Attacks on ships in the Red Sea quadruple shipping costs

Maersk, a major Danish shipping firm, expects a 2-3 month halt in shipping in the Red Sea following the United States’ attack on a fortified Houthi base in Yemen.

According to the Commerce Ministry, the situation in the Red Sea is deteriorating faster than expected, pushing freight rates up, especially on the route from Thailand to Europe, with costs increasing to as much as US$5,000 per container. This forces exporters to bear additional costs, leading to increased product prices.

The US and the UK launched an attack on the fortified base of the rebel group in the early morning of January 18, The attack targeted secure bases in 5 northern provinces of Yemen, including the key port province of Hodeidah. This follows an incident on January 17, when the rebel group used attack drones to target US cargo ships in the Gulf of Aden.

Al-Masirah, the Houthi-owned television station, reported that this was the fourth attack by the US within days specifically targeting rebel groups in Yemen.

Vincent Klerk, CEO of Maersk, said the halt to global shipping resulting from the attack on cargo ships in the Red Sea could last for at least another 2-3 months.

Reuters reports that Maersk and other shipping companies have instructed hundreds of cargo ships to avoid sailing in the Red Sea and instead use longer routes via the Cape of Good Hope to cope with the situation.

Speaking at the Reuters Global Markets Forum in Davos, Switzerland, Klerk said: “For us, such movements make transportation significantly longer and may cause supply chains to halt for at least 2-3 months. We hope it will be shorter. However, the cessation time may extend due to the unpredictable situation.”

Maritime consulting firm Drewry's container index shows that shipping rates have increased significantly since early December. Meanwhile, insurance industry sources indicate that war risk insurance premiums for shipping through the Red Sea have also risen.

Banking executives have expressed concern that this crisis may lead to currency pressures, potentially resulting in delayed interest rate adjustments or even increased interest rates.

“This crisis has a significant impact because nearly 20% of global trade is transported through the narrow Bab el-Mandeb strait, one of the most crucial arteries of global trade and the backbone of the world's supply chain. It is now congested," Klerk said.

The Shippers' Council of Thailand said the situation is worse than anticipated. Its chairman Chaichan Charoensuk stated that the situation in the Red Sea is highly uncertain, affecting the transportation of goods from Asia to Europe and Africa. Initially, it was expected that the situation would not escalate significantly, but now it requires close assessment and monitoring. Since the rebel group first attacked cargo ships in the Red Sea, freight rates have increased significantly.

The Commerce Ministry and the Shippers’ Council have held meetings with shipping companies to seek cooperation in adjusting ship rates reasonably and fairly. They also urged shipping companies to increase the number of vessels on the Asia-Europe route to meet the demand for cargo and maintain the service frequency. This is aimed at achieving a balance between ship rates, container quantities, and market demand.

However, the situation escalated, leading some shipping lines to announce the cancellation of sailing in the Red Sea for safety reasons. Nevertheless, some lines continue to operate through the Red Sea, albeit at a much-reduced capacity. Products from Thailand to the Middle East, Europe, and North America may face higher costs, as ships divert around the Cape of Good Hope.

Thai exporters are bearing the burden of increased shipping costs, which at $3,000-$5,000 per container are four times higher than in November when rates were $1,000 per container. Additionally, there are other impacts, such as the return of congestion in some routes, causing delays. Ships from China to Europe are experiencing an average increase of 4 days, and ships from Southeast Asia to the US east coast are delayed by 2.5 days.

Chaichan expressed concern about the significant impact, noting the soaring rates are causing anxiety about increased expenses that exporters cannot pass on due to pre-agreed contracts. Another meeting is scheduled between the Ministry of Commerce, the Council and shipping companies at the end of January.

Chaichan emphasised that the current situation has not yet impacted Thailand's exports significantly. However, there is a need to closely monitor the situation because there are no clear signals as to when it might be resolved. The most worrisome scenario for global exports is that the intensity of conflict could escalate further in this major global shipping route.

The CEO of Saudi Aramco, Amin Nasser, warned the crisis in the Red Sea could lead to a shortage of oil tankers and delays in transportation, especially as ships have to use alternative routes, which take longer.

Nasser added that Saudi Aramco could bypass the Red Sea routes by using pipelines connecting the oil refineries on the eastern coast of the country to the western coast. Saudi Arabia is the world's largest oil exporter and has previously been targeted by rebel groups in the Yemen region with attacks on oil refineries in 2019.