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Red Sea Crisis

Geopolitics, trade, and the Red Sea Crisis

Over 50 vessels attacked by Houthi rebels in the Red Sea, thousands of ships diverted via the Cape of Good Hope, and billions of dollars of trade disrupted in the Red Sea crisis.

The crisis that has developed in the Red Sea since mid-November seemed to come out of nowhere and illustrates the highly unpredictable nature of geopolitical impact on the shipping industry.

In the latest episode of Chat about Geopolitics and Trade we turn the tables on our usual presenter Punit Oza, Founder of Maritime NXT, for his expert insights into what is happening in the Red Sea and Yemen.

Over the next 30 minutes or so you will hear about the background to the current situation, the geopolitical response, impact on trade, and where do we go from here.

Listen now in the player above or the app of your choice below

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Episode transcript

Marcus Hand  00:09

Over 50 vessels attacked by Houthi rebels in the Red Sea, thousands of ships diverted via the Cape of Good Hope, and billions of dollars of trade disrupted in the Red Sea crisis.

Hi, this is Marcus Hand with our latest episode of Chat about Geopolitics and Trade podcast series.

The crisis that has developed in the Red Sea since mid-November seemed to come out of nowhere and illustrates the highly unpredictable nature of geopolitical impact on the shipping industry. Now, normally, in our monthly Chat about Geopolitics and Trade, Punit Oza, founder of Maritime NXT, interviews leading industry executives about their experiences related to geopolitics and shipping.

But today we thought we'd turn the tables and ask Punit for his expert insights on what is happening in the Red Sea and Yemen. Over the next 30 minutes or so, you will hear about the background to the current situation, the geopolitical response, impact on trade, and where do we go from here?

Punit, welcome to the podcast.

Punit Oza  01:14

Thank you so much, Marcus. It's really nice to be on the other side of the table after a while. I remember doing the very first episode with you as the host and me as the guest. It's really nice to kind of be back as a guest again. I look forward to a very interesting conversation.

Marcus Hand  01:31

Yeah, it's great to have you back as a guest. I'm really looking forward to sharing some of your opinions and insights with our listeners. We've just been having a chat before and there's some great stuff in here, I can assure you. So, let's get this underway. And very simply, how on earth did shipping end up in this situation? Could you explain the history of the conflict in Yemen and put this into some kind of context?

How did Yemen became a center point in this situation?

Punit Oza  01:54

Yes. Thank you so much.

I think Yemen has always been a volatile country. In the 1990s, actually unified the north and the south Yemen, unified as one country and there was a stable period for a while till 2014. And in 2014, the government, which was elected, was actually having a bit of a crisis when they reduced or cut the fuel subsidies and they faced a backlash from the Houthis and they basically went again and rebelled against the established Yemeni government at the time, allegedly backed by Iran. But they basically got the president to resign officially, and the president had to flee. At this point of time, they started taking over. The Houthis started taking over large parts of Yemen, including the capital, Sana'a.

The president, in inverted commas, recognised by the international community, still had to flee to Aden, the southern port town and once he reached Aden, he actually went ahead and declared, saying he never resigned. And he's still the president. And obviously, it was something that the international community is still recognising in some cases as this president, as the official president of the Yemen.

Hodeida, the other port on the western side of Yemen, is now under Houthi control and it is probably one of the reasons why shipping has actually become a big part of this discussion.

In 2015, the Saudis got involved in the conflict at the request of the president of Yemen and then internally it became a bigger challenge because the Gulf Cooperation Council, GCC, got involved as well. Iran officially backed the Houthis in 2015. Interestingly, the Americans had special troops on ground and so did UK, and both of them withdrew their troops in 2015 when the Saudi and the Iranians came into the play.

In 2017, the Houthis actually bombed or tried to bomb the Saudi airport in Riyadh, and that was diverted by the Saudis, and they realised that this is becoming a bigger threat and they decided to blockade Yemen altogether and this is basically the genesis of the discussion.

The blockade was very effective. Interestingly, a blockade was possible for the first time, that all the air, sea and land transport was pretty much blocked. Land in some ways, but sea and air were definitely blocked by the Saudi blockade. It became a huge humanitarian problem. A famine ensued in Yemen, and under UN pressure, the blockade had to be ended.

In 2022, five years afterwards, the UN actually brokered a ceasefire in Yemen, and there seemed to be some kind of a semblance of normalcy returning into Yemen. And then the current crisis happened. The Hamas launched an attack on Israel on 7th October, Israel has counterattacked, and from 17th October onwards, the Houthis initially started bombing Eilat, which is the port city in Mediterranean, at the Red Sea of Israel, the Red Sea port city. And of course, they were also lobbying missiles at Saudis and even Egyptians at the end of the day.

Now, obviously, they decided that rather than putting stuff into the land, let us also strike some of the ships. And they started targeting, and one thing I must say, I usually don't give opinions in this regard to this, but one of the interesting ideas, or one of the interesting insights is that the Houthis seem to be extremely knowledgeable in terms of which ship belongs to whom. They seem to have a lot of shipping insights in terms of beneficial ownerships of ships, which ports is the ship sailed from, which is a cargo that she's carrying.

So, they started targeting any ships with Israeli interest or Israeli linkage, US or UK. And obviously, as you mentioned, over 50 ships were bombed and this is a continuing discussion and this is where the problem really starts.

In December 2023, US and UK decided to put up the Operation Prosperity Guardian, which basically looked at giving cover to ships. I think it has been partly successful, but it's been a big challenge to actually really save, because these Houthis are actually occupying pretty much the entire western seafront and the coastal area of Yemen, even some southern part as well. So, this makes these ships easy targets at the end of the day. Obviously, now the military operations have started, the US, UK have actually gone ahead and put it out there. They've started bombing certain parts of the Houthi strongholds, and this is only going to increase in terms of broadening the war scope.

Where is the shipping getting involved in this? This is essentially shipping becoming innocent bystander in this entire discussion. The only reason why these ships are being targeted is because of the fact that they are either linked or somehow connected with the interests of the countries where the Houthis are really looking to target in order to make a statement. And their terms or their key demand is that the Israel and the Hamas conflict should end and only then their bombings will stop. So, this is effectively very clearly the shipping stuck with a small conflict, now becoming bigger and bigger and enveloping the shipping space as well.

The strategic role that ports and shipping are playing in the conflict

Marcus Hand  07:47

You mentioned there about the strategic part about ports in this, both in Yemen and those that sort of on the Saudi side targeting them. So, could you explain a little bit more about the strategic role that ports and shipping are playing in this whole conflict?

Punit Oza  08:01

So, I think having Hodeida as a port under their control, the Houthis have a place where they can take the ships, capture them and dock them and control them. That is obviously one of the reasons why one of the ships is still under their control. I think the Galaxy Leader, which is still under their control in Hodeida port.

The other thing is that any ship that transits the Suez Canal and the Red Sea has to pass the Bab El Mandeb. Bab El Mendeb, translated from Arabic, literally means the Gate of Grief or Gate of Tears, very ironic to actually have a name like that; it's literally become the Gate of Grief and a Gate of Tears today for shipping community. And the interesting part is that it's only 14 nautical miles wide from the Djibouti side to the Yemeni side.

So, if you are transiting a small Gate of Grief or Tears, with 14 nautical miles separating the two coasts and missiles, kind of even inland, you can pretty much imagine the threat that you actually face. You can't go very fast in that small space and you have no escape whatsoever. And the Hodeida port is obviously another place, as I mentioned.

Interestingly, the previous blockade has taught the Houthis to actually reskill, rearm and replenish their weapons. A lot of them, I believe, have actually been allegedly supplied by the Iranians, but also other countries have actually been involved in that discussion. The Bab El Mendeb transits are actually 65% down, but they're still there at the moment.

And the only reason why the strategic aspect of the value of ports and shipping comes in is because the Houthis realise and the people controlling those territories realise, that the alternative to going via the Suez Canal is the Cape of Good Hope and that is simply too expensive and too challenging.

Also remember that there are certain liner companies which call these Red Sea ports. Now there are other countries on the Red Sea, the Egyptian Red Sea, the Israeli Red Sea, of course, the Jordanian Red Sea. The fact that there is Sudan, Djibouti, Ethiopia, Somalia. They're still being serviced by shipping lines, and they have no option but to go to these places.

So, shipping has, unfortunately, being a lifeline industry providing services to all these countries, is also now at the receiving end of these challenges at the same time. But strategically, shipping and ports are playing a very important part in making a political statement and a geopolitical statement for both the Houthis as well as the Americans and the British.

The different effect of Russia-Ukraine conflict and Red Sea crisis on the shipping

Marcus Hand  10:53

That's really interesting to see how that plays out strategically there. This obviously isn't the only geopolitical conflict that shipping has been caught up in in recent times. We've got the Russia-Ukraine conflict as well. How does this differ from that?

Punit Oza  00:09

So, the Russia-Ukraine conflict , I think you had mentioned this to me in a separate conversation, that after a point of time, the war becomes a normal  occurrence, you somehow feel that this has been happening for a while. People need to kind of build it into their calculations and discussions.

So, Russia Ukraine conflict is very much a localised conflict in some ways because there is no direct intervention of any other countries except the Russians and the Ukrainians currently getting involved in the conflict.

Yes, there is indirect help and support coming from other countries, both to Ukraine and maybe even to Russia, but it's still very much a localised conflict. What I call a territorial battle at the end of the day versus the conflict here in the Red Sea, and is linked to another conflict, which is the Israel Gaza conflict, Israel Hamas conflict. And the Israel Hamas conflict is very much an ideological battle, more than a territorial battle.

Because of the fact that it's more complicated because there are two battles linked to each other at the same time it's also very simple. If the other battle stops, the Israel Hamas, this battle has no legs to stand on and will stop on its own. Which is exactly why the broker ceasefire in 2022 worked, because there was no conflict other than this that needed to be solved. And today there is an alternate conflict which is influencing the Red Sea attacks and this is where the difference really lies.

The Americans are fully in the battle now. They are actually physically bombing spaces. They have actually lost people and personnel on the ground, both in Jordan as well as at sea. And this is something that really is potentially having a conflict which is widening as well, because the Arab in the Middle Eastern world and the Iranians, although the fact is that Chinese have actually brokered a ceasefire between Saudi and Iran. Saudi were actually in talks with Israel before this to normalise the relationships, but that's all gone into a back space now because there's really nothing that is dominating the conflict as much as the Israel Hamas conflict. And that's why this conflict is potentially much more wider and has more potential of creating more complications for the industry as a whole.

I also believe that the Russian-Ukrainian battle has got very specific commodity challenges, but in case of the Red Sea attacks, it is commodities which are flowing from different parts of the world through a choke point into other parts of the world, which means all commodities, at least in theory, can get impacted by this conflict.

Russia-Ukraine is only linked to those commodities where Russia and Ukraine are themselves involved in either consuming or producing those commodities. This is where this conflict is much wider and much more challenging for the world as a whole.

Marcus Hand  14:11

Okay, I'm going to take that into two parts, I think, come back to the commodities part of that and come first to the sort of wider conflict and other countries getting drawn in if they say it's specifically to protect shipping at this stage.

So, you mentioned Operation Prosperity Guardian. You've had the US and UK military action backed by some of their allies. We're seeing India getting involved in protecting ships to some degree, possibly the EU, but then if we look at the big Asian power, China, they seem to be staying well clear. Could you explain to our listeners what is happening here?

Where does China stand in this conflict?

Punit Oza  14:45

Yeah, that's the very interesting part. China was surprisingly the broker for a deal between Saudi and Iran, which paved way for both Iran and Saudi Arabia to become the parts of the BRICS plus, or the BRICS expanded BRICS Alliance, which is looking to kickstart very soon. And that was a big breakthrough, I believe, in the overall relationships as well as the stability of Middle East.

But China today is kind of more an economic player in this entire discussion. There are Chinese companies which are still doing business. I know that China has actually a joint venture with the Saudi Arabians, exporting Petco and other oil commodities from the Jeddah area in the Red Sea. So, they are obviously continuing to protect their interest as such, but they're not getting involved in the military part of it.

I think the military discussion has predominantly happened with America, UK, France, Germany, now, I believe the Danish navy is also sending some ships with the EU coming into play as well. I believe 17th February they actually are launching an operation where they are collaborating with the Americans and the British to do something out here.

On the other hand, we actually have the other Asian powers, India, for example, has sent fleet into the Red Sea, into the Indian Ocean, mostly to protect its own ships. Piracy is another challenge. They've actually rescued a couple of ships from the pirates, but they've also helped bring some of the ships which were hit by missiles to port of refuge in India. And that has actually been one of the other aspects, that India has played a proactive role.

At the same time, Pakistan has also been involved in protecting some of its fleet on the merchant side. But militarily, nobody has really played a bigger role.

Interestingly, in the Prosperity Guardian, when you look at the number of countries which are part of the coalition, even Singapore is involved, but it doesn't have any ships there. So are the Bahrainian and the other people involved. Interestingly, Saudi Arabia has supported the operation but had not put any assets on the ground as such. They are obviously supporting the Yemeni elected government and they believe that that's their part of the role that they're playing.

But this is a hodgepodge of countries and China has decided to stay out, at least militarily. But economically, I believe it's definitely playing a part in keeping the trade moving, both for Chinese and non-Chinese actors, as you speak, basically.

Suez Canal closure impact on trade between Asia and Europe

Marcus Hand  17:28

So, quite a complex situation and it's interesting to get that background on the actions of China within this.

Now, turning more to the trade impact here and one of the things about this is, that essentially this blocks trade through the Suez Canal. Perhaps we can sort of look back at what happened the last time that the Suez Canal was closed for a long period of time.

Punit Oza  17:50

So, it's no coincidence that the Hamas decided to attack Israel on the 50th anniversary of the Yom Kippur war. That was the last time the Canal was closed for years. And I think if you look back on that closure of the Suez Canal, the immediate short-term impact was the ships were rerouted via the Cape of Good Hope, which is basically a 75% increase in sailing time from Asia to Europe and vice versa.

Obviously, huge cost implications for the parties, and because of the fact that you were taking that much more time for performing these voyages, there was a huge contraction of supply of ships as well.

But there's one big change compared to the previous years, in that point of time, the oil prices spiked through the roof because Middle East was basically the majority of supplier, or the major supplier of oil to Americas. And they were the principal reason why the oil embargo happened in the first place, because of that particular war happening with the Yom Kippur war.

Now, this time around, America has actually had a very different perspective. Once the export ban was lifted by Obama, America has continuously upgraded its production both of shale and crude oil from Gulf of Mexico. And today it is actually not a consumer of oil or net importer of oil, it's a net exporter of oil. And that's why even with all these crisis, the Russia-Ukraine scenario, the current Red Sea crisis, we are still not seeing the oil prices going through the roof, which is why its inflationary challenges are much more limited.

This is a bit of a mercy at the moment for the economy, because if the oil prices had skyrocketed with these challenges, it would have really made a huge problem for the economic climate of the globe as well. I think this time around it's a bit different, but that was a short-term impact, a very big oil shock, and that created a huge issue with regard to how America viewed the oil as well.

Long term impact, medium to long term impact, was basically this gave rise to scrapping of the old fuel guzzling ships and more eco ships came into play because people actually felt that they needed to do these long voyages and they needed to have more eco ships.

Interestingly, the source of the goods started changing. The suppliers, who were traditionally very solid and robust, could not supply the goods either competitively or at all. Because of these choke points and because of the Suez Canal closure. And the Asian importers, the European importers had to look for local sources, even if paying a bit more, they started securing multiple supply sources going forward. And obviously this changed the dynamics of the prices going forward and obviously a new building spree erupted because of this shipping side and that created a lot of interesting opportunities for both the yards as well as the ship owners and ship operators.

But interestingly, a lot of people have kind of not forgotten those days. There is still a lot of bias in terms of dealing with certain suppliers and certain choke points in certain areas. Geopolitical memories remain in people's minds even today and that for me is something which will be another big discussion. Even if the current crisis goes away from the Red Sea, people will not forget it in a hurry. They will still try and diversify their sources of supply and they will try and keep those sources of supply as diversified as possible, because this can erupt once again and nothing is for sure.

So, memories are the biggest impediments to the most economic flow of trade because they actually create barriers in people's mindsets more than the actual trade routes.

Marcus Hand  22:05

Now, you talked there about the impact that the last closure of the Suez Canal had and that kind of long-term impact it had on trade patterns. So, if we look at what's happening now and take that sort into account, what impact does it have on the trade flows, short, medium and long term?

Impact of the Red Sea closure on trade flows in short, medium and long terms

Punit Oza  22:23

Absolutely. First of all, we need to list out the countries which are impacted by the Red Sea directly. Egypt is probably the biggest loser at this point of time. Suez Canal tolls are about close to 10% of the GDP of the country. It's losing it in a big way today. On top of that, there doesn't seem to be a light at the end of the tunnel. It obviously is losing a lot, and it potentially will be more. It's itself in a big challenge economic space and obviously that's going to get worse.

Sudan, Eritrea, both Red Sea countries are dependent on aid cargoes and if aid cargoes are basically suffering or becoming more expensive, this is going to have an impact of how much aid goes to these countries.

Ethiopia is having its own internal challenges, civil war challenges. It is now going to create more problems for importing and exporting the goods that it has. Djibouti has substantial Chinese investments and they need to be serviced and China also exports a lot from Djibouti out to China in terms of raw materials as well.

Yemen is in complete chaos. Obviously, that's going to create more volatility with regard to already problematic areas.

Jordan is a big supplier of rock phosphate and other minerals to the world. Whether it is supplying to the Mediterranean and Europe countries, not a problem. But to Asian countries, the Red Sea blocked means its major supply is going away. Its markets are going to get diminished as well.

Israel Eilat is of course going to get affected, but Eilat is a very small percentage of Israel's trade. So obviously the challenge for it is more the safekeeping of the people in Eilat and the towns close by because the bombing from Houthis continues there.

The Mediterranean countries are directly or indirectly going to get impacted. Turkey and Syria and a few other countries, they all used to use the Suez Canal to export into Asia and that's not happening anymore. So please understand that this is already impacting the whole of Red Sea countries and also beyond that to the Mediterranean countries, they are directly impacting as such.

Short term impact

So, in the short term, there's higher costs because of rerouting. There is longer time taken, there is going to be greater emissions. So, all these companies are going to miss their emission targets whether you like it or not. They are emitting a lot more by the fact that they are guzzling more fuel. And of course the risk still remains in terms of how do they actually keep these contracts going? Do they service these contracts? Do they increase the numbers? The freight costs are simply skyrocketing as well.

Medium term impact

The medium-term impact I believe is going to be more like demand erosion because after a point of time the buyers will simply say “I can’t afford these additional costs. I need to look for alternative sources. I need to look for alternative products if possible.” Supply sources will change. I mentioned this to you, Jordan supplies rock phosphate to India, today there is a huge opportunity that Saudi Arabia may decide to increase its phosphate production and Dammam may become a huge hub port selling phosphate to India and India needs phosphate for fertilisers, for phosphoric acid, for a lot of other things. It's all about delivery cost. I also see potentially force majeure situations happening in the medium term. If this continues on for a while, there will be force majeures declared for sure.

Long term impact

Long term impact is, as I mentioned, the key is the saving grace is the lack of oil shock, the fact that the oil prices are still contained and reasonable. Obviously, this has created a huge advantage in terms of the global economy being a bit more stable. This will also mean that there is no need to go ahead and push for more eco ships because the prices are not going through the roof. Inflationary impact will be lower, but essentially the supply is getting contracted.

So, in the long term we will see that some of these fleet will actually come on board, especially the container ships which are being ordered and which are coming on stream at the moment, may get absorbed in a much easier way because the supply is actually now much more contracted. In terms of the fact that supply is tighter, and because of that, maybe the new ships coming may not actually face a big challenge that they could face otherwise. So, this can be interesting for the shipping industry, but the people who are going through the Red Sea, the seafarers, the assets, the companies, it's actually a big challenge for them, and it'll continue to remain so.

Interestingly, one of the ships that recently got attacked on the 12th of February was a Star Iris and the ironical part is that they were actually carrying corn from Brazil to Iran on a US owned bulker, which is basically controlled in Greece. Now, this is a very interesting space. It's a US listed company, Star Bulk carriers. The controlling beneficial ownership is probably in Greece. The cargo was actually coming from Brazil and going to Iran, who is actually allegedly backing up the same people who bombed the ship at the end of the day

So, you know, this is where geopolitics creates the most ironical situations in the world, and trade flows are bound to get affected by this. It's a developing story, and I really don't know how long it can go on, but I don't see any light at the end of the tunnel until the Israel-Hamas conflict discontinues.

Marcus Hand  28:11

Yeah, that last example you quoted there with the Star Bulk ship just illustrates just how complex this actually is from the perspective of the shipping side and this question of what ship is safe to go through.

Now, you kind of listed a lot of countries that are quite directly impacted in the region there. We come to that sort of billion-dollar question. You said there you don't see a light at the end of the tunnel until the end of the Hamas-Israeli conflict. Is there some solution that could come from the region, given the number of countries that are being impacted in that area?

The Middle East question can only be answered by the Middle East themselves

Punit Oza  28:49

Yeah, I think the GCC has a big role to play, but GCC is divided in Yemen as well, because GCC recognises the Yemeni leadership before the Houthis took over. So, there is a conflict in GCC itself, so it's not really able to unify itself. Iran has its own agenda in that sense to work with. So, the unification is a challenge.

The only country which actually has most at stake is really Egypt. And I think they are pushing, but they'll have to push harder in that sense.

I read somewhere that the Middle East question can only be answered by the Middle East themselves. It's very difficult for outsiders to go and take a call in this. The only reason why Americans and the British are in there is because they are having lives at stake now, they've lost people and they've lost assets themselves. So that is the reason why they are keen on building that safe heaven for ships.

But I think they cannot solve the problem militarily. This has to be solved by solving the Israeli-Hamas challenge. And, as I said, till that point in time, we will not see a big change.

 Interestingly, there are basically people on both sides of the coin. The Hamas still have hostages and Israelis still want to basically try and get an upper hand in some form or the other. So, there are some kind of cards up everybody's sleeve. Hopefully, they decide to kind of take a breather at some point of time and do something about it, because this is obviously going to have an impact in the medium to long term. And once the numbers start trickling in, maybe the next quarterly GDP update of these countries will actually be a factor. And then maybe the wider impact to the Mediterranean countries and the global GDP impact that IMF may be able to bring about, maybe it'll take three to six months to get this out there for people to realise this is serious, it's going to affect your pocket and my pocket, let's do something about it. That's the hope I have, and hopefully that's the only solution that comes up basically.

Marcus Hand  31:05

Hopefully that is a scenario that plays out and we do get a solution to this in the not too longer term. It doesn't look like we're going to get something immediate, certainly based on the scenarios you've described.

Punit, thank you so much for taking the time. We could have talked about this for hours, I'm sure, we probably will have a coffee.

Punit Oza  31:25

Well, thank you so much. This was much longer than the usual podcast, but hopefully it kind of gave a perspective. It's also something that I find extremely useful in terms of all the teaching and training that I do in this particular topic at various universities. So, thank you so much for the opportunity, Marcus, always a pleasure.

Marcus Hand  31:46

Well, thank you, and thank you for taking the time to talk to our listeners, and we will see you on the next episode of the Seatrade Maritime Podcast.