Red Sea attacks threaten Asia's holiday food imports, rattle supply chains: 'stakes are high'

Asia's cargo deliveries and supply chain have been thrown into uncertainty during the peak holiday season following Houthi militant attacks on ships plying the Red Sea, which connects to the arterial route to Europe through the Suez Canal.

Shipping lines, led by the world's second-largest container shipping company AP Moller-Maersk, have since last weekend suspended vessels on the route, which accounts for around 15 per cent of the world's shipping traffic and 30 per cent of global container traffic.

Houthi militants have attacked 10 vessels, saying they are targeting those with a connection to Israel, which is locked in a war with Hamas. The rebels have also been launching drones and missiles against Israel, more than 1,000 miles (1,600km) away.

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Ships have been forced to divert around the Cape of Good Hope, adding up to two weeks' journey, or 30-40 per cent more time between Asia and Europe, said Cedomir Nestrovic, professor of geopolitics at Singapore's ESSEC Business School Asia-Pacific.

"Import costs will be higher for perishable food items with limited shelf lives like cheese, butter and salmon as well as beverages like wine," he said. Exports of electronics and automobile parts to Europe from Asia are also likely to stumble because of the shipping bottleneck, he said.

The upheaval in freight structures may also usher in supply-chain shifts to certain parts of Asia from others, he added.

The militant attacks have exacerbated traffic on the Suez Canal, where low water levels due to a drought in the region have reduced the number of vessels that can pass through on the route since around July-August.

Logistics and forwarding companies have painted a bleak picture for the impact on shipping, saying the situation is resembling a milder version of the supply chain crisis seen during the worst of the pandemic.

According to global trade solutions provider Flexport, 90 per cent of Suez Canal-bound container vessels are pausing or re-routing, which could remove about a quarter of the globe's total capacity, inflate prices, and delay shipments.

At least 11 container ships, which had passed through the Suez and were approaching Yemen carrying consumer goods and grains bound for countries including Singapore, Malaysia and the United Arab Emirates, are anchored in the Red Sea between Sudan and Saudi Arabia, Reuters reported on Tuesday citing LSEG ship tracking data.

Crude oil prices have risen to two-week highs following the militant attacks on ships to around US$79 per barrel on Wednesday, pinching a majority of import-dependent Asia.

"In terms of major oil infrastructure and vulnerable chokepoints, there's been very little slack in the market at any time to be able to cope with major disruptions," said Vandana Hari, founder of Singapore-based energy consultancy Vanda Insights.

"Least of all now, with an unprecedented 7 million barrels per day of Russian crude and refined product exports rewired in the space of less than a year," she added.

Russia, which has spearheaded efforts, along with Saudi Arabia, to cut output to shore up prices, on Sunday announced deeper export cuts.

The United States on Tuesday announced the launch of a multinational naval force to protect trade in the Red Sea after attacks by Houthi rebels, which includes Canada, France, Italy, the United Kingdom, Bahrain and the Seychelles.

Opinions are divided over how far the efforts are likely to succeed.

Oil-rich Middle East nations are likely to pull their weight to resolve a crisis that could hurt their shipments, Hari said.

"The stakes are high for the region's oil and gas producers and exporters. So one way or another, they will find a way to lean on Iran and the Houthis to calm down," she said.

Others agreed that it is likely the situation will be defused, but added that it would depend on how swiftly the US is able to respond effectively.

"It has said it will protect shipping on the Red Sea, but I would like to see some conviction in what the US does," said John Driscoll, director at Singapore-based JTD Energy Services. "For instance, will it send an aircraft carrier to protect ships?"

"It's an election year in the US and [President Joe] Biden's foreign policy has been under attack when there are all kinds of tensions brewing in the Middle East region," he added.

International shippers have already started charging higher freight rates to and from Asia, industry executives said.

"Freight rates have gone up by about 10 per cent and insurance premiums will also go up," said G Chandrasekhar, an independent regional commodities specialist based in Mumbai, adding that movement of goods between Asia and the west is getting delayed.

Shipping lines are likely to be extremely cautious about navigating the Red Sea for a long time, he said.

The Baltic Dry index, a key indicator of shipping costs, is nearing a two-year high in December.

However, a bigger worry is that the geopolitical tensions will rattle a nascent recovery in global supply chains, said Jamus Lim, associate professor of economics at ESSEC Business School Asia-Pacific and a specialist on China and Southeast Asia.

"The disruptions will disrupt the trend of diminishing global supply chain pressures, which had steadily fallen over the course of 2023. This relief has been key for helping reduce global inflationary pressures," he said.

This article originally appeared on the South China Morning Post (SCMP).

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