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Trade disruptions in Red Sea cast shadows on global grain trade and food security

18 January 20247 min reading

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.