues dealt with in the last 18 months that was caused by lack of equipment, carrier space and shipment origin facilitation delays.

This current issue is a direct result of the wartime activities between Israel and Palestine which have resulted in attacks by a group called The Houthis.

Global trading partners inclusive of buyers, sellers, freight forwarders, carriers, customs brokers, importers of record and US principle parties in interest need to remain informed on this current crisis and are encouraged to update senior management of this current threat to the global supply chain to make decisions to protect the financial interest of their companies including but not limited to extended lead times in procurement and sales strategies, added costs to the company bottom line, shipping delays, increased insurance premiums, increased fuel costs, addition ports of call for diverted cargo.

What is happening and what does it mean for global trade?

Attacks from a rebel group call The Houthis on shipping vessels have increased in response to the war in Gaza, with BP halting all shipments of oil and gas through the region Houthi rebels in Yemen have significantly stepped-up attacks on commercial shipping vessels travelling through the lower Red Sea since mid-November in response to Israel’s bombardment of Gaza. On some occasions, Houthis have boarded or sought to board merchant tankers; on others, they have targeted cargo ships with drones and missiles. Damage has been minimal in most cases, but in mid-November, one tanker, the Galaxy Leader, was successfully hijacked.

Threats have escalated further in the past week, to the point where Maersk, MSC and other shipping groups have halted or rerouted traffic, while the US has announced a maritime coalition to defend shipping against attacks.

Who are the Houthis and why are they attacking now?

The Houthis are a Yemeni rebel group who control the west of the country, including its Red Sea coast. They are aligned with and supplied by Iran but are politically independent. While other Muslim countries and groups have chosen not to try to help Hamas in Gaza, the Houthis declared war on Israel at the end of October.

Despite the Houthis initially saying that only ships traveling to Israel would be targeted, the threat to trade has grown as vessels flagged to other countries with no connection to Israel have been attacked.

Why is the southern Red Sea so important?

About 12% of global trade passes through the Red Sea, including 30% of global container traffic.

Billions of dollars of traded goods and supplies pass through the Red Sea every year, meaning that delays there can affect fuel prices, the availability of electronics and other aspects of global trade.

The Red Sea, one of the world’s most densely packed shipping channels, lies south of the Suez Canal, the most significant waterway connecting Europe to Asia and east Africa.

How will the disruption affect shipping?

Prominent shipping companies including Maersk, Hapag-Lloyd, and MSC have decided not to use the Red Sea over the past week.

According to the Atlantic Council, a thinktank, seven out of the 10 biggest shipping companies by market share have suspended operations in the Red Sea.

Some ships are being diverted around the Cape of Good Hope, on the southern tip of Africa, increasing their journey time by up to two weeks.

In the past week, BP halted all shipments of oil and gas through the Red Sea.
Insurance risk premiums for sailing through high-risk areas are also rising. This risk premium paid by shipping companies have increased by 300% in the last month. Despite the formation of the US-led OPG, it is not clear when commercial shipping groups will feel confident enough to allow their vessels to pass through the Bab el-Mandeb strait again.

How have the US and other western nations responded?

As the situation escalated over the past month, the US has repelled attempts to board other cargo ships, while US, French and British warships have shot down Houthi drones and missiles.

The US announced it had assembled a coalition of countries who had agreed to carry out patrols in the southern Red Sea to try to safeguard vessels against attacks. The coalition, called Operation Prosperity Guardian (OPG), includes the UK, Bahrain, Canada, France, Italy, the Netherlands, Norway, Seychelles and Spain, but the leading regional Arab powers – Egypt and Saudi Arabia – are absent.

Senior Management Advisory Notice

It is recommended that global supply chain business entities inclusive but not limited to Purchasing, Sales, Logistics, Corporate Risk Management, Finance and Trade Compliance include this topic on senior management round table agenda for transparency and risk management strategy discussions due to the importance that global trade disruptions have on global trading entities at even the slightest delay in global supply chain shipping.

This is now categorized as a crisis and requires internal discussion and corporate “C” suite recognition to define transparency and company connectivity for the most appropriate decisions forward.

We will continue to remain available for comment and advise forward based on request and future crisis developments.

Professionally,

Rennie Alston, Director
renniealston@comcast.net
908 313-7605