Escalating Conflict in the Red Sea: What Are the Potential Impacts?

Geopolitical tensions in the Red Sea have escalated significantly. Following last week's announcement by four major shipping companies that they would suspend operations along the Red Sea route, oil giant BP also confirmed on Monday that it will suspend transportation through the region.

In early December, the Houthis declared a ban on sailing in the Red Sea and Arabian Sea for any ship heading to Israel - regardless of its nationality. Subsequently, there have been numerous incidents of ship attacks in the Red Sea.

For safety reasons, major shipping companies including Mediterranean Shipping Company (MSC), Maersk, Hapag-Lloyd, CMA-CGM, Yang Ming Marine Lines, and Evergreen Marine Line have recently declared the suspension of Red Sea shipping or the alteration of ship routes. Orient Overseas Container Line (OOCL), a subsidiary of the Chinese-owned COSCO Shipping Group, has halted acceptance of Israeli cargo due to operational concerns. Furthermore, oil giant BP and Norwegian oil and gas giant Equinor have also joined the ranks of suspending Red Sea shipping on Monday.

The Red Sea is a crucial link between the Mediterranean Sea through the Suez Canal and the Gulf of Aden through the Bab el-Mandeb Strait, thereby connecting the Atlantic and Indian Oceans. Given that it represents one of the most direct sea routes between Eurasia and Africa, the Red Sea is of paramount importance to global shipping and ranks as one of the busiest maritime trade corridors in the world. Available data shows that around 12% of global trade, including approximately 30% of global container traffic, as well as 10% of crude oil and 12% of refined oil shipments, traverse the Suez Canal and pass through the Red Sea and Bab el-Mandeb Strait.

Currently, some major global shipping companies have announced plans to bypass the Suez Canal and are considering diverting to the Cape of Good Hope in Africa to avoid dangerous areas. A rough calculation shows that this will affect 80% of the total capacity operated on the Far East-Northern Europe route.

1. The substantial 40% surge in voyage distance will inevitably trigger considerable cost escalation, encompassing fuel consumption, labor expenses, insurance premiums, and various other charges - consequently, propelling the overall costs for shipping companies.

2. Furthermore, diverting via the Cape of Good Hope in Africa will add around 10 extra days to the journey,substantially lowering ship turnover efficiency, absorbing effective transport capacity within the market, and stimulating short-term freight rate increases.

As for tanker stocks, Norwegian tankers Hafnia and Frontline maintained their upward momentum on Monday, escalating by 5.39% and 2.49%, correspondingly, with weekly cumulative gains ranging from 11% to 15%.

Moving forward, some analysts opine that the transportation challenges brought about by the Red Sea conflict and heightened geopolitical risk premiums may only serve as short-term disturbances to oil prices.

The redirection or re-routing of ships, which can lead to increased worldwide trade expenses and delays, has heightened anxieties surrounding the stability of the global supply chain in the aftermath of the Suez Canal blockage. This is particularly concerning given the ongoing navigation challenges caused by drought in another crucial shipping route, the Panama Canal.

As the year-end Christmas peak season for transportation approaches, shipping companies have implemented four rounds of price increases since November. If the blockage in the Suez Canal persists, it could further drive up shipping prices, fuel costs, labor expenses, insurance premiums, and various other costs associated with finding alternative routes. Ultimately, consumers may end up bearing the burden of these rising costs. This situation is similar to the story we witnessed during the COVID-19 pandemic, where supply chain disruptions and increased orders from people staying at home led to a surge in consumer prices.

Many people have compared the recent Evergrande crisis to the 2021 Suez Canal blockage caused by the grounding of the Ever Given, which lasted only six days. According to a report by German insurer Allianz at the time, the disruption in shipping due to the Suez Canal blockage resulted in global trade losses of approximately $6-10 billion per week.

However, analysts point out that considering the uncertainty of geopolitical risks, this crisis may be even more severe. Nevertheless, the situation remains to be observed.