“The Houthi group’s attacks on commercial vessels sailing through the Bab al-Mandeb Strait, connecting the Red Sea to the Gulf of Aden, are heightening concerns in the global supply chain and trade. These attacks, occurring in response to Israel’s bombardment of Gaza, are compelling ships to alter their routes. The Red Sea route, playing a pivotal role in the global grain trade, enables the transportation of approximately 42 million tons of wheat annually from the Black Sea region and the EU to East Africa and Asia. Maintaining the openness of the Red Sea route is crucial for ensuring price stability in delivering the world’s most competitively priced Black Sea and EU wheat to these regions.”
The Houthi group’s attacks on commercial vessels navigating the Bab el-Mandeb Strait, linking the Red Sea to the Gulf of Aden, have caused a shock in the global supply chain and international trade. These Houthi assaults, in response to Israel’s bombing of Gaza, have significantly impacted international trade by compelling major shipping companies to alter their routes.
Four out of the world’s top five container shipping firms (CMA CGM, Hapag-Lloyd, Maersk, and MSC) have halted the passage through the Bab al-Mandeb Strait, a route through which approximately 30% of global container traffic transits. These companies, responsible for 53% of the global container trade, are redirecting their vessels to traverse the Cape of Good Hope. Other significant players like Zim, Evergreen, Yang Ming, Cosco, OOCL, HMM, ONE, and major tanker owners Frontline and Euronav have also suspended Red Sea transits. Even the global oil giant BP has ceased all shipments through the Red Sea.
Since the Houthi attacks, insurance rates for ships using the Red Sea have doubled. The costs for vessels linked to Israel have reportedly surged by 250%, leading some insurance companies to refrain from insuring such ships. As of December 27, more than 170 container ships were rerouted to South Africa to avoid the Suez Canal.
The gradual impact of increased transportation costs is unavoidable and will affect nearly every commodity, with cereals being particularly crucial for global food security. Consequently, the closure of one of the world’s most vital trade routes raises significant concerns about its repercussions on both global food security and international grain trade.
Despite the attacks, dry cargo ships carrying grain have not been redirected from the Red Sea. However, the shipping insurance association has heightened the risk level for ships transiting the Gulf of Aden. While the flow of ships for dry cargo remains unrestricted, there are plans to implement a war risk premium scheme, making it mandatory for shipping companies.
42 MILLION TONS OF WHEAT IS TRANSPORTED THROUGH THIS ROUTE
When we consider that approximately 42 million tons of wheat is transported annually from the Black Sea region and the EU to East Africa and Asia through the Red Sea, it becomes evident how critical the Red Sea route is in global grain trade. This quantity corresponds to 10% of global wheat trade. East African countries, in particular, exhibit high sensitivity to the flow of the Red Sea. The necessity for keeping the Red Sea route open is strengthened by the fact that all the wheat they import traverses the Red Sea, and a significant portion of this wheat originates from the Black Sea and the EU, currently offering the world’s most competitive prices, contributing to price stability.
In the scenario of a complete interruption in the Red Sea, there would be a need to redirect grain shipments from the EU and the Black Sea region via the Cape of Good Hope. However, this alternative would result in extended voyage durations, elevated maritime transportation costs, and an estimated increase of 15% to 24% in transportation costs from the Black Sea to Asia. This, in turn, would diminish the overall trade volume to these regions due to the added 2 to 3 weeks in sailing days for each vessel. The cost of maritime transportation will also rise due to the prolonged duration of journeys.
2023 EVALUATION AND 2024 EXPECTATIONS
Chairman of the Turkish Flour Industrialists Federation (TFIF), Haluk Tezcan, who assessed the year 2023 in the cereal sector and shared expectations for 2024, emphasized that global financial crises, climate change, natural disasters, and wars pose risks for the industry in 2024. TFIF President pointed out the increase in wheat production worldwide in line with the population, noting that the annual global grain production has surpassed 2 billion tons. Haluk Tezcan expressed the following views:
As known, we have completed the 2023 harvest and planting season. In these days, as we move towards 2024, climate change, natural disasters, wars, and issues in energy resources stand out as significant risks for the upcoming season, alongside the global financial fluctuations experienced in the year we are about to leave behind.