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Red Sea Crisis: a Catalyst of Alternative Route Exploration

Gray Rhino or Black Swan?

On Nov 19, 2023; Houthi militants boarded and hi-jacked a Ro-on/Ro-off Vehicle Carrier, GALAXY LEADER, sailing on the Red Sea making its way to India. The attack lifted the curtain on recent Red Sea crisis’s that have been happening. In the past year alone, Yemen's Rebels have carried out 26 ship attacks (as of Jan 10), according to US Central Command (CENTCOM). As a response to the Houthis' attack on commercial ships, Operation Prosperity Guardian, a US-led-military operation by a multinational coalition, was formed in December 2023. On Jan 12, the coalition conducted its first airstrikes against Houthi targets in Yemen after Houthis launched 18-24 attack drones and missiles at ships on Jan 10. Airstrikes from coalition and Houthis revenge were still ongoing when this newsletter was being prepared.

Fearing that their fleets would be targeted, many international liners decided to detour their ships from crossing the Suez Canal (Red Sea Route) to South Africa passing Cape of Good Hope (Cape Route). However, the Suez Canal accounts for 15% of the world’s total shipping traffic; the detouring not only caused a few days delay but a massive impact of re-scheduling, resources & manpower allocation, and costs.

Red Sea Route stakeholders were not new to the risks of voyage disruption via the Suez Canal. The Canal has been encountered several closures in the 60's and 70's last century, which gradually vanished in the public's memory; however, the run aground of the Ultra Large Container Carrier EVER GIVEN in Mar 2021 raised concerns about the blockage of the Suez Canal and its effects.  Despite the Canal blocking only lasting six days, the whole world logistics supply was in chaos: 300 ships were stranded on both sides of the Canal, and many more were detoured.


Bab-el-Mandeb: Gate of Lamentation

While the 120-mile-long Suez Canal is the narrowest section of the Red Sea Route, connecting the Mediterranean Sea to the Arabic Sea, it is not the only hot spot within this corridor. There are 16 miles between the two narrowest points of the Bab-el-Mandeb Straits at the southern end of the Red Sea (called "Gate of Lamentation" or "Gate of Tears" in local language due to fast water and currents that endangered residents crossing the straits in the old days). 9% of worldwide seaborne petroleum trade passes through the straits, which represents one of the most important chokepoints for petroleum transportation. Because of the slow and congested traffic in the region, organized gangs attacked merchant ships for political or economic reasons. A large number of Somalian pirates are cruising around the Gulf of Aden adjacent to Bab-el-Mandeb looking for their prey. The Houthis are based exactly in the eastern band of Bab-el-Mandeb.

Triggering Another Round of Inflation

Based on a VLCC class supertanker traveling from Europe to Asia, an industry analyst calculated that routing through Cape Route would require 5,000 km (3,100 miles) longer distance, 10 more days, and added cost $1 million on fuel. In addition, the infrastructure of fuel refineries and supply in the African region was unable to accommodate the sudden increase in demand for ships passing through, so fuel prices rose rapidly compared with other regions. 

From the experience of the EVER GIVEN incident in 2021, the effects of ship schedule delays included port congestions; supply chain disruptions; overstocking due to late arrivals of seasonal products; and a delay in ship turnover. The current impact can be reflected in the Drewry World Container Index (WCI composite) which showed an increase of 15% in the week of January 11 to $3,072 per 40 ft container. On November 16, before the start of Red Sea Crisis, the WCI composite Index was at $1,469 per 40 ft container. 

The continuous disruption of traveling along Red Sea Route would affect the global oil supply, thus pushing up global oil prices. This may cause another round of worldwide inflation. The efforts of many countries to suppress inflation could easily go down the drain and affect the recovery of the global economy.

Incentive of New Routes Exploration

There has always been a desire among many stakeholders to explore new routes and new modes because of current geopolitical conditions and the revenue at stake. Although the freight train between China and Europe has been considered an alternative to the sea route, it only covers 3% of the total cargo shipped between China and Europe. The China-Europe freight train shipped around 600,000 TEU per year, while 26.5 million TEU crossed the Suez Canal each year (EVER GIVEN has a capacity of 20,000 TEU). Therefore, the Eurasia train could only supplement sea transport rather than replace it.

The Northeast Passage and Northwest Passage, two arctic sea-lanes, are hot topics now that countries are trying to get their foothold on the possible route exploration and development: a modern version of "Age of Discovery" with polar as the arena. The first regular container service between China and Russia's arctic ports via Northeast Passage began in July 2023. For the first voyage, a Chinese registered company used an ice-class container ship built in 2005 with 1,638 TEU: left from St. Petersburg and arrived Shanghai (including a few ports on the way) in 28 days. A report stated the service period (navigation season) was only from Jul to Nov each year. It appears the operation is still in the pilot trial stage, with a long way to go before it can be scaled up for commercialization. Nonetheless, this routing has been taking off.

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