By Zachary Atkins, Staff Writer
Photo courtesy of unsplash.com
As has been illustrated multiple times in the past decade, the Suez Canal, and by extension, the Red Sea, is a critical junction for global trade. Most impactful, is the flow of manufactured goods from Asia to Europe, and to a lesser, but still important degree, global energy distribution. Houthi rebels in Yemen have hijacked and attacked more than two dozen ships in the Red Sea since November.[1] To illustrate the importance of this area of the world, 15% of all global seaborne trade travels through the Red Sea.[2] This has impacted the cost to ship around the globe.
Costs have already increased for these large shipping companies, more than doubling since this time last year.[3] The rise in cost can be partly attributed to supply chain disruptions and a shortage of empty containers, but this is only half the story.[4] To use the Red Sea as your route now requires expensive war risk insurance.[5] War risk coverage is often required for vessels going into areas designated as high risk by a group of insurers called the Joint War Committee, which consists of underwriters at Lloyds and other organizations based in London.[6]
War risk insurance premiums for shipments through the Red Sea are increasing due to repeated attacks on merchant vessels by Yemen’s Houthi movement. The Houthis, an actor in a three-way civil war,[7] are well-equipped and trained, have expanded their targets to include U.S. ships. Even before these recent attacks, the southern Red Sea was considered a high-risk.[8] Ships sailing through such areas need to notify insurers and pay additional premiums. War risk premiums have risen to around 1% of a ship’s value, up from 0.7% last month, with expectations of further increases. For a ship carrying goods worth $100 million through the Bab al-Mandeb strait off Yemen on route to the Suez, means an extra $1 million for the few days necessary to go through the Red Sea area. War risk rates for the Red Sea were less exorbitant than those for shipping in the Black Sea from Ukraine, which can range up to 3 percent. One reason for the differential, the environment is considered more hostile because Russia is a more dangerous attacker than the Houthis. So far, insurers say, the Houthi attacks, while intimidating, have produced relatively little damage.[9]
The terms for war risk quotes now have significantly shorter durations, with 24 hours becoming the norm. This elevated threat extends to vessels associated with the UK, U.S., and other Western nations.[10] Rising tensions and increased costs for transporting goods globally may lead to more ships taking the longer route via the southern Africa’s Cape, particularly due to a combination of higher insurance rates and rising fees for using the Suez Canal. There are concerns that if the U.S.-led coalition fails to thwart further attacks and ensure freedom of navigation in the region, war insurance coverage could become unavailable, forcing traffic to use the longer route around the Cape of Good Hope.[11]
For the United States, will this mean an acceleration of near shoring (moving production to countries closer in proximity to final markets)[12] and an increase of domestic manufacturing?
[1] https://www.bbc.com/news/world-middle-east-67614911
[2] Id.
[3] https://www.nytimes.com/2024/01/24/business/red-sea-attacks-shipping-costs.html
[4] Id.
[5] https://www.bloomberg.com/news/articles/2024-01-18/red-sea-attacks-strikes-and-houthis-ensure-shipping-chaos-on-vital-routes?embedded-checkout=true
[6] Id.
[7] https://www.wsj.com/world/middle-east/houthis-yemen-rebels-us-strike-explained-75697f9c
[8] https://www.reuters.com/business/finance/red-sea-war-insurance-rises-with-more-ships-firing-line-2024-01-16/
[9] https://www.nytimes.com/2024/01/24/business/red-sea-attacks-shipping-costs.html
[10] https://www.reuters.com/business/finance/red-sea-war-insurance-rises-with-more-ships-firing-line-2024-01-16/
[11] https://www.reuters.com/business/finance/red-sea-war-insurance-rises-with-more-ships-firing-line-2024-01-16/
[12] https://www.forbes.com/sites/garydrenik/2023/03/23/why-nearshoring-is-closer-than-ever-how-mexico-is-becoming-the-next-big-thing-in-global-markets/?sh=555ac073354b
