The Decision: How the Red Sea crisis impacted global shipping?

The tension in the Middle East has not deescalated since the morning of October 7, the day that Hamas has targeted Israel. Following attacks by both sides and Israeli ground operation towards Gaza Strip and southern Lebanon, the conflict in Gaza became the deadliest and outstanding reality of the region. The new chapter has begun in Gaza case after Iranian-backed Houthi movement in Yemen has declared a war against Israel, shooting Israel with ballistic missiles and hijacking Israel-linked vessels at Bab-el-Mandeb Strait. When the Houthis seriously started to threaten shipping security in the Red Sea by attacking non-Israeli firms and vessels as well, the crisis is deepened. Since mid-December, leading shipping firms are diverted their vessels through the Cape of Good Hope due to increased security risk in the Red Sea, particularly at the Gulf of Aden.

Decision 1: Divert the vessels until further notice to avoid threats.

The decision of leading shipping firms to divert their vessels through the Cape of Good Hope until the secured environment in the Red Sea is established was seen as a valid argument although it would add extra cost fuel, freight rates, and 7 to 10 days voyage time. While vessels and ports could schedule their shipping plans by considering the latest updates, the US Navy could form the 'Operation Prosperity Guardian' unit to patrol the area and deter the Houthis' attacks. As Maersk CEO has explained after the "diversion" decision, it was expected it could take 4-6 weeks for the Operation Alliance to coordinate sturdy and aversive coalition forces. When Maersk announced the updated schedule of ongoing routes that all will transit the Cape of Good Hope until the end of January 2024, everything was going least-worst. However, after 48 hours, the company has made a new decision, which was unexpected and contradicting with their previous operations. Before that, there is one more important decision has given: failure of the Operation on paper...

Decision 2: France, Italy, and Spain not joining the Operation Prosperity Guardian

As the President Biden stated "America is back" when he was elected, the public opinion thought that forming the Operation Prosperity Guardian (OPG) would secure the Red Sea and the coalition forces would become successful as in Mosul in 2017. However, the OPG theoretically failed before launching its task. When it was formed by the US, such European powers as fSpain, France, and Italy would join the task force with their navies. However, the French Defence Minister stated the country's warships, including frigate Languedoc (D653) will remain under French forces. This was followed by the Italian Defence Ministry that Italian warships, including the frigate Virginio Fasan (F591), which was deployed in the Red Sea, will not join the OPG forces. The Spanish Defence Ministry added; Spain will only join operations coordinated by the EU or NATO. Madrid also vetoed any support from the EU resources in Operation Atlanta in Somalia to the OPG. It should be added the the Operation Atlanta is commanded by Spain right now. After the refusal by three European powers, which continue to protect their national firms by their own forces, the OPG has lost trust and reliability. One company trusted the OPG and made a decision to get back to the routine: Maersk.

Decision 3: All aboard to the Red Sea! No, wait...

Just 48 hours was necessary for Maersk to rethink of their decision to redivert their vessels to the Red Sea. When the Danish giant announced their latest decision, the majority in the shipping industry was sure that this was not a right decision to take at that moment and would be changed few days after. While the US Navy sank three Houthis' boats in the Red Sea as part of the OPG, Maersk was planning to maintain its operations transiting the region. As it was released on their website, "Diverting vessels around the Cape of Good Hope to mitigate the ongoing risks of sailing through the region is a necessary step in the interest of safety, but it has ultimately brought about increased costs for carriers.". However, the inevitable scenario happened, despite the OPG's "persistent defensive presence in the Red Sea" aim. The Maersk Hangzhou vessel was attacked by the Houthis in the Red Sea on January 2, which was the second vessel of the company hit by Yemen-based military group. After this attack, Maersk, once again, halted its shipping in the Red Sea 'until further notice'. On January 5, the company rerouted four of its five container vessels that were stuck in the Red Sea towards the Suez Canal in order to avoid further risks. Besides, German Hapag-Lloyd stated in an email to customers that the diversion would remain until January 9, the day the situation will be reassessed.

"An investigation into the incident is ongoing, and we will continue to pause all cargo movement through the area while we further assess the constantly evolving situation," Maersk announced and added, "As such, Maersk is invoking Clause 20(a) of the Terms for Carriage and Clause 22(a) of the House Bill of Lading (whichever is appropriate to the relevant carriage) in order to recover these costs." The Copenhagen-based company was successful to lift its shares, 6.4% and 5.1% on Tuesday and Wednesday, respectively. French CMA CGM is also preparing to hike rates around 100% from Asia to the Mediterranean starting from January 15, CNBC reported. As seen in the table below, the freight rates for forty-feet equivalent unit (FEU) in several routes have increased since December 2023. The price has doubled for some routes just in one month, reflecting the significance of the situation.

The Shanghai Containerized Freight Index (SCFI), the most important rate indicator on sea freight from China, shows the hiking rates for TEU, which is approximately three times higher than mid-December 2023:

The rising costs and escalated security risk in the Red Sea that forced vessels to divert through the Cape of the Good Hope led to sign short term 'spot rate' contracts, instead of fixed three-month contracts. As shown in Xeneta chart for the Far East Main-Mediterranean Main rates, by January 2, the spot rate for 40' standard dry is more than double of the market average for long-term contracts, which is concerning for inflation rise in the upcoming months unless the crisis is solved:

Experts claim that freights rates are rising significantly they will be increasing "more than whatever the cost will be to sail around Africa". As Clarksons Research Services notes, container ships that are diverted around the Africa to avoid Houthi attacks in the Red Sea haul the equivalent of 4 million TEU. Oil tankers, especially those who haul refined fuels from the Mediterranean to Japan via the Suez Canal, also have rising market prices, climbed to USD 26,000 this week, which was USD 8,000 in early December, Braemar wrote.

The number of Suez transits are 28% less than earlier last year. This is primarily caused by the fact that 3.1% global commerce was diverted away from the Red Sea since the crisis has erupted. According to the IMF, the Suez Canal is "systematically important" shipping lane that hosts more than 19,000 vessel transit per year. Therefore, it is crucial for global shipping industry and political actors to figure out how the Red Sea transits could be preserved from military attacks. Unless a rational 'decision' has been made, the crisis in the Red Sea would remain under dominium and hence the coercion of Yemen-based rebels.