The Red Sea Crisis has had a huge impact on the global shipping industry, disrupting major trade routes and causing significant shipping delays worldwide. Houthi rebels have been launching attacks on carriers passing through the Red Sea and the Suez Canal, which is a major passageway for shipments between Asia, Europe, and the United States.                            

The root cause of this crisis traces back to the turbulent geopolitical situation in the Red Sea, when Houthi rebels seized control of the Galaxy Leader, a car carrier, in late November. With the rebels continuing with subsequent attacks and hijackings along the Red Sea trade lane in response to the Israel-Gaza war, major ocean freight carriers have been forced to rethink their transits through the Suez Canal.                            

Economic Implications of this Deviation    

To avoid the risks associated with the Red Sea, many freight carriers are unable to pass through the Red Sea and the Suez Canal. As such, carriers and shipments need to divert their routes around the Cape of Good Hope in South Africa, adding an extra 7,000 kilometres to their journey. This deviation means that shipments are facing delays of approximately 10 days, throwing supply chains and logistics into disarray.                    

The longer transit time not only disrupts schedules but also contributes to volatile and rising ocean freight shipping rates. With longer transit routes around the Cape of Good Hope, the cost of fuel needed for each trip has also increased. Coupled with rising freight insurance costs due to the attacks, the cost of ocean freight shipping is rising rapidly.                          

The economic repercussions of this are more far-reaching than just an increase in shipping costs. With this black swan event causing the rapid rise of freight shipping costs, contracted freight rates are now in jeopardy and carriers are unlikely to honour previous agreements, forcing shippers onto the spot market. This shift further increases uncertainty in the market and leaves shippers vulnerable to additional charges for transporting their goods.                        

The spot market rates, particularly between the Far East and the Mediterranean, are set to be 5950$ per Forty Foot Equivalent (FEU) for February. Compared to the market high of 6050$ on January 16, this represents just a marginal decline in costs.                    

Sustainability Concerns    

Beyond economic implications, the Red Sea Crisis also has an impact on the environmental concerns related to container shipping emissions. By avoiding the Red Sea and opting for the longer route around the Cape of Good Hope, there will be a substantial increase in carbon emissions from these diverted ships.                        

According to gryn’s calculations, a Forty Foot Equivalent Unit (FEU) container going from Marseille to Shanghai will see a rise in emissions, from 2 tons of CO2e to 3 tons of CO2e, as a result of the deviation of 7000km. That is a 50% increase from original emissions.                        

It is important to note that in this calculation, it was assumed that the vessel maintains the same speed when navigating around the Cape of Good Hope as it does when traversing the Red Sea. However, the prolonged transport duration requires ships to increase their speed from approximately 16 to 24 knots on average. This acceleration results in an additional rise in emissions and exacerbates the environmental impact.    

With maritime shipping becoming part of the European Emissions Trading System (EU ETS) from January 2024, carriers will face additional carbon costs for trades between the EU and Asia. These increased costs will be passed on to shippers, who are already facing the financial burden imposed by elevated freight rates from the Red Sea crisis.    

How to Navigate the Uncertainty    

In the face of this dual challenge – economic and environmental – shippers and carriers alike need to start adopting new measures to mitigate the impact of the Red Sea Crisis.    

Negotiate Contracts: The spot market may be inevitable as freight costs continue to increase and carriers may fail to acknowledge current contracts. Shippers should be prepared to be in constant communication with carriers to renegotiate contracts and new spot rates in light of the prevailing circumstances.    

‍Explore Intermodal Solutions: Prepare to use different modes of transportation, such as air and rail. Switching to air freight will minimise supply chain disruption but comes with significantly higher emissions. Opting for rail transportation helps maintain a relatively low carbon footprint, although it's often not a viable alternative.    

Monitor Market Trends: Stay informed about market trends, spot rates, and geopolitical developments. With proactive monitoring of trends, shippers and carriers are better equipped to make informed decisions and adapt to any new changes in the shipping landscape.