Two European giants in oil and gas declared on Monday that their oil tankers would avoid the waters off the coast of Yemen, a crucial passage point for ships travelling through the Suez Canal to navigate between Europe and Asia. They are joining Maersk, the world’s largest container shipping company, which withdrew from the area last week as Houthi militants, backed by Iran, intensified their attacks in support of Hamas. A drone and an anti-ship ballistic missile from Houthi-controlled Yemen on December 18th attacked the chemical and oil tanker Swan Atlantic. According to data compiled by Bloomberg, fifty-six merchant ships entered or exited the Red Sea on Saturday and Sunday. This represents a 35% decrease compared to the beginning of the month.

Companies transporting consumer goods and raw materials like coal, corn, and energy products face longer journeys. Even though there has been some easing in global supply chains to absorb recent capacity constraints, the sudden closure of the Suez Canal in 2021 highlighted how fragile networks can be when major links break down.

These incidents threaten a trade corridor through which approximately 12% of maritime trade passes typically. They come when the Panama Canal, the other vital waterway from ocean to ocean, is constrained due to drought. The war in Ukraine and the Russian airspace ban are also forcing carriers to find alternative routes between Asia and Europe. All of this combined is dangerously inflationary.

The increasing uncertainty in the Suez Canal and the global economic rebound due to easier financial conditions could exert upward pressure on commodity inflation in the coming months. Natural gas prices in Europe have surged by 13%, and Brent crude oil futures traded higher after rising 3.9% in the previous session.
The London-based Joint War Committee, which advises Lloyd’s maritime insurers on risks, has extended the portion of the Red Sea it considers one of the world’s riskiest waters. The insurance cost has nearly multiplied by ten since the start of the attacks.

Shipping rates for containerized goods from Asia to the Mediterranean are already rising. According to Freightos.com, an international freight booking and payment platform, the rate for this route via the Suez Canal has increased by 62% since late November.

Over the past two years, the Suez Canal has also become a significant route for global LNG (liquefied natural gas) trade, driven by Europe’s appetite for it as the primary replacement for Russian natural gas. Its importance has grown this year as goods bound for Asia take longer routes due to congestion at the Panama Canal. LNG carriers have also changed ways, opting for the longer and more costly path via the Cape of Good Hope.

The situation implies higher shipping costs and short-term delivery delays. All these costs will be directly passed on to consumers.