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Red Sea crisis deepens shipping industry challenges in Middle East

The heightened security risks led to increased security measures

As the Red Sea crisis intensified, major shipping routes were disrupted, affecting vessels travelling through the Suez Canal over security concerns. The recent incidents impeded the smooth flow of maritime traffic, resulting in delays and increased operational costs for the shipping industry. Disruption to the crucial waterway for global trade that connects Europe to the Indian Ocean and Asia has resulted in a cascading effect on the global supply chain, affecting the transportation of goods and potentially leading to shortages or delays.

The heightened security risks led to increased security measures for shipping companies to reroute vessels to avoid high-risk areas in addition to bearing additional costs to beef up the security measures of the vessels. The challenges also influence insurance premiums for ships operating in these waters, impacting global trade as well.

The Suez Canal issue started earlier last year had an inverse impact on the vessel schedules, delaying it to an undefined extend. But the current situation is even worse as all the major liners suspended shipping via Red Sea. This challenge is very serious as almost 20,000 ships pass through every year, contributing to 10 percent of global trade.

The major impact on the industry happens as the route has been key for the oil trade. Hundreds of vessels are being halted at the water and being re-routed around Africa, increasing transit time and operational costs. The shipping rates have been increased by the operators. The security issues threaten the free flow of trade and commerce. At present it is difficult to predict how significant the impact impacts will be, analysts have stated that apart from the shipping costs, the rates for oil may also shoot up as the Red Sea plays a key role in the oil trade.

The Suez Canal issue had impacted shipping rates due to the vessels getting delayed making the challenge more serious. This will have major impacts on the industry.

In the meantime, the UAE has established itself as a central hub for shipping, offering effective solutions to overcome challenges in transporting consignments globally. The streamlined customs procedures and the seamless flow of cargo from the UAE have consistently positioned the country as a logistics hub.

However, disruptions in sea routes have led to a significant surge in rates, exemplified by the UAE-Jeddah route, where rates have soared from $150 to $2,000. Despite this increase, the impact on movements is expected to be minimal, as transportation can still be efficiently conducted over land. Consequently, shipping companies have adapted by enhancing multi-modal movements, redirecting shipments originally intended for UAE ports by sea to various destinations in the region via road transport.

Shipping rates are experiencing a substantial rise of $300 as part of a general rate increase (GRI). This represents the increment in base rates by ocean carriers along specific routes, typically in response to heightened demand for shipping containers. However, confirmation of these rate hikes is pending in light of the Red Sea crisis. War risk surcharges have surged significantly, leading to substantial freight cost escalations for various ports, including Jeddah, Port of Neom, Djibouti, Aden, Hodeidah, Port Sudan, Massawa, Berbera, Aqaba, and Sokhna. Likewise, insurance premiums have seen an uptick in areas prone to heightened risks.

The current impact might vary based on the nature and intensity of the issues going to happen in the Red Sea.

The writer is managing director of Gallop Shipping in Dubai