The recent Red Sea attacks present formidable challenges to the global economy and the freedom of international navigation. They further complicate supply chain crises and disrupt international energy provisions. These attacks come amidst existing disruptions caused by the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine.

The crisis has reshaped global trade dynamics, compelling nations to seek alternative routes beyond the Red Sea and Bab al-Mandab strait. These are crucial for many countries worldwide to sustain economic activity and global growth. However, lurking beneath the surface lies the potential peril threatening the flow of goods and maritime traffic to ports along the Red Sea, notably those in Yemen.

Major Implications

The attacks in the Red Sea have sparked significant repercussions, notably:

1 - Shipping Giants Diverting Routes: The assaults in the Red Sea have spurred numerous shipping giants worldwide to reroute their shipments, reflecting mounting apprehensions regarding the region's security. This shift has cast doubt on the reliability of global supply chains, particularly as the expense of maritime shipping through the Bab al-Mandab strait has surged to unprecedented levels.

Consequently, some shipping firms have opted for alternative routes, diverting away from the Red Sea. However, this shift has resulted in decreased efficiency in ship rotations and a rapid depletion of logistical capacity on routes between Asia and Europe. Consequently, sea shipping companies are facing additional fees, exacerbating the challenges already posed by global crises such as the COVID-19 pandemic and the conflict between Russia and Ukraine. The escalating tensions in the Red Sea compound global fears of potential inflationary pressures, particularly if the crisis persists.

The escalating tensions in the Bab al-Mandab strait and the disruption of vital international trade routes in the Red Sea foreshadow heightened risks and significant ramifications for global trade and national economies. These events mark a critical juncture in regional developments, likely leading to catastrophic consequences, including price hikes for goods and increased insurance costs for maritime freight. Moreover, deep-seated crises in global supply chains are anticipated.

The disturbances in the Red Sea have significantly impeded maritime activities in the Suez Canal and disrupted ship traffic. In early 2024, the Suez Canal reported a substantial decline in revenues during January, plummeting by 46% to $428 million compared to the previous year's $804 million for the same period. The decrease in the number of passing ships by 36%, totalling 1,362 ships, underscores the apprehensions stemming from potential attacks by the Houthi "Ansar Allah" group in the Bab al-Mandab area.

2—Surge in Insurance Premiums: The escalation of tensions in the Red Sea has triggered a significant uptick in insurance premiums for ships traversing the region. Rates have soared to approximately 1% of the vessel's value, up from about 0.7% previously, despite various discounts offered by insurance providers. This translates to substantial additional costs for maritime voyages, amounting to hundreds of thousands of dollars for a typical 7-day journey.

For instance, a container ship carrying 12,000 Twenty-Foot Equivalent Units (TEU) and cargo valued at $100 million would now be required to pay an extra $1 million to secure freight passage through the Red Sea. Before the recent attacks, the London insurance market had already classified the southern Red Sea as a high-risk zone, necessitating ships to notify their insurers when navigating through these waters and pay an additional premium for a seven-day coverage period.

The surge in insurance premiums has cascading effects on international businesses, inflating the purchasing value of commodities. This entails the cost of merchandise and shipping expenses, further compounded by a 10% surcharge known as the cost of goods.

These developments coincide with Yemen's ongoing struggles, compounded by supply chain bottlenecks and commercial shipping crises. The spike in marine insurance premiums exacerbates challenges in importing essential goods, exacerbating existing imbalances in supply and demand and perpetuating a decline in food stocks. Consequently, this imbalance has led to heightened commercial disruptions and a surge in local commodity prices, surpassing citizens' purchasing power.

3—Rise in Shipping Costs to Yemeni Ports: The intensification of the shipping crisis in the Red Sea and Bab al-Mandab has precipitated a sharp increase in transportation expenses to Yemeni ports, which have surged by over 400% compared to the November 2023 figures.

Reports from business circles indicate that the cost of shipping a 40-foot container from China to Aden has surged to over $11,000 under current tariffs while shipping to the port of Hodeidah has reached $12,700. By contrast, prior to the Red Sea attacks, shipping costs to Yemeni ports for the same container stood at $6,200 for Aden and $7,800 for Hodeidah.

This substantial escalation in shipping costs poses a significant challenge for the private sector and importers, doubling the import bill and exerting pressure for higher inflation and increased consumer prices. Yemeni citizens grapple with numerous economic crises, compounded by the economic warfare waged by the Houthi "Ansar Allah" group and the depreciation of the national currency. The surge in shipping costs exacerbates the financial strain on the populace, further eroding their living standards.

The deepening supply chain crisis has hindered the government's efforts to mitigate insurance costs for shipping to Yemeni ports. Despite attempts by the Ministry of Transport, in collaboration with the United Nations, to negotiate a security deposit in London to reduce insurance fees for commercial vessels entering Yemeni ports, recent developments have thwarted these efforts, perpetuating the maritime shipping crisis.

Since the onset of the conflict, insurance fees for sea freight to Yemen have surged sixteenfold, and sea transport costs to the port of Aden have escalated by 100 to 150%. These developments exacerbate the financial burden on citizens, amplifying the economic impact of maritime transport, diminishing maritime traffic, and deteriorating living standards.

4—Inflationary Pressure on Commodity Prices: The escalation in insurance premiums poses a significant risk of cost escalation, particularly for entities engaged in importing goods. This expense surge is anticipated to fuel inflation and increase prices across a broad spectrum of goods and commodities.

Furthermore, long-haul oil tankers carrying up to 90,000 metric tons of cargo are currently subject to an additional security fee of $150,000 per trip when transporting refined products from the Middle East and India to Africa.

Trade passing through the Bab al-Mandab Strait represents a substantial portion of global commerce, accounting for 12% of the international trade volume, according to data from the World Trade Organization for 2022. The Red Sea and the Suez Canal handle billions of dollars worth of goods daily, ranging from oil to wheat and other essential commodities.

Sea shipping companies decided to hike costs on all shipments through the Red Sea, but Yemeni ports bear the brunt of the impact due to the heightened insurance premiums. Nonetheless, these costs remain comparatively lower than transportation expenses to Yemeni ports despite the geographical distance separating them from ports in Northern Europe and neighbouring Red Sea ports. For instance, transporting a 40-foot container from Chinese ports to Jeddah in Saudi Arabia and Aqaba in Jordan does not exceed $7,000.

In recent years, insurance premiums for sea freight operations to Yemeni ports have remained elevated. Yemen has been designated as a "dangerous area" in international markets and maritime freight due to the ongoing conflict since 2015. This classification has significantly contributed to the soaring prices of goods in the local market, driven by the surge in insurance premiums, freight charges and currency depreciation. These factors collectively contribute to a significant inflationary impact on the overall price level, diminishing the population's purchasing power and disrupting supply chains.

5 - Decrease in Wheat Imports: The Red Sea attacks have significantly impacted imports to Yemen, exacerbating challenges merchants and importers face related to shipping lines to Yemeni ports and the soaring maritime freight costs.

Wheat imports, crucial as the staple commodity in Yemen and widely consumed, have notably declined due to disruptions in the Red Sea and Bab al-Mandab. Import volumes have plummeted by half compared to pre-attack levels last November 19th.

In January alone, wheat imports at Yemeni ports along the Red Sea, under the control of the Houthi "Ansar Allah" group, experienced a staggering 43% decrease. Similarly, imports of the same commodity at ports in Aden and Mukalla, under government control, declined by 37%.

This drastic reduction in import volumes underscores alarming concerns. Supply chain crises in Yemen risk exacerbating food security gaps and shortages of essential commodities. Yemen primarily relies on imports to meet most of its food requirements.

Food prices have surged by 6% across all categories in the past month. This has been exacerbated by a significant depreciation of the local currency against the dollar, a rise in transportation costs between governorates, and increased fees for financial transfers between government-controlled areas and those under the Houthi "Ansar Allah" group's control.

The persistent elevation of the general price level, surpassing the three-year average, adversely affects consumer purchasing power and further restricts access to food for impoverished families.

In summary, the myriad disruptions confronting supply chains to Yemen, from shipping lines' reluctance to traverse the Bab al-Mandab strait to the surge in insurance premiums for transporting goods and commodities, have severely compromised Yemen's food security. Given that imports of essential commodities serve as the cornerstone of current food reserves, these challenges loom large.

Yemen heavily relies on imported foodstuffs to satisfy approximately 90% of its national food needs. The spike in the prices of essential food items will significantly impact Yemen's import bill and millions of Yemenis' access to food.

The sharp price hikes triggered by shipping and supply chain crises will further strain Yemen's external accounts and widen the gap in food insecurity, particularly during Ramadan, when demand surges in the local market.

These new crises, compounded by economic woes, exacerbate food security challenges and livelihood constraints. Projections suggest that many Yemeni governorates may confront acute food insecurity in the months ahead.

A report by the United States Agency for International Development (USAID) in February highlighted that millions of people in governorates under the control of the Ansar Allah group would face emergency conditions—the fourth stage of the Integrated Food Security Phase Classification—where at least one in every five families will experience severe food shortages, leading to malnutrition, heightened mortality rates, or loss of vital assets.

During the first half of 2023, Hodeidah Port received approximately two million tons of food, of which 57% were wheat and flour imports, while the remaining percentage encompassed rice, cooking oil, and dairy products, among others.

In the preceding year, imports through the ports of Hodeidah Governorate, controlled by the Ansar Allah group, constituted 70% of Yemen's total imports. This underscores the critical threat posed by ongoing disturbances in the Red Sea and Bab al-Mandab, primarily jeopardising the flow of goods and maritime shipping to Yemen's Hodeidah Governorate ports.

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(٥) Market & Trade Bulletin، Yemen، December 2023 – Issued on 31 January 2024
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