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Another risk of supply-chain disruption taking shape after Covid and Ukraine war

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MUMBAI : Geopolitical risks to global trade and economy refuse to abate. After Covid and the Ukraine war ravaged global supplies, creating energy and food crises in many parts of the world, another risk has started building up. The Israel-Hamas war, even though it hasn’t spilled over to other countries, is threatening a wider disruption of trade and supplies.

Days after Yemen’s Iran-backed Houthi rebels threatened to target Israeli vessels in the Red Sea over Israel’s war with Hamas in the Gaza Strip, they seized a ship owned by an Israeli businessman and rerouted it towards the Yemeni coast.

The seizure threatens not just Israeli shipping but the whole traffic in the Red Sea, one of the world’s busiest shipping routes. Even the seized ship which the Houthis say is owned by an Israeli company bears not just Israeli interests. The automobile carrier Galaxy Leader flies a Bahamas flag and is registered to an Isle of Man-based company which is in turn linked to another company from Israel. The ship was chartered by Japanese Nippon Yusen, had departed from Korfez in Turkey, was headed to Pipavav in India, and carried staff of various nationalities. Clearly, targeting of ships by Houthi rebels jeopardises global interests even without considering the risk of other ships getting targeted by mistake or ships avoiding the route due to escalated risk.

The importance of the Red Sea and Suez canal
The Red Sea is one of the most important shipping routes as the traffic between Europe and Asian and Arab countries passes through the Red Sea and the Suez Canal that connects the Red Sea to the Mediterranean Sea.

“The Red Sea is the most balanced route to take from Europe to Asia, as it is the shortest and the most cost-effective in terms of fuel and tolls,” a spokesperson for Nippon Yusen, also known as NYK Line, the Japanese operator of the seized ship, told Nikkei Asia. Japan’s trade minister, Yasutoshi Nishimura, warned of potential supply chain disruptions following the hijacking. “Various goods, including automobiles, are transported along this route, which connects Europe and Japan via the Suez Canal,” he told reporters. “There could be an impact on the Japanese economy, including supply chains.” Japan is one of the many Asian and Arab countries which trade through this route. The trade also includes LNG supply from Arab countries to Europe and Chinese goods headed for Europe. The Suez canal accounts for roughly 10 percent of the total global maritime trade.

In 2018, an estimated 6.2 million barrels per day of crude oil, condensate, and refined petroleum products flowed through the Bab el-Mandeb Strait toward Europe, the United States, and Asia, as per US Energy Information Administration. The Bab el-Mandeb Strait is a sea route choke point between the Horn of Africa and the Middle East, connecting the Red Sea to the Gulf of Aden and Arabian Sea. Total petroleum flows through the Bab el-Mandeb Strait accounted for about 9% of total seaborne-traded petroleum (crude oil and refined petroleum products) in 2017. About 3.6 million b/d moved north toward Europe; another 2.6 million b/d flowed in the opposite direction mainly to Asian markets such as Singapore, China, and India.

War risk premiums
The seizure of a cargo ship by the Houthis has seen the return of war premiums for oil and shipping in the region, S&P Global has reported. The seizure of the vessel will indicate to shipowners transiting the Red Sea that war risk premiums will rise, Luv Menghani, a shipbroker with Dubai BluePeak Commodities and Shipping, told S&P Global.

Shipping insurers are also assessing the escalation in rhetoric from the Houthis with caution, weighing potential for wider flare-up in an area that is already high risk. The escalation in Houthi rhetoric will have “an impact on shipping insurance” even as the conflict remains contained, Eurasia Group said in a note recently.

Oil markets, which had shaken off the impact of the Oct. 7 attack by Hamas on Israel and subsequent escalation in conflict in the region, could see the return of war risk premium, as per S&P Global.

“Crude has had almost no risk premium on account of the Israel-Hamas conflict for more than a fortnight. But this incident is likely to reinject some war premium,” Vandana Hari, founder and CEO of Singapore-based Vanda Insights, told S&P Global. “However, the extent and sustainability of any such premium is uncertain as the picture that has emerged so far since Oct. 7 is that despite the hot tempers, the Middle Eastern neighbors are showing restraint and pushing for a diplomatic resolution,” she said.

A Houthi attack targeting Saudi Aramco’s Abqaiq and Khurais oil facilities in 2019 led to oil posting its biggest increase in intraday trading, after the incident shut-in half of the country’s crude supplies temporarily. “The fact is, [the missiles are] passing through Saudi territory, whether maritime or land. Is that going to affect Saudi Arabia by mistake? That’s also something that needs to be discussed,” Bader al-Saif, assistant professor of history at Kuwait University, told S&P Global.

Geopolitics disrupting maritime trade is a challenging prospect for the global economy since squeezed supplies and higher transport costs can hike inflation at a time when globally inflation is seen to be cooling and central bankers might pivot early next year to cutting rates. Higher transport costs as well as higher insurance premiums due to escalated geopolitical risks mean higher prices of energy and other goods.

Many think it’s premature to see the belligerent Houthis as a wider concern for shipping and trade. Other countries have resisted getting drawn into the Israel-Hamas conflict so far. The oil market has shrugged off the impact of the Israel-Hamas war. The Houthis seizing the ship may not be an escalation of the Israel-Hamas conflict and it may still remain contained especially when a negotiated truce is being talked about.

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