For about two months, a spate of missile and drone attacks by Houthi fighters in the Red Sea has presented shipping passengers using the Suez Canal with a difficult choice: risk an air attack and pay significantly higher insurance premiums, or forego the canal and wait a longer route around Africa, confusing schedules and higher fuel fees.
The attacks – at a chokepoint that handles 12 percent of global trade, including nearly a third of global container ship traffic – have already led to some closures of European car factories and raised fears of a rise in consumer prices.
Costs have already increased for shipping companies. A composite measure of global shipping costs, the Drewry World Container Index, has more than doubled since the end of last year. The increase is partly due to a shortage of empty shipping containers caused by up to two weeks of extra time traveling around Africa's Cape of Good Hope.
And using the Red Sea now requires expensive war risk insurance. It is a specialty offered by a group of brokers and underwriters based in London.
“We are not fair-weather insurers,” said Munro Anderson, operations manager at Vessel Protect, a marine war risk insurance company. “We are there for our customers when things are most difficult,” he added.
War risk cover is often required for ships sailing into areas identified as high risk areas by a group of insurers called the Joint War Committee, made up of insurers from Lloyds and other organisations. War risk is “an area of business where the underwriting community generally makes money if they get it right,” said Marcus Baker, global head of transportation, freight and logistics at Marsh, an insurer in London.
But the cost of insuring container ships or tankers transiting the Bab al-Mandeb Strait off Yemen en route to the Suez has risen sharply in recent weeks.
Naval war risk premiums have increased fifty-fold since the pre-war period and are as high as 1 percent of the ship's value, although around 0.7 percent appears to be more common. For a ship carrying $100 million worth of goods, that means an additional $700,000 for the few days it takes to sail through the Red Sea.
Mr. Baker said war risk rates for the Red Sea were less exorbitant than those for Black Sea shipping from Ukraine, which could be as high as 3 percent. One reason for the difference: The environment is considered more hostile because Russia is a more dangerous attacker than the Houthis. So far, the Houthi attacks, while intimidating, have caused relatively little damage, according to insurers.
Some insurers also insist that customers have a guarantee in their contracts that they have no connection to Israel, whose military operation in Gaza is the reason for the Houthis' attacks, or to the United States and Britain, which have air and rocket missiles have launched attacks on the Yemen-based group. To deter attacks, more and more ships are sending messages like “No Contact with Israel,” according to TankerTrackers, a monitoring service.
So far, the U.S.-led multinational naval task force protecting merchant ships in both the Red Sea and the Gulf of Aden has not helped reduce insurance costs, brokers say, even as rates may ease. Israel has offered to pay the ship's owners compensation for any damage in Israeli waters.
But for now, most of the giant ships carrying stacks of containers from China to Western ports use the African route, which could take two weeks longer given higher fuel costs. In the past 30 days, 517 container ships have bypassed the Red Sea by rounding the Cape of Good Hope, while 212 continued through the Suez Canal, said Jonathan Roach, who tracks container shipping for Braemar, a London ship broker. In November the ratio was roughly the opposite.
Tankers that transport oil and liquefied natural gas around the world are also increasingly avoiding the Suez Canal. Even LNG tankers from Qatar, a key gas supplier to Europe whose ships were considered safe from Houthi attacks because the emirate had harbored Hamas leaders, are now sailing through Africa, said Laura Page, an analyst at Kpler, which tracks shipping.
Over time, more tankers may choose the longer route. “There will come a point where the pain and expense of going into the Red Sea and through the Suez Canal outweighs the simple economics of going around the Cape,” said Lois Zabrocky, chief executive of International Seaways, the oil and chemical companies owns and operates tankers, said at an investor event last week. “And this is an ever-evolving situation.”
Still, energy prices were subdued, reflecting weaker demand and rising production in the United States and elsewhere. Brent crude was below levels seen on October 7, the day Hamas attacked Israel. Although tanker freight rates have risen about 25 percent since disruptions began in the Red Sea, according to Goldman Sachs, European natural gas prices have remained subdued, likely due to large amounts of stored fuel and alternative supplies from the United States.
CMA CGM, a Marseille-based company and one of the world's largest container shippers, is sending some ships through the Suez Canal, at times escorted by the French navy. Analysts say the ships still moving through Suez tend to be older and smaller vessels that would incur smaller casualties if hit.
It's unclear whether rising shipping costs will affect consumer prices, particularly in Europe, where the economy is barely growing. Weak consumer demand means companies will be under pressure to factor additional shipping costs into their profit margins “rather than passing price increases on to the consumer,” Morgan Stanley analysts said this week.
One factor mitigating the current crisis is an excess of ships and freight containers. Following the severe shipping congestion in 2022, logistics companies ordered large quantities of ships and containers, which are now helping to ease the global bottleneck in the movement of goods.
Longer shipping routes resulting from avoiding the Red Sea actually help the market absorb a significant oversupply of ships and, at least temporarily, ease pressure on companies to scrap excess ships, Braemar-based Mr Roach said. “Maybe it’s not such a bad time for this situation to arise,” he said.
Despite this plentiful supply of ships and containers, hostilities in the Red Sea have led to an increase in freight costs. Mr Roach said disruptions in the Red Sea would likely last another three to four months or longer until prices peak in 2022.
Christian Roeloffs, managing director of Container xChange, a company in Hamburg that runs a shipping container market, said prices for the boxes have skyrocketed because the sudden lengthening of transportation routes has caught the industry with incorrect inventories of the boxes.
Importers rushing to stock up on orders from Chinese factories before they close for the upcoming Lunar New Year are also creating a scramble for containers, he said.
“Even if the capacity is theoretically there, it cannot be made available so quickly,” said Roeloffs. He predicted the Chinese holiday next month would give shippers time to recover. “We’re really going to see normalization,” he said.
Jenny Gross contributed reporting.