The Economic Consequences of the Houthi Maritime Escalation

SMA NEWS – ADEN THE CAPITAL

“The escalation in Houthi attacks clearly provides a fertile environment for hostile and piracy acts against the international shipping industry in one of the world’s most important and busiest maritime lanes.”
On November 19, 2023, the Iran-backed Houthi militia in Yemen announced that they have seized a cargo ship, partially owned by an Israeli businessman, in the Red Sea. This came after a series of missile and drone attacks launched by the Houthis toward the southern Israeli port city of Eilat. 

The seizing of the cargo ship is considered the height of escalation in maritime tensions in the Red Sea region by the Houthis. The Iran-backed Yemeni militia have caused security tensions in the area with their frequent attacks. On October 19, a series of cruise missiles and drones launched by the Houthis toward Israel were intercepted by the U.S. Navy. On November 8, the Houthis shot down an American MQ-9 military surveillance drone off the coast of Yemen, while on November 15, a US destroyer intercepted a Houthi drone in the Red Sea. 

Days after the Houthis hijacked the cargo ship Galaxy Leader, they attacked two other vessels in the Indian Ocean and the Gulf of Aden. On November 24, a container ship ‘CMA CGM Symi’, owned by an Israeli billionaire, was attacked by a drone suspected of being linked to Iran in the Indian Ocean.  

On November 26, a chemical tanker, ‘Central Park’, owned by an Israeli businessman, was seized by armed men in the Gulf of Aden. It was released later by the US Navy forces who arrested five gunmen.

Although the Southern Transitional Council (STC) and the Yemeni government have officially accused the Houthis of being behind the last incident, the Pentagon has blamed Somali pirates. In any case, the escalation in Houthi attacks clearly provides a fertile environment for hostile and piracy acts against the international shipping industry in one of the world’s most important and busiest maritime lanes through which a large chunk of the international trade passes as well as energy and fuel material is transported.

As a result of the rise in Houthi attacks, experts envisage that it would massively harm the already-collapsed Yemeni economy, amid the war that will complete its ninth year soon. Besides, countries overlooking the Red Sea, especially Egypt, the owner of the Suez Canal, will likely suffer from the negative economic consequences of the Houthi escalation, which will also have repercussions on the global economy. 

Global damage

Giving a picture of the trade volume that passes the maritime route, the U.S. Energy Information Administration in a report said: “In 2018, an estimated 6.2 million barrels per day (b/d) of crude oil, condensate, and refined petroleum products flowed through the Bab al-Mandeb Strait toward Europe, the United States, and Asia, an increase from 5.1 million b/d in 2014.”

“Total petroleum flows through the Bab al-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.”

Around 21,000 marine vessels pass through the Bab al-Mandeb Strait annually, or around 57 vessels daily, which constitutes 12% of global trade. The strait is very important for the Suez Canal, as it controls the southern access to the strategic Egyptian canal. This makes Egypt one of the countries most adversely impacted by the Houthi escalation in the Red Sea, according to economic expert Dr. Mohammed Al-Kasadi. 

He said: “Egypt will be affected by this escalation as the Suez Canal alone adds 6-7 billion dollars annually to the state treasury. Furthermore, all ports along the Red Sea will be affected also as well as all international supply chains.”

He added: “Furthermore, the high level of risks will increase the costs of securing navigation in the Red Sea and the Bab al-Mandeb Strait. Consequently, this will impact the prices of food and commodities.” 

Economic expert Majed Al-Daare said: “The consequences of this escalation will impact the trade traffic and the global economic returns. This will also directly hit the interests and economies of countries which benefit from the shipping line fees in the Red Sea, basically Yemen and Egypt.”

Egyptian economic expert Dr. Ibrahim Jalal Fadloun indicated that the “water triangle represented by the Strait of Hormuz, the Bab al-Mandeb Strait, and the Suez Canal is the most important commercial and economic one in the world.”

He said that “whoever controls these three straits can control the Arabian Peninsula and the Arabian Gulf countries overlooking the Red Sea at both the security and economic levels. Instability in the Middle East negatively affects these lanes, and consequently pushes states to search for alternative safe crossings for their trade.”

The Egyptian expert believes that the best examples for that are the ’Chinese Silk Road‘ and the “India-Middle East-Europe Economic Corridor‘ that was recently announced”. He said: “The Houthi seizure of a cargo ship (‘Galaxy Leader’) in the Red Sea deepens the maritime terror and concerns about a repeat of the Somalian scenario (attempted capture of tanker ‘Central Park’). This is in conjunction with the growing geopolitical risks, fueled by the war in Gaza.”

Indermit Gill, World Bank’s chief economist, told ‘The New York Times’, that “If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades — not just from the war in Ukraine but also from the Middle East.”

Impact on Israel

The Israeli newspaper ‘Globes’ revealed the size of losses incurred by Israel due to the Houthi maritime escalation. Judah Levine, Head of Research at the Israeli online freight marketplace ‘Freightos’, told ‘Globes’ that “Israeli ships are sailing around Africa to avoid attack by Houthi terrorists”.

According to Freightos’ data, the shipping price for any container from China to Ashdod Port (in southern Israel) rose by 9-14% in the last two weeks of October, putting it 5% higher than the level before the outbreak of war. Meanwhile, the price of shipping between Asia and other Mediterranean countries fell 7% in the last two weeks of October and is down 8% since October 7. (the beginning of the Israel-Hamas war triggered by Hamas’ surprise attack on Israel)

Judah Levine indicated that “other ships owned by Ungar’s Ray Shipping have steered clear of the Bab al-Mandeb Strait between the Arabian peninsula and Africa in order to avoid attack”.

He added: “The Israeli, or partly-Israeli, ships are reinforcing the security teams that they carry, which adds to costs. Zim* has even announced that it will raise the rise premium on each container by over $100. It can be presumed that this step has already led to higher shipping prices for containers on the international shipping lanes leading to Israeli ports”.

‘The Maritime Executive’, a maritime journal, pointed out that “at least one ship, the Zim Europe, has diverted from its usual Suez route and is now transiting south around the Cape of Good Hope (South Africa). The diversion will add thousands of miles to its journey”.

At an earlier time, Bloomberg warned that “some shipping companies may avoid the Bab al-Mandeb Strait and the Red Sea for reasons related to safety. This may indirectly impact the global supply chains. This reminds us of the chaos that hit supply chains during the pandemic period”.

In his analysis that was published by ‘South24 Center’ days ago, Dr. Andrew Korybko said: “If the Houthis continue their maritime escalation, then Saudi Arabia might be forced to respond and an international maritime coalition might soon assemble for protecting this economically vital waterway.”

Expert Dr. Marta Furlan said in her analysis published by ’South24 Center‘: “Should the threat posed by the Houthis to regional security and stability continue unabated, the United States would probably start by considering – and approving – the re-listing of the group as a Foreign Terrorist Organization (FTO)”. Beyond that, it is important to note that if American personnel get killed in future such attacks it will be the threshold that would inevitably lead to an American military intervention. 

It is to be noted that the Houthi threats against the maritime lanes and ports are not a result of the latest developments (the Israel-Hamas war). The Houthis had previously hijacked an Emirati shipping vessel off the Port of Hodeidah in the Red Sea in January 2022. Besides, four drone attacks launched by the Houthis in October and November 2022 against oil ports in Hadramout and Shabwa (South Yemen) led to the cessation of oil exports by the Yemen government, which continues till now. 

At the time, the Houthi militia officially even threatened all international shipping companies with bombing any vessel heading towards the South Yemeni ports.
(*Zim Integrated Shipping Services Ltd., commonly known as ZIM, is a publicly held Israeli international cargo shipping company, and one of the top 20 global carriers) – SOUTH24