Recent Houthi attacks in the Red Sea have heightened concerns about their impact on global grain trade. With the Red Sea's pivotal role in one-fifth of the global wheat trade, potential disruptions could lead to increased shipping costs, delays, and a negative impact on world food security. Arnaud Petit, Executive Director of the International Grain Council, emphasizes the need to keep the Red Sea open to avoid market shocks in these countries, especially given the competitiveness of the Black Sea and EU origins in terms of wheat FOB price.

The Houthi group's assaults on commercial vessels navigating the Bab al-Mandeb Strait, linking the Red Sea to the Gulf of Aden, have sent shockwaves through the global supply chain and international trade. These Houthi attacks in response to Israel’s bombardment of Gaza deal a serious blow to global trade, as they force the world's largest shipping companies to change the routes of their ships. Recent increases in oil prices are directly linked to these attacks.

Exacerbating the crisis is the fact that the Panama Canal is also currently experiencing a disruption. Due to the drought, ship traffic in the canal has slowed down significantly. Some companies had even turned to the Suez Canal for Europe-Asia shipments. Experts highlight the unprecedented nature of the situation, noting that both the Suez and Panama Canals have never experienced simultaneous closures before.

RED SEA TENSIONS RESHAPE SHIPPING ROUTES

Four of the world's five largest container shipping companies - CMA CGM, Hapag-Lloyd, Maersk and MSC - have halted transit through the Babul-Mandeb Strait, through which about 30 percent of global container traffic passes. These four companies account for 53 percent of global container trade. They are now diverting their ships to the route through the Cape of Good Hope. Other significant players, including Zim, Evergreen, Yang Ming, Cosco, OOCL, HMM, ONE, and tanker owners Frontline and Euronav, have also paused Red Sea transits. Global oil giant BP has also halted all shipments through the Red Sea. With 40 percent of Asia-Europe trade passing through Suez, a blockage here has the potential to have a major economic impact. Experts describe it as "the most significant threat to global shipping in recent years".

The Suez Canal, spanning 192 kilometers, serves as the quickest sea route between Asia and Europe. For the world economy, a prolonged closure of the Suez Canal means longer trade routes and higher costs due to higher insurance premiums. The diversion adds about 6,000 nautical miles to a typical journey from Asia to Europe, potentially adding three or four weeks to product delivery times.

Since the Houthi attacks, insurance rates for ships using the Red Sea have doubled. For Israel-linked ships, costs have reportedly increased by 250 percent and some insurance companies are no longer willing to insure Israel-linked ships. As of 20 December, more than 100 container ships have been rerouted around southern Africa to avoid the Suez Canal.  

In 2023, approximately 24,000 vessels have traversed the Suez Canal, constituting about 10 percent of global maritime trade by volume. Specifically, the Suez Canal plays a significant role in various sectors, with 21% of global container shipping, 12% for refined product moves, 11% for LNG, 8% for liquefied petroleum gas (LPG), 8% for crude, and 5% for dry bulk. Notably, oil tankers from Persian Gulf countries like Iraq and Saudi Arabia rely on the Suez Canal to reach European destinations.

THE DOMINO EFFECT ON GRAIN TRADE

It is inevitable that the rise in shipping costs will have a cascading effect on nearly every product. Notably, among these products are grains, which hold immense importance for global food security. Therefore, the closure of one of the world's most vital trade routes raises significant concerns about its impact on both global food security and the international grain trade.

In a discussion with Arnaud Petit, the Executive Director of the International Grain Council (IGC), we delved into this pivotal issue. Speaking to Miller Magazine, Mr. Petit sheds light on the situation, emphasizing that while the attacks have escalated, the shipping of dry bulk vessels carrying grains has not been directly targeted. Nevertheless, the implications on shipping insurance, supply chains, grain prices, and global food security are of critical concern.

Petit clarifies that, despite the attacks, dry bulk vessels carrying grains have not been diverted away from the Red Sea. However, the association of shipping insurance companies has elevated the risk level (CESAM level 7) for vessels transiting the Gulf of Aden. Although the flow of vessels for dry bulk is not prohibited, the war risk premium scheme is set to be activated, becoming mandatory for shipping companies from December 22, 2023. Petit highlights that this scheme, though voluntary for shipping companies, introduces new trade cost concerns, stating, "If not taken, only ordinary risks will remain covered, and the loss must not be the result of an act of war or collateral damage to an act of war." He points out ongoing monitoring and negotiations with insurance companies for war risk premiums, stating, "This is potentially a new trade cost increase for net importing countries."

CRUCIAL ROLE OF THE RED SEA ROUTE IN GLOBAL WHEAT TRADE

Petit underscores the critical role of the Red Sea route in global grain trading, citing that around 42 million tons of wheat are transported via the Red Sea annually from the Black Sea region and the EU to Eastern Africa and Asia. He emphasizes, "This is one-fifth of the global wheat trade," and stresses the importance of keeping the Red Sea open to avoid market shocks, saying, “Eastern African countries are very sensitive to the Red Sea flow as one-half of the wheat imported by these countries went through the Red Sea. The fact that the Black Sea and EU origins are currently the most competitive in terms of Wheat FOB prices reinforced the need to keep the Red Sea sailing open to avoid any domestic market chocks in eastern African Countries. The Near East Asia (Pakistan, Bangladesh...) remains also a region heavily dependant on wheat from the Black Sea region.”

POTENTIAL CONSEQUENCES FOR GLOBAL GRAIN MARKETS

Petit acknowledges the dynamic global wheat trade this marketing year and suggests that the replenishment of stocks may offer flexibility in timing. However, he warns that delays and increased shipping costs could impact grain exporters, stating, "The increased cost of transportation and/or delays in delivery would put further pressure on their FOB prices to stay competitive to the alternatives offered by the fresh harvest in South America and North America export campaign. A longer low prices in relation to the high cost of production might incentivise the farmers to shift their planting intention to further spring crops such as maize or oilseeds."

Petit also highlights the financial pressure on net grain-importing countries with weak currency exchange rates. Any increase in transportation costs would further inflate their food import bills, potentially exacerbating their existing challenges.

CHALLENGES OF DIVERTING GRAIN TRADE

In the event of a complete Red Sea disruption, Petit discusses the possibility of rerouting grain cargoes from the EU and Black Sea region via the Cape of Good Hope. However, this alternative would lead to longer sailing times, increased maritime transportation costs, and an estimated 15% to 24% rise in the cost of transportation from the Black Sea to Asia, according to IGC estimates. “This will reduce the total volume traded to these regions as the number of sailing days would increase by 2 to 3 weeks for each vessel. The cost of maritime transportation will also be higher due to longer journeys”.

THE US-LED COALITION'S STRATEGY IN THE RED SEA

The United States has established a new naval force, Operation Prosperity Guardian, to ensure security at Babulmendep. This joint military operation to protect commercial shipping in the Red Sea has 10 partners: the U.S., U.K., Canada, France, Italy, Spain, the Netherlands, Norway, Bahrain and the Seychelles. However, questions linger about the coalition's readiness and addressing Houthi capabilities. Using advanced UCAVs and ballistic missiles in their attacks, the Houthis reportedly also have a large arsenal of anti-ship missiles, some of which have a range of 800 km. The US-led coalition is wary of launching a direct military operation against the Houthis in Yemen because it would mean expanding the war in the Middle East.