Once again the Red Sea and Suez Canal are looking like expensive bottlenecks for the global supply chain & shipping sector. Delays on cargo deadlines, losses to shipping lines, wholesalers, manufacturers and of course insurers, could all become a regular feature until spring 2024.
The conflict situation regarding Yemen, Gaza and Israel is likely to remain volatile and could escalate very quickly. The presence of US forces and Iranian backed terror groups in the region could also increase tensions. On the upside, global superpowers China and India stand to lose a great deal of manufactured goods if container ships are hijacked or sunk. So there’s that political pressure in the background too.
Meanwhile, here is some expert commentary that IE has rounded up for your festive season digestion.
DBRS
DBRS Morningstar published a commentary discussing the implication of the recent Houthi rebels’ attacks to cargo vessels in the Southern Red Sea and the Gulf of Aden for global supply chains, shipping lines, and marine insurance companies providing war coverages in the region.
Key highlights include the following:
— Houthi rebels’ recent attacks on cargo ships have further disrupted marine operations in the Southern Red Sea and the Gulf of Aden, unsettling global supply chains and raising transportation costs.
— A multinational naval coalition is expected to address the security challenges in the region and protect the freedom of navigation. However, the financial impact on shipping lines, cargo owners, and insurers will remain for some time.
— The marine insurance market has responded to the heightened security risks in the region by materially increasing the price of marine war coverages, restricting insurance capacity, and expanding the geographic area deemed unsafe for sea navigation.
CONTAINER xCHANGE
Some in-depth analysis from Christian Roeloffs, cofounder & CEO of Container xChange is well worth absorbing, and if you prefer it’s available on YouTube here – https://www.youtube.com/watch/UegHC0btQw8
Christian adds;
“The key question for the industry is the duration of the current situation. Is it a temporary disturbance, a perceived bump in the road, or are carriers capitalizing on the situation as container vessels are diverted around the southern tip of Africa, adding strain due to the Suez Canal’s inaccessibility.”
Approximately 1.4 to 1.77 million TEU of capacity, accounting for 5 to 6% of the market’s total capacity, is affected. This offers relief for carriers amid the current state of overcapacity.
“The lingering question is the duration of this circumstance and when naval forces, particularly from Egypt, Great Britain, France, and the US, will take control of security in the Red Sea.”
“Industry sources suggest that this task might not be straightforward. Forming convoys could impede traffic, and addressing drone boat attacks poses challenges, especially considering the difficulty of detecting these boats in high-traffic areas like the Red Sea.”
FOIL VIEW
Toby Vallance, Executive Committee Member of the London Forum of Insurance Lawyers, says:
The recent attacks by Houthis rebels on vessels present various challenges to the shipping industry, as the Red Sea is one of the world’s busiest shipping lanes. In response, a number of the major carriers, including Maersk, CMA CGM, Evergreen and MSC have already announced either paused shipping through the Red Sea or rerouted vessels due to safety concerns. In terms of rerouting, that alternative means going around the Cape of Good Hope, adding two weeks journey time.
For those vessels still transiting through the Red Sea, war risk premiums are reported to have increased from 0.07% of the value of a ship in early December to 0.5%-0.7% this week. Furthermore, on Monday, the Joint War Committee expanded the high risk zone in the Red Sea from 15 degrees north to 18 degrees north.
Both options of increased premiums and rerouting around Africa will see a knock-on effect on the price of goods (especially oil), due to a stifled global supply chain, which may be further perpetuated given the time of year.
Comparisons have been drawn to the Ever Given Suez canal incident in 2021 and the potential impact on supply chains due to vessels and cargo being displaced. However, the impact of the Ever Given grounding was made so much worse by the lack of shipping capacity at that time. An issue which does not exist today due to increased capacity entering the market in 2023. So while there will be some delays to supply chains, the hope is that this can be kept to a tolerable level.”
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