Supply Chain Disruption - Take 2
When a period of unrestrained competition among the main maritime operators was anticipated, driven by the oversupply of available capacity, a sequence of geopolitical, strategic, and environmental events has led to a new phenomenon of widespread disruption in the international supply chain. This, in turn, resulted in a consequent rise in freight rates in maritime transportation services.
Israeli-Palestinian Conflict
The Israeli-Palestinian conflict is triggering shockwaves that are assuming uncontrollable proportions. The Houthi rebels, whose rebellious nature is only a derogatory term given by the international community, control a significant part of Yemen's territory and, being Shiite, have strong support from Iran's regime.
Located strategically at the confluence of the Red Sea and the Gulf of Aden, this rebel movement, in solidarity with the Palestinian cause, initiated a series of attacks (24 have been counted so far) against merchant ships originating from, calling at, heading to, owned by, or registered in the State of Israel.
The first attack occurred on November 19, 2023, on the RoRo ship 'Galaxy Leader,' operated by NYK (a Japanese company) but owned by 'Ray Shipping,' owned by the Israeli businessman Rami Ungar (one of the wealthiest men in Israel).
The video of the helicopter-led approach and seizure of the ship highlights the sophistication of the means used. Despite the majority of the 25 crew members being Filipino seafarers and officers from Eastern European countries (Bulgaria, Ukraine, and Romania) with no connection to Israel, they remain detained by the Houthi rebels, who have used the seizure video as an instrument for international propaganda.
Video 1 – Seizure of the RORO ship – “Galaxy Leader”
Source: The Guardian, Novembro, 2023
Other smaller-scale attacks have been carried out on different ships in the same region, utilizing low-cost commercial drones adapted to transport explosives, 'homemade rockets,' or even short/medium-range missiles.
The preferred targets are ships with extensive hull/sail surfaces (above-water structures), traditionally container ships and RoRo ships, which are more easily targeted by ground-based gunfire. The international attention drawn to these operations and the high value of the transported goods also enhance the likelihood of attacks on these types of ships. Conversely, ships with limited exposure to rebel fire (bulk carriers/tanker ships) have been less frequently targeted.
What also seems increasingly evident is that all international ships are potential targets, not just those connected to the State of Israel. The attacks are becoming increasingly indiscriminate.
International Coalition
In response to the attacks on merchant ships, the US has established an international coalition comprising warships from over ten Western countries, naming the operation 'Operation Prosperity Guardian' to protect and escort these ships through the Red Sea towards the Suez. Despite noble intentions, Spain, France, and Italy quickly withdrew from it due to disagreements regarding the coalition's leadership (US vs. European Union vs. NATO).
China also outright declined the invitation, as did Saudi Arabia and Egypt, deeming participation in a coalition against elements of the Arab world as detrimental to their image. At present, the Coalition comprises ships from the US, UK, Norway, the Netherlands, Greece, Canada, and Australia.
Figure 1– “Bab al-Mandab” Strait
The Bab al-Mandab Strait, at its narrowest point, spans only 16 nautical miles and connects the Red Sea with the Gulf of Aden. This is where most attacks on merchant ships have been occurring. Despite the preventative nature of the international coalition, the rapid escalation of the conflict has led to an unpredictable spiral of violence.
On December 30, 2023, the container ship 'Maersk Hangzhou' was attacked by 4 fast boats operated by Houthi rebels attempting a conventional approach from the sea. The alarm signal, evasive maneuvers by the ship, armed personal security, and swift intervention by US Navy helicopters led to the destruction of three out of the four assault boats, resulting in the death of 10 Houthi rebels. The fourth assault boat managed to escape.
Given the gravity of this war-like scenario, major global maritime operators chose to opt for the Cape Route over the Suez Canal. The journey from the Far East to Northern Europe via the Cape Route spans approximately 13,500 nautical miles, compared to the traditional 10,000 nautical miles through the Suez Canal (1 nautical mile = 1,852 meters). This added distance extends a 26-day journey through the Suez to a 34-day journey via the Cape Route (at an average speed of 16.5 knots).
Figure 2 - Cape Route vs. Suez Canal
Conflict Escalation - January 2024
If there were any doubts about the progressive escalation of the conflict, they dissipated in the early days of 2024 in light of the following events:
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Impact on the Maritime Transport Market
In terms of the containerized cargo market, the most dynamic segment of shipping involving maritime exchanges of finished and semi-finished products, which constitute the primary aspect in terms of value in international trade, there is a widespread and sharp increase in maritime freight prices. This is particularly evident on the Far East route (Asia/Europe) and also on the Transpacific route (Asia/Europe). A similar trend is expected to occur on the Transatlantic route (USA/Europe).
1) Far East Route (Asia/Europe)
The necessity of bypassing the Suez Canal for security reasons, mandated by major international maritime operators, results in a significant increase in distance between major cargo generating/attracting centers. Even without the traditional practices of slow-steaming (navigating at low speeds) that have been common in the market as a cost rationalization tool, the increased distance traveled (via the Cape Route) leads to less competitive transit times and a reduction in available capacity.
Once again, like what occurred during the pandemic period - Supply Chain Disruption Take 1 - 2021/2022 - this situation involves a reduction in available capacity (associated with international political upheaval) rather than a significant increase in demand (which actually indicates sluggish growth). The shrinkage of available capacity consequently adjusted the supply and demand curves towards higher freight rates.
2)?Transpacific Route (Asia/US West and East Coast)
Apart from the cascading effect caused by ships shifting to more economically profitable routes, there's also a reduction in available capacity associated with transit issues in the Panama Canal (critical for supplying the US East Coast, housing major cargo attraction centers).
The expansion of the Panama Canal in 2016, besides being undersized in terms of the maximum capacity of ships passing through it (approximately 13,000 TEU), was also undersized in terms of the water supply system feeding the locks - see analysis in the book "Containerized Cargo Maritime Transport Market" by Fernando Cruz Gon?alves (2015).
The low precipitation levels observed in the last year led to the necessity of reducing the maximum draft of ships passing through the Panama Canal from 14.94 meters to 13.41 meters, alongside decreasing the frequency and daily number of transits.
On the West Coast, home to the two largest US ports (Long Beach and LA), problems intensify concerning intermodal transportation services to the East/West Coast (rail/road transport), linked to issues of social/labor unrest.
3)?Transatlantic Route (USA/Europe)
To add to the perfect storm, on January 1st, 2024, the European Union began implementing a tradable emissions system applicable to maritime transport in order to achieve the descarbonization in the sector.
Beyond the requirements for meeting energy efficiency indicators, ships are now taxed based on the monetary valuation of externalities associated with polluting emissions when navigating EU territorial waters.
These demands necessitate the use of more environmentally friendly fuels, which are naturally more expensive, to reduce CO2 emissions, sulfur oxides, nitrogen oxides, and particulate matter. The response from maritime operators has been the implementation of surcharges on maritime freight, passing the increased costs to shippers, and naturally, to the final consumers of goods.
Conclusions
When we began this article, the interest was purely academic, aiming to analyze the impact of political, economic, and social upheaval on the maritime transport market. Upon concluding it, we believe that the issue of widespread increases in maritime freight rates is the least relevant issue under consideration.
In our opinion, we are currently facing the most tense and conflict-ridden international situation since the end of the Cold War.
The current world panorama encourages the creation of a diffuse and scattered web of interests and strategic objectives that reflects the contradictory motivations of different participants. This web materializes hypocrisy and hinders the balance between extreme positions.
Iran is the major regional power and an ally of Yemen's Houthi rebels, Russia is dependent on Tehran-supplied weaponry and drones for the war with Ukraine, Hamas seeks to motivate the Arab world's solidarity for the Palestinian cause, but Saudi Arabia is both an enemy of the Shiite Huthis, but a financier of radical Islamist movements and "home base", in parallel with Qatar, from U.S. Army bases.
Egypt is extremely dependent on the revenues from the crossing of the Suez Canal, but naturally sympathetic to the suffering of the Palestinians. Syria and, in particular, Lebanon, although they are unable to solve their internal problems and upheavals, are at the same time the preferred base of the radical Islamic movement Hezbollah.
At the moment, there is also a strong possibility of Israeli military intervention in Lebanon in a pre-emptive strike. In other words, the State of Israel seeks to survive in a hostile and adverse environment, and for this it needs the support of the US and the Western World (even if it has to resort to state terrorism actions).
Just as Donald Trump personally took responsibility for the order to eliminate General Qasem Soleimani, it's possible that Israel implicitly takes credit for the Kerman attack in Iran.
In contrast to the aura of Donald Trump, Joe Biden, in a US Presidential election year, facing low popularity and an aged, less internationally involved image, needs to reverse the negative polling trend.
After the White House's ultimatum on the Huthi rebels over the past three days, attacks on merchant ships in the Red Sea have calmed down. The main actions turned to Somalia, which took advantage of the easing of international pressure to resume piracy actions on its coast (they had not been felt since 2017).
Regardless of the different players involved in these attacks, it is our conviction that, in the short term, there will be a "muscular" intervention by the International Coalition in this region. We sincerely hope that we are not right. It was a good sign for Peace in the World.