Attacks on navigation in the Red Sea, more inflation in Europe

Jorge Costa Oliveira

In recent weeks, invoking solidarity with the Palestinians of Gaza, the Yemeni Houthi Ansarallah movement has attacked cargo ships “linked to Israel” off the coast of Yemen. These attacks have created enormous uncertainty about maritime trade in the Red Sea and the Gulf of Aden, especially in the Bab al-Mandab Strait area, through which 40% of Asia’s maritime cargo with Europe passes.

The world’s major shipping companies have announced that as long as this situation of insecurity and uncertainty persists, they will suspend the use of the Red Sea route and use the circumnavigation route of Africa. The US (and some allied countries) announced the establishment of an international naval mission – Operation Prosperity Guardian – to protect the passage of ships and allow the resumption of commercial navigation in the area. However, the recent attack on the cargo ship Maersk Hangzhou is expected to maintain the suspension of all cargo ship transit through the Red Sea.

Taking Rotterdam as a destination example, the use of the route through the Cape of Good Hope translates to an increase of +3457 nautical miles and +9 days, with the inherent additional costs. The increase in war risk insurance premiums is also significant, depending on the type of ship, but especially for long-range tankers (LR), incurring tens of thousands of dollars of additional costs for a seven-day journey.

Analysts fear that a prolonged stalemate in the Red Sea could trigger price increases. The increase in crude oil benchmark indices will have a knock-on effect on gas, while shipping companies will respond to longer journey times and higher insurance costs by charging higher prices to their business clients for maritime freight, which will, in turn, be passed on to final consumers.

Futures markets will soon show us the extent of these additional costs and the most affected sectors (e.g., fuel, food products). While this new inflationary outbreak seems inevitable, its scale is uncertain, as is its progression. What seems clear is that in addition to the uncertainty generated by these events, the inflationary impulse will erode the disposable income of households and halt any inclination to reduce benchmark interest rates determined by central banks. It is also possible that geopolitical tensions in the Red Sea and Gulf of Aden area may worsen and spread to the Persian Gulf.

On December 16, a spokesperson for Ansarallah said the group had been involved in negotiations mediated by Oman with unidentified “international parties” regarding their operations in the Red Sea. However, the inflexibility of the Israeli government regarding the war in Gaza has been exploited by Iran-controlled movements (such as Ansarallah) to radicalize their “defense of the Palestinians” position and tactically corner the Saudis and their allies in the region. No agreement is to be expected. In addition to the war in Ukraine, it is time for Europe and Europeans to realize that this war between Israel and Hamas affects them greatly.