The response by the Huthis—the Iranian-backed militant group controlling northern Yemen—to a warning from 12 countries 10 days ago to cease their attacks on Suez-Canal-bound shipping transiting the Red Sea was to launch further attacks this week that required U.S. and U.K. forces to shoot down 18 drones, two anti-ship cruise missiles and one-anti ship ballistic missile.

That was followed by U.S. and U.K. counter-airstrikes on 16 Houthi command centers, munitions depots, and air defense systems in Yemen. Oil prices, unsurprisingly, spiked on concerns that fears of the Gaza war spreading regionally were starting to be realized.

The Huthis will likely maintain a relatively high risk-tolerance for U.S.-led counterattacks, relishing the opportunity to translate long-term rhetorical anti-Israeli positions into high-profile action accruing local and regional popularity.

Since the attacks started after the start of the Israel-Hamas war in October, approaching 30 vessels transiting the southern part of the Red Sea have been attacked from Yemen by Houthi drones and missiles. Around one-seventh of global seaborne trade passes through the Suez Canal.

In response, most global container lines taking cargo between Asia and Europe rerouted their vessels via the southern tip of Africa.

An added problem for carriers is that drought in Panama has led to historically low water levels in the canal there, resulting in a cap on the number of vessels allowed through each day. In November, this caused multiple shipping lines to switch several services between Asia and the U.S. East Coast to use longer Suez routes instead. However, the severe disruption in the Red Sea led to these services being diverted even further around Africa.

Carriers have made individual risk assessments. Maersk and CMA CGM were the first to re-start using the Suez Canal late last month, but on December 30, Maersk again suspended transits through Suez after one of its vessels was attacked.

Freight Rates
Until the Suez routes reopen, the diversion around Africa will absorb between 1.4-1.7 million 20-foot equivalent units (TEU, the size of a standard cargo container) of vessel capacity, equivalent to 5-6% of global capacity. This will eradicate the overcapacity on which the cyclical downturn forecast for 2024 is based.

If the new routings become permanent for the foreseeable future, freight rates will stabilize considerably above pre-pandemic levels, if significantly below the levels seen during the pandemic.

This is because of the overcapacity. Freight rates are much lower now than when the Ever Given vessel blocked the Suez Canal for six days in early 2021, the middle of the pandemic. World trade volumes are also historically weak, having grown by less than 1% last year, and no marked near-term recovery is in sight.

Supply chain routes from Asia to north-west Europe will become seven to eight days longer; Asia to the eastern Mediterranean will become ten to twelve days longer; and Asia to the U.S. East Coast will take four to five days more, in addition to the seven to eight days extra transit time already incurred by shifting from Panama to Suez.

Marine insurance costs have risen from around 0.1% of the value of the loaded ship to about 0.5%. Vessels moving through the Suez route must pay a risk premium of typically USD30-100 per container, and these premiums are being increased to the upper end of this range.

Smaller container ships carrying 5,000 or fewer containers will be most affected.

Shortages and delivery delays will rise, especially in assemble-to-order products like cars and furniture. The market for car carrier transit was tight before the attacks, as Chinese exports of electric vehicles (EVs) have been rising rapidly.

Sea freight costs tend to make up less than 1% of the retail value of many products, which will protect consumers from sharp price rises to a certain extent. The IMF estimates that global supply chain bottlenecks added an average of one percentage point to global inflation during the pandemic; the impact of the Red Sea attacks will be less dramatic.

Moreover, a spike in shipping costs can take roughly one year to feed through to broader inflation. If the severe disruption is limited to less than three months, the impact on inflation a year from now will be hard to distinguish from other factors.

Delays fell, and global schedule reliability improved during 2023, albeit stabilizing at a level much lower than the pre-pandemic norm. In the decade before the pandemic, global vessel reliability (the likelihood that a ship would arrive on the scheduled day) averaged 77%. In the second half of 2023, this stabilized at just 63%.

The disruptions from the Red Sea crisis will cause reliability to drop sharply in the next few months, constraining the recovery of world trade flows.

Depending on the degree of U.S. success in degrading the Houthi's capabilities—Thursday's U.S. and U.K. airstrikes on Yemen were likely only the first—and any restraints that Tehran might impose, the threats to shipping could increase. Current political dynamics suggest that is highly possible. 

However, a bigger risk to supply chains will come if the attacks kick off assaults on shipping elsewhere or cause other maritime choke points to be blocked.

Attacks in the Red Sea create more inefficient trade flows, costing time and thus money but delaying, not disrupting supplies. If Iran hindered shipping passing through the Strait of Hormuz, then up to 20% of global oil and LNG supply could be impacted, with few alternative routes to the market.