Red Sea attacks strain Europe’s supply chains

Red Sea attacks strain Europe’s supply chains

POLITICO — 2024-01-29

Maritime and Ports

Cargo shipments between Asia and Europe are being disrupted by continued attacks on vessels in the Red Sea, and that's starting to have an economic impact.

Most shipping lines have diverted away from the Red Sea since attacks by Houthi rebels started in November and are taking the much longer route around South Africa. That extends journeys by a week and increases fuel costs, insurance fees and crew wages.

“The persistent attacks on commercial vessels navigating the Red Sea are exerting discernible impacts on supply chains,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

"Supply disruptions in the Red Sea are reigniting inflation in the manufacturing sector," Chris Williamson, chief business economist with S&P Global Market Intelligence, said in a note.

Some carmakers have temporarily suspended production of electric vehicles in the EU due to the crisis; most batteries are sourced in Asia.

Tesla will halt production at its Berlin Gigafactory between January 29 and February 11, and Volvo Cars briefly ceased production in its Belgian factory earlier this month.

Ivar Myklebust, board chair of Gram Car Carriers, a leading vehicle shipper, told the Trade Winds publication that the Red Sea is "car-carrier free for first time in 30 years."

The energy industry is also warning that the disruption could affect supplies of liquefied natural gas to Europe; 13 percent of the continent's LNG comes through the Red Sea.

The shipping industry wants Brussels to help.

“It’s time for the EU to act. Seafarers are putting their lives at risk and that shouldn’t be the case,” said Sotiris Raptis, secretary-general of the European Community Shipowners' Associations. “As Europeans face the disruption of their supply chains, we need to exhaust all available tools to address the situation, including a naval operation.”

The EU plans to announce its strategy for policing the Red Sea on February 19. Meanwhile, more and more member states are sending warships to patrol the area.

Since November there have been more than 30 attacks on shipping by the Houthis, an Iran-backed militant group who say they are acting to support Hamas in its war against Israel.

“This is a different level compared to piracy that shipping companies can’t deal with on their own,” said Raptis.

Despite the growing naval presence in the Red Sea, major shipping companies like Maersk, Hapag-Lloyd and the Mediterranean Shipping Company are avoiding the route.

“If we can have three to four extra navy vessels in the area, I think protection will be fairly high. But true deescalation might need some diplomatic efforts on the side to avoid violence from spiraling any further,” said Martin Kröger, head of the German shipowners’ association.

The attacks are also making it prohibitively expensive to sail the Red Sea thanks to soaring insurance rates, something that might need government intervention, Kröger said.

“The UK was very engaged in bringing the insurance rates down for merchant ships in the Ukraine corridor. There might be room for negotiations on Red Sea premiums,” he said.