Multiple acts of aggression by Iran-backed Houthi militants targeting ships in the Red Sea have caused significant disruptions in global trade. With more than a dozen vessels already attacked since the onset of the Israel-Hamas war, the shipping industry faces a potential escalation of disruptions and price increases for goods and fuel shipments. As major shipping lines and oil transporters suspend services through the Red Sea, the world anticipates the response from the United States.

Leading shipping companies such as MSC, Maersk, Hapag Lloyd, CMA CGM, Yang Ming Marine Transport, and Evergreen have swiftly diverted all scheduled journeys to ensure the safety of their vessels and seafarers. Collectively, these carriers represent around 60% of global trade. Evergreen has gone a step further, temporarily halting the acceptance of any cargo bound for Israel, effectively suspending its shipping service to the country. Similarly, Orient Overseas Container Line (OOCL), a part of the Chinese-owned COSCO Shipping Group, has also ceased accepting Israeli cargo due to operational issues.

The ramifications of these disruptions are far-reaching, particularly for Israeli imports. Approximately 30% of Israeli goods arrive through the Red Sea on container vessels, which are typically booked two to three months in advance. The extended travel time resulting from the attacks could render importing time-sensitive products from the Far East unprofitable, leading to potential stock increases, higher costs, and the loss of market competitiveness.

The impact of these events has also spread to the energy sector. British multinational oil and gas company BP, citing the deteriorating security situation in the Red Sea, has temporarily halted all transit activities in the region. Additionally, the Yemen-based Houthis' continuing attacks have compelled oil tanker group Frontline to avoid the Red Sea altogether.

The disruptions in the Red Sea have already caused a surge in ocean freight costs, with Asia-U.S. East Coast prices rising by 5% to $2,497 per 40-foot container since the onset of the Israel-Hamas war. The situation may worsen as major companies circumvent the Suez Canal, opting for longer routes around Africa to reach the Indian Ocean. This detour adds up to 14 days to shipping routes, leading to increased fuel costs and creating a perceived vessel capacity crunch. Consequently, delays in container and commodity deliveries are expected, impacting supply chains.

Container shipping, which comprises nearly a third of all global shipping, represents an estimated $1 trillion worth of goods transported annually. The expanded travel time is predicted to absorb 20% of the global fleet capacity, potentially causing further delays and exacerbating supply chain challenges. Moody's, in a note to clients, highlighted the potential credit positive implications for the container shipping industry and the tanker and dry bulk markets. However, the risk of additional disruptions to supply chains remains a concern.

Insurers are not immune to the situation, with the Joint War Committee (JWC) announcing a widening of the high-risk zone in the Red Sea. This change in coverage reflects an evolving situation where ship owners have already re-routed voyages due to the threats posed by the militants. The decision to expand the high-risk area will impact insurance premiums.

The shifts in shipping routes will also have an adverse effect on Egypt's struggling economy. Already grappling with a downturn in tourism due to the Israel-Hamas war, Egypt's ownership, operation, and maintenance of the Suez Canal suffer as major companies divert their vessels away from the Red Sea. The Suez Canal Authority reported record earnings of $9.4 billion during the 2022-23 fiscal year, but the ongoing disruptions may hinder future revenue growth.

As the attacks on ships in the Red Sea continue and the trade disruptions persist, all eyes are on the United States to ascertain its response. U.S. Defense Secretary Lloyd Austin is expected to unveil more details on the American strategy related to this escalating situation. The global trade community eagerly awaits measures that can mitigate the risks and restore stability to shipping routes in the region.