Ships of US and Israel allies or satellites are still forced to circle the Cape of Good Hope for fear of attacks by the Yemeni Houthis, a situation that has serious consequences, in particular for European countries

The powerful US Navy had to pull anchor and sail out of the Red Sea, unable to withstand the armed attacks of the Houthis. Prior to that, the US Navy’s intervention to protect the passage of commercial ships through the Strait of Aden was met with so much hope that the Danish company A.P. Moller-Maersk (MM), one of the world’s largest shipping companies, said in late December 2023 that it wants to reopen the route through the Red Sea, just two weeks after planning to abandon it for safety reasons. However, the reality is quite different, as ships flying the flags of allied or satellite countries of the USA and Israel are still forced to sail around the Cape of Good Hope to avoid being struck or looted by Yemeni forces.

MM reported in September 2024 that its shipments through the Red Sea were down 66% from 2023. Rounding the Cape of Good Hope resulted in longer delivery times and higher transportation rates. The average time of arrival to European ports from Asian ports almost doubled: from 19 to 34 days of navigation. However, there is no significant difference for shipments from Asia to the US Gulf Coast, which had a navigation time of 44 to 48 days. In any case, as far as rates are concerned, the increase recorded in January 2024 was 174% for the Asia – East US Coast route, 333% for the Asia – Northern Europe route, and as high as 495% for the Asia – Mediterranean route. The peak was reached in the summer of 2024, when the Drewry World Container Index, a rate index of eight major global routes, nearly reached $6,000 per FEU (forty-foot equivalent unit – ed.) in July 2024, before dropping to about $3,000 per FEU in late October, still about three times the October 2023 price.

About 5% of the world’s crude oil traffic, 9% of the world’s petroleum product traffic, and 8% of the world’s liquefied natural gas traffic pass through the Red Sea.

The Red Sea, after the Straits of Malacca and Singapore, is the third largest commercial hub in the world, accounting for about 12% of total traffic and about 30% of containerized cargo worth $1 trillion. Despite the challenges of the last two months of the year, more than 26,000 vessels passed in 2023, a 10% increase over the previous all-time high. About 8,000 of these vessels were oil tankers with a volume of about 8 million barrels of oil per day, up 28% from the previous year. Actually, approximately 5% of the world’s crude oil traffic, 9% of the world’s petroleum product traffic, and 8% of the world’s liquefied natural gas (LNG) traffic, as well as another 8% of the world’s grain product traffic, passed through the Red Sea.

The company, which manages the Suez Canal traffic, recorded revenue of $9.4 billion for the 2022-2023 fiscal year, but difficulties and shipping restrictions were not long in coming. In the first months of 2024, the Egyptian government announced that following a reduction in maritime traffic by at least 30%, revenues from the Suez Canal had fallen by 64% year-on-year, dropping from $648 million in May 2023 to $337 million in 2024. Even the extension of discounts on transit tariffs, which reach up to 75% in the case of oil and oil product tankers, has not been enough to encourage maritime operators to accept the risk of cargo loss.

The consequences of the Red Sea blockage are underestimated, especially by European analysts. The 2024 rates, while rising sharply, were 69% below the highs of September 2021, when they reached 10,322 dollars/FEU. However, the most important and often omitted data is that the average annual tariff index price from Shanghai to ports in Europe (Rotterdam and Genoa) or the USA (New York and Los Angeles) is more than 1000 dollar/foot above the average of the last 10 years, which was inflated by peaks recorded in 2020-2021. It should also be kept in mind that the number of voyages departing from Shanghai is increasing by at least 100% year-on-year.

Obstacles in Suez could boost global inflation by 0.3%

The continued disruption to shipping through the Suez Canal cannot be underestimated as it could contribute to a 0.3% increase in global inflation and a 0.7% increase in consumer goods inflation, as well as cause a 0.4% contraction in global GDP. According to the latest statistics, oil trade flows through the Bab-el-Mandeb Strait were about 4.0 million barrels per day between January and August 2024, less than half the average of 8.7 million barrels recorded for the whole of 2023. The volume of petroleum products transported by sea has also begun to impact the global shipping sector. According to February forecasts, only two supertankers could be launched in the whole of 2024, the lowest number in forty years, adding to the shortage of operational oil tankers that has plagued the sector for some time.

European countries seem to be the most affected by the Suez Canal blockage. Historically, about a quarter of all products imported from Asia pass through the Red Sea. Energy products are the most important: transit volumes through the Red Sea increased by 140% after the withdrawal of energy supplies from Russia. India has managed to become Europe’s first trading partner for petroleum products with a supply of 360,000 barrels per day, surpassing even Saudi Arabia and Kuwait. It is supply from these countries that has slowed sharply, from 2.9 million barrels of petroleum products per day at the end of 2023 to 2.1 million barrels in 2024, while recording a 31% drop in imports from India, 15% from Saudi Arabia, and 43% from Kuwait. Among petroleum products, diesel, gasoil, and jet fuel are the most important for the European market, accounting for 32%, 23%, and 22%, respectively, of the total volume of petroleum products passing through the Suez Canal. As for LNG, there have been no tanker passages from the Red Sea since February 2024, with a few exceptions, which in turn have been directed toward the Cape of Good Hope. LNG imports from the Middle East have declined, and the market share lost to Qatar has been absorbed by US producers who have managed to increase exports to Europe.

For European countries, the economic impact will be even more severe, with a 0.7% increase in inflation and a 0.9% GDP decline, exacerbated by a deteriorating trade balance. In December 2023, there were declines in European imports and exports of 3.1% and 2%, respectively. Even Europe’s largest economy, Germany’s, no longer seems able to digest the higher energy and raw material costs needed to support its industry. The most relevant example is provided by Germany, which, according to official statistics, saw a 4.7% drop in exports to non-EU countries between August and September 2024, about 1.3% lower than in 2023.

The most logical solution to alleviate the situation that is becoming increasingly difficult to resolve would be to open new trade routes with Asia and therefore join China’s One Belt, One Road (OBOR) initiative, to which many European countries are either opposed or withdrew their signatures after initially signing up, as Italy did. In addition, the complete closure of Europe to Russia would prevent the use of two trade routes, fundamental to trade with Asia, namely the Northern Sea Corridor (Northern Sea Route, NSR), which runs from the Murmansk port, crossing the Arctic to reach Chinese ports, and the International North-South Transport Corridor (INSTC), which runs from Moscow, passing through Azerbaijan and Iran, reaches Mumbai. Both are already in operation, but INSTC may be of most interest to Europe as it represents a real alternative to the sea route through the Red Sea, 40% faster – about 19 days travel time, cheaper, with fares 30% lower, and safer than the sea route through the Red Sea.

Countering China’s OBOR initiative and commercial, financial, as well as military warfare against Russia could further increase the dependence of European markets on the US market. In 2023, the USA was the EU’s largest partner in exporting goods (19.7%) and the second largest partner in importing EU goods (13.7%). While the trade balance with the USA at the end of 2023 was still positive for Europe, $368 billion in imports versus $553 billion in exports, the growth rate of US exports to Europe was three times that of imports, which increased 35% and 13%, respectively, over 2021. As was the case with gas supplies, where there has been a dramatic increase in LNG imports from abroad, rising from an average of 15 million tons per year between 2018 and 2021 to an average of 55 million tons in 2022 and 2023, European trade in goods and services to and from Europe will also be increasingly controlled by the United States.