Ripple effect of Red Sea attacks

The United Nations’ trade body has cautioned that the rising assaults on ships in the Red Sea are exacerbating challenges for shipping routes already impacted by conflicts and climate change.

The combination of attacks in the Red Sea, geopolitical tensions affecting Black Sea shipping, and the climate change effects on the Panama Canal have given rise to a “complex crisis” affecting crucial trade routes.

According to UNCTAD data, in 2023, the Suez Canal managed 12% to 15% of global trade. However, there has been a 42% decrease in trade volume through the canal over the last two months. Ongoing conflict in Ukraine has also significantly altered oil and grain trade patterns, reshaping established trade routes.

Simultaneously, the Panama Canal is contending with a severe drought causing a 36% reduction in total transits compared with the previous year, UNCTAD said. “The long-term implications of climate change on the canal’s capacity are raising concerns about enduring impacts on global supply chains.”

The Red Sea crisis, marked by Houthi-led attacks on shipping, further complicates the situation. The resulting temporary halt in Suez transits by major operators has led to a 67% decline in weekly container ship transits, alongside significant drops in tanker and gas carrier transits.

Meanwhile, freight rates are on the rise, with a record $500 increase in average container spot freight rates in the last week of December, UNCTAD said. Average container shipping spot rates from Shanghai have more than doubled (+122%) since early December, with rates to Europe tripling (+256%). Rates to the west coast of the US have increased by 162%, despite these ships not passing through the Suez Canal.

“Prolonged interruptions, particularly in container shipping, pose a direct threat to global supply chains, raising the risk of delayed deliveries and higher costs,” said UNCTAD.

Insurance premiums are up, and energy prices have surged due to discontinued gas transits, directly impacting energy supplies, particularly in Europe. The crisis is also affecting global food prices.

UNCTAD said there is an “urgent need for swift adaptations” from shipping and robust international co-operation is necessary to navigate the rapid reshaping of global trade dynamics. “The current challenges underscore trade’s vulnerability to geopolitical tensions and climate-related challenges, demanding collective efforts for sustainable solutions, especially in support of the countries more vulnerable to these shocks.”

Environmental impact

Another impact of the issues in the Red Sea concerns the environment. MIS Marine managing director, Dominic McKnight Hardy, told the Baltic: “One little recorded upshot of ships being forced to avoid the Red Sea and navigate around the Cape of Good Hope, is the knock-on effect the detour will have on Carbon Intensity Index (CII) grades.”

MIS Marine data reveals that rerouting has changed behaviours, with ship’s sailing an average 10% faster around the Cape, compared with the Red Sea route.

“For a 100,000 dwt gas tanker, this increase would translate into a rise in fuel consumption by 291 tonnes, and an additional 920 tonnes of CO2 emitted. What is less reported, is that the same ship would see a 17% increase in carbon intensity under the CII framework, with a significant risk of a negative change to its letter rating the following year.”

This serves as a reminder that CII grades reflect a retrospective view, with a new letter rating applied annually. This means that if a vessel’s sailing profile alters, a grade could offer a charterer a false representation of a vessel’s performance over the following 12 months. “The Cape scenario emphasises the need for a solution that calculates carbon performance based on known values, providing a real-time assessment of carbon intensity within an actual voyage. Forgoing this functionality, CII is at risk of failing the shipping industry, pricing players out of the market, based on temporary situations beyond their control.”

One solution, McKnight Hardy said, would be to generate real time CII data intelligence, allowing charterers access to insight that effectively reveals a ‘live’ letter rating.

Contract questions

Commenting on the contractual impact of the Red Sea crisis, Nick Austin, transportation lawyer at global law firm, Reed Smith, said that the jury is still out on whether there will be an increase in legal disputes stemming from the crisis. ”

We are mostly seeing shipowners and charterers working together to find solutions and avoid disputes in what everyone accepts is a challenging situation.

We have seen this with some oil majors publicly choosing not to order tankers through the Red Sea to avoid putting shipowners in a difficult position, both legally and in terms of the risk of an attack.”

However, in some cases, more legal stances are being taken with charter terms being scrutinised to determine if a vessel can take a different route without creating a legal liability for the shipowner. “This needs to be looked at on a vessel-by-vessel basis, but co-operation is key to avoiding disputes and we are also seeing plenty of that,” he said.

It may also take time before legal disputes materialise given that many vessels which have detoured around the Cape of Good Hope are yet to reach their destination, he added. “And if the situation improves, we may start to see disagreements about whether it is safe enough to pass through the Red Sea without owners being able to refuse.”

However, it is still early days in terms of formal disputes being referred to maritime arbitration or Court action.

Austin added that Reed Smith is seeing “a large number of queries” from shipping clients seeking clarification on the legal position under charter arrangements. “The primary area of concern revolves around ‘war risks’ clauses. These vary from contract to contract and can have markedly different implications depending on the wording.

“This is a difficult time for all involved – owners and charterers are aware of the complex balance between the legal considerations and the practicalities of ensuring swift and efficient cargo transport,” Austin concluded. “Thus far, the industry is working to collaboratively seek solutions amidst universally acknowledged challenging circumstances.”
Source: Baltic Exchange