Houthi Attacks Impact on the Shipping Industry
Beginning in mid-November of 2023, the Houthis, a Yemeni political and military organization, have carried out dozens of targeted strikes against commercial ships in the Red Ship. These attacks have largely been orchestrated in an effort to show support for the Palestinian cause and condemn Israel’s actions in Gaza. While the Houthis claim that their strikes are targeted exclusively against Israeli ships, in practice, the Houthis have been attacking all ships indiscriminately. This is due to the opaque nature of the shipping industry in which vessel ownership, operation, crew nationality, and registry flag are often different.
The international community’s response to these strikes demonstrates the complexity of the issue. For example, the U.S. is spearheading a twenty-country naval task force to protect commercial ships in the Red Sea; however, the Houthis' use of guerilla tactics and the sheer number of ships that need protection renders this strategy ineffective. Russia and China took a different approach, striking a deal with the Houthis to ensure the safe passage of their vessels in exchange for support from the United Nations Security Council. Yet, two days after this agreement, the Houthis launched five missiles against a Chinese oil tanker.
In economic terms, the Houthi’s attacks pose a challenge to the global shipping industry. One-third of all container traffic flows through the Red Sea, and 12% of seaborne oil, and 8% of liquified gas flows through the Suez Canal. These events particularly affect Asia to Europe shipping routes as 40% of their trade normally transits the Sea. The only alternative to the Red Sea route is around the Horn of Africa, which can cost $1 million more in fuel costs.
In response, many global shipping companies, such as the Danish company Maersk, decided to avoid the Red Sea altogether. Consequently, global freight rates skyrocketed to $4000 per 40-foot container in early February. Insurance rates also sharply increased since these attacks began. These price changes primarily affected high-value vessels where companies were unwilling to take the risk of crossing the Red Sea. Meanwhile, smaller and lower-value ships are still making the voyage.
However, since the initial spike in prices, global freight rates have gradually declined. As of March 13, 2024, rates declined to just above $3000 continuing a downward trend over the past month. This is largely due to the drastic increase in global capacity as shipping companies continue to build up their fleets in the wake of Covid-19. This goes to show the limited risk that geopolitical events pose for the shipping industry and that the supply of ships and fuel prices remain the largest drivers in this industry.