Red Sea attacks: Fears mount for grain and fertilizer prices as freight costs double in six weeks

26 Jan 2024 --- Attacks on shipping vessels in the Red Sea are intensifying and causing F&B costs to rise globally, with insurance prices soaring and delivery times lengthed as vessels circumnavigate dangerous channels. Inflation is also increasing, bringing serious concern to the industry that a COVID-19-style economic collapse could be on the horizon.

Iran-backed Houthi militants began hijacking and bombing ships in the Red Sea following Israel’s invasion of Gaza, in what the group says are acts of solidarity that will continue until the conflict in Palestine ends.

Despite the US organizing an international defense force to protect traffic through the area, which serves as a vital transport route through the Suez Canal, the risks faced by shipping companies remain too high to subvert the situation. This week, two commercial vessels were forced to turn around despite having a US Navy escort.

Stefan Vogel, RaboResearch general manager for Australia and New Zealand, tells Food Ingredients First that the situation will likely worsen.

The US has launched an international defense coalition to protect the Red Sea, called Operation Prosperity Garden.“Many shipping companies, both for containerized goods as well as bulk goods like grains and fertilizers, have to make tough decisions. Either take the risk and pay increased insurance costs to go through the Red Sea area or add significant extra travel time and costs by going around Africa,” he says.

“Traffic through the Suez Canal is heavily impacted, and volumes have declined severely. The increased travel time around Africa takes shipping capacity out of the market as the vessels are not as quickly available to pick up a new load, and therefore, freight rates are increasing, especially container freight has jumped up a lot, doubling in the last six weeks.”

However, container freight is still roughly three times cheaper than in the last shipping crisis, in 2021, caused by COVID-19-related supply chain disruptions.

Escalation fears
Vogel says RaboResearch analysts fear the situation in the Red Sea will get worse before it gets better.

“If unresolved, it might tighten the availability of shipping capacity severely and increase freight costs even more,” he says.

“In the last shipping crisis, we saw exporters in regions that aren’t on the main routes, for example, Australia and New Zealand, struggling to find the needed containers for export as shippers preferred their main routes from Asia to Europe or America, rather than going to Oceania. We may see a repetition of this if the Red Sea situation further escalates.”

Many researchers are warning that counterattacks on Houthi positions in Yemen, which have been launched by Western governments, along with the continued conflict in Gaza, could lead to an escalation and regional war throughout the Middle East.

Calls for collaboration
The US government has reportedly pleaded with Chinese officials to help pressure Iran into ordering the Houthis to stop their attacks. Despite Beijing officials calling for an end to the violence, some Chinese shipping lines are instead filling the void, with several companies exploiting the drop in Western traffic in what is said to be a perceived immunity from Houthi threats.

The Indian government deployed warships and other military assets to help protect cargo moving past its coastlines but refused to join the US defense coalition despite an invitation.

To prevent an escalation, Vogel says supply chain collaboration is essential.

“Whenever the reliability of the shipping industry drops, it’s important to understand, exchange information, and prepare for delays accordingly. If the export machinery struggles to move the volumes, it can impact the whole supply chain, which isn’t able to move all their products as quickly as possible.”

“This [disruption] can sometimes be felt all the way to the producers on farms. The Red Sea might look small on a world map, but it is a very big area to protect and intercepting drones is significantly more costly than the drones themselves, which means those countries who protect the trade face much higher costs than for the Houthis.”

By Louis Gore-Langton

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