Impacts of the Red Sea Crisis

10 January 2024

Attacks on commercial cargo ships by the Houthi rebels in the Red Sea, as well as the return of piracy off the coast of Somalia, are causing concern for traders everywhere, especially with Chinese New Year holidays only weeks away. There is no clear leadership or agreement on how to tackle the crisis. Importers and exporters should be looking at what shipping and supply alternatives might be available to them.

Altogether, Houthis in Yemen have now launched more than 20 attacks on container ships using drones, ballistic missiles, and in one case, an explosive unoccupied vessel.

With ships diverting from the Red Sea to go around Africa, not only does it add extra time and fuel costs, but now hijackings by pirates near the Gulf of Aden and Arabian Sea have resumed after a six-year lull. An Indian warship intercepted the MV Lila Norfolk after they received news that it had been hijacked off Somalia’s coast.

Exports to the European Union from Indonesia were US$24.6 Billion during 2022 (last figures available) and imports back to the Indonesia were valued at US$9.5 Billion. Much of that shipping traffic transits the Suez Canal, connecting the Red Sea to the Mediterranean, which is the shortest route between Europe and Asia.

The EU is negotiating a Free Trade Agreement (FTA) with Indonesia and, as we reported in our article last year, there is focus on the electric vehicles (EV) industry between the two parties. Time is of the essence, as elections in 2024 will see the departure of President Widodo as well as European Commission President Ursula von der Leyen, a strong proponent of free trade deal in Southeast Asia.

Redirecting ships around the Cape of Good Hope adds up to two weeks’ journey, or 30 to 40% more time between Asia and Europe. These diversions are expected to cost up to US$1 Million in extra fuel for every round trip between Asia and Europe, while insurance costs are also rising, adding to the overall cost of shipments.

There has been an expectation that the crisis would push airfreight rates up; that there would be an increase in demand for ‘air-sea’ services as well as rail demand from Asia-Europe, however these have not happened – yet.

An article titled, It’s time to develop Plan B, written by Sanjoy Paul, Associate Professor at UTS Business School in Sydney, has been published by The Conversation. He urges international traders to considers these actions:

  • To minimise the impact of all of these disruptions, businesses need to develop backup plans that can be implemented quickly.
  • They include diversifying supply sources, being prepared to use alternative shipping routes and onshoring critical manufacturing.
  • Resources ought to be allocated now and planning done in collaboration with local and international partners.
  • The businesses that best prepare will be those best able to ride out and gain from the next disruption.

Calls have been mounting for the United Nations to step into the Red Sea crisis. A statement issued by the UN Security Council said that the campaign waged by the Yemen-based, Iran-backed Houthi militia had included what the governments described as the “historic first use of anti-ship ballistic missiles” against commercial shipping.

It added that this was “a direct threat to the freedom of navigation that serves as the bedrock of global trade in one of the world’s most critical waterways.”

With no clear path out of this crisis, importers and exporters need to examine what other options are available to them.

Jalak Kargo Logistik provides you with professional advice on all aspects of international shipping and trade, whether by airfreight or sea cargo. We take care of your logistics needs – both import and export – through our extensive network of offices and agents. Jalak handles your international and domestic shipments, including customs clearance, trucking and warehousing. Call us if you have project cargo or express courier consignments.

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