Conflict in the Red Sea: Strategic update

What’s happening?

US and UK forces have responded to Houthi militia attacks on shipping in the Red Sea, mounting strikes against multiple targets in Yemen.

Yemeni leaders have issued statements threatening retaliation and committing to further action against shipping. These statements have explicitly connected attacks to the conflict in Gaza.1

Since the strikes, renewed Houthi attacks have struck both merchant ships (US-owned M/V Gibraltar Eagle) and naval ships (USS Laboon).

Global oil prices rose briefly in the aftermath of air attacks, exceeding US$80 per barrel, but quickly fell back and stand at around US$75 at time of writing.2

The Suez Canal is currently open in both directions.3 However, the number of ships transiting the canal has fallen sharply.

Large shipping companies (including Hapag-Lloyd, Maersk and MSC) have diverted traffic from the Red Sea / Suez Canal route via the Cape of Good Hope.

This will add to the length of journeys and to the cost of fuel, especially if ships have to travel faster in order to minimise journey times.

The cost of global freight has jumped sharply, with The Shanghai Containerised Freight Index up from around 1,000 in early 2023 to around 2,200 now.

IGD Viewpoint

Despite attacks by the US and UK, Yemeni militias remain capable of attacking shipping in a critical seaway, used by a large proportion of global freight traffic.

In view of this, it is surprising that attacks on shipping have not created more disruption – markets for fossil fuels remain fairly calm, for the moment, perhaps because global supply remains sufficient.

However, higher transport costs for fossil fuels and for other goods will eventually exert some inflationary pressure on shoppers worldwide.

Welfare impacts may be especially severe in areas where shoppers are already financially insecure, such as North and Eastern Africa.

Focusing on UK food and grocery, problems in the Red Sea are not expected to have significant impact on availability or price overall – although there may be category-specific effects.

In the short-term, changes to UK border operations have greater potential to impact shopper experiences and businesses should continue to focus here.

Modern food and grocery supply chains are energy-intensive, however. In the longer term, higher energy costs would affect the cost of delivering food to shoppers, placing pressure on profit margins and perhaps causing inflation to persist longer than expected.

Sources

1 Statement by Brigadier General Yahya Saree, Yemeni spokesman, 12 Jan 2024

2 Energy Information Administration, US Dept of Energy, 16 Jan 2024 – data is for Brent Crude

3 Press release, Suez Canal Authority, 12 Jan 2024