Houthi Attacks, Red Sea Shipping & Middle Eastern Tension

January 1, 2024

January 01, 2024

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  • Houthi Attacks, When Will They Stop?

  • Impacts to Global Shipping

  • Rising Tensions in the Middle East 

Houthi Attacks, When Will They Stop?

Houthi rebels continue to significantly impact Red Sea trade despite operation Prosperity Guardian and independent naval operations. In the past week, US Central Command has shot down 13 drones and eight missiles. The top commander of US naval forces in the Middle East indicated that the Houthi showed no sign of slowing December 30th. The Houthi launched a successful strike on a Maersk containership hours later. The ship made a second distress call shortly thereafter. The Houthi launched four small boats in an attempt to board the ship. The US Navy repelled the attack, killing ten and sinking three of the four Houthi boats after coming under fire. On December 31st, the US and UK were rumored to be considering immanent drone strikes on Houthi locations in Yemen. Offensive announcements or actions have not materialized with the UK instead announcing an increased defensive presence. An attempted Houthi attack on a US warship is being reported at the time of this publication.

It is difficult to assess whether strikes would improve the state of maritime transit in the near term. Disruptions are the result of small and mobile Houthi strikes. Approximately 20 Houthi attacks using only 75 drones, 18 missiles and four small boats have led to today’s situation. The Houthi can easily regroup and launch similar attacks with Iran’s backing. Iran has a frigate in the Red Sea adding complexity to the situation. The risk of escalation in the Red Sea and/or globally may outweigh the benefit when considering secondary effects in a tense global environment.

The Houthi have a significant geographical advantage. Their territory, Yemen’s coastline, rests on the 26km wide Bab-el-Mandeb Strait. Only half the strait is navigable by ship. The narrow channel allows the Houthi to easily monitor transit and launch effective, mobile and cheap attacks. Moreover, an Iranian spy ship is parked in the strait relaying intelligence. The US Navy and its partners face logistical challenges and must replace expensive defense weaponry. Said weaponry is already in high demand due to tensions with China and the ongoing Ukraine-Russia and Israel-Hamas wars. Sporadic attacks, relatively benign in comparison to the US and allied partner’s capabilities, can have an outsized impact on the economics of global trade.

Impacts to Global Shipping

The impacts to global shipping are most concentrated in the container segment due to the high cargo values and extensive counterparty exposure. Attacks in the Red Sea have increased the cost of war insurance tenfold. Ship owners are now paying around 0.7% of their ship plus cargo value to insure their transit through the Red Sea. It’s a meaningful expense for ships that regularly carry cargo valued in excess of one billion USD. Container liners, unlike other shipping segments, dictate transit routes. As such, container liners have more direct responsibility without the excuse other segments may be able to hide behind if adverse events such as loss of life or ecological disaster were to occur. Dry bulk and tankers are generally ‘rented’ by a single counterparty and given routing instructions.

Liners have diverted more than one million TEUs around Africa per Flexport. The diversion adds 10-14 days of transit time. Maersk notability announced a 48-hour pause on Red Sea transit following the aforementioned attack. Maersk is backtracking on their decision earlier last week to resume activity in the Red Sea. Meaningful changes in maritime safety are not expected over this timeframe. Maersk has yet to re-route ships in the Red Sea. Given the cost to re-route, their operational pause is expected. Both MSC and Maersk have been targeted and are not operating through the Red Sea as of publication; the two largest liners control nearly 35% of global container shipping capacity. It demonstrates the attacks are targeting western economic trade rather than Israeli assets.

Container rates have surged off their lows as a result and liners have added additional surcharges to cargos traveling through the Red Sea. The Shanghai containerized freight index, which indexes container freight rates, increased 40% (W/W). The Asia-Europe route lead, rallying more than 100%. Although transit impacts on tankers are muted relative to containers, any future rerouting could result in an outsized move in tanker transit costs due to their high fleet utilization rate (~90% vs. ~80% for containers). Additionally, tankers will add almost no new ships to the global fleet in 2024. Dry bulk transit and rates are unlikely to experience substantial impacts due to Red Sea disruptions. Bulkers generally transit around the Cape of Good Hope already due to lower cargo values and cargos tend to be less time sensitive.

Escalating Tensions in the Middle East

Israel remains steadfast that de-escalation is contingent on the dissolution of Hamas, demilitarization of Palestine and release of hostages. Hamas’ rejection of an Egyptian brokered resolution triggered global fears and rhetoric out of Jerusalem that military operations would continue for months. Prime Minister Netanyahu reaffirmed this yesterday. The Egyptian led deal sought to resume hostage/prisoner exchanges and a temporary ceasefire in phase one. Phase two outlined Hamas’ relinquishment of power to a newly formed political leadership and a permanent ceasefire. Iran-backed Hamas seems unlikely to cede control to a government established under Sunni oversight in the near term, while Israel views a Saudi/UAE led government in Palestine favorably.

The Sunni influence and an Israeli drone strike on a senior Iranian general in Syria (12/25) have triggered further aggression from Tehran and its proxies. Hezbollah launched drone strikes on the American Erbil Air Base, injuring three service members on December 25th. President Biden responded by destroying three Hezbollah facilities with a series of drone strikes. The Houthi launched drone strikes on the Israeli port of Eilat on December 27th. Although repelled, it marked a major act of Houthi aggression towards Israeli territory. The group has focused its operations on the Red Sea, outlined above. Israel killed 11 Iranian Revolutionary Guard officers with an airstrike on the Damascus International Airport December 28th. Escalation continued December 29th on Israel’s northern border, with Israel launching counter strikes in Syria following Hezbollah’s attempted strike. The IDF repelled two drone strikes originating in Iraq on December 31st with the Iranian-backed Islamic Resistance claiming responsibility alongside attempted strikes from Gaza January 1st.

Global negotiations remain fluid as the humanitarian crisis and feared spillover conflicts have outside parties eager to reach a diplomatic solution.

For context, a rumored US-Israeli-Saudi agreement was the likely trigger for the October 7th terror attack. The deal would have provided Riyadh US security guarantees against Iran in exchange for their establishment of diplomatic ties with Israel. Formal Saudi-Israeli ties seem unlikely, with more than 95% of Saudi’s believing the Arab world should cut all relations with Israel in recent polling.