Yemen-based Houthi Attacks Disrupt Global Trade Routes, Impacting Industries

Increased attacks on commercial ships by Yemen-based Houthis have led to disruptions in global trade routes, causing significant impacts on various industries.

The escalating attacks by Yemen-based Houthi rebels on commercial ships have resulted in disruptions along the crucial Red Sea trade route, with potential ramifications for global supply chains. The Global Trade Research Initiative (GTRI) warns that prolonged disruptions could adversely affect industries such as electronics, automobiles, chemicals, consumer goods, and machinery, which heavily rely on just-in-time manufacturing processes. As companies maintain low inventory levels and depend on the timely arrival of components and finished products, any delays or increased costs can have severe consequences.

Just-in-Time Manufacturing Processes Vulnerable to Disruptions

Companies that rely on just-in-time manufacturing processes are particularly vulnerable to disruptions in global trade routes. The GTRI highlights that industries such as electronics, automotive, machinery, chemicals, pharmaceuticals, plastics, textiles, and consumer goods will be impacted due to delays in the shipment of components and finished products. The Suez Canal, a vital route for transporting goods to different markets, is experiencing delays and increased freight costs as vessels are forced to take longer routes due to the attacks.

Ripple Effects on Trade and Local Productions

The attacks by Houthi rebels have disrupted the movement of goods along the Red Sea, the world’s busiest shipping route. This disruption has immediate ripple effects, including increased freight costs, mandatory war risk insurance, and significant delays due to rerouting. GTRI co-founder Ajay Srivastava warns that if the disruption continues for an extended period, it will not only impact trade but also local productions across various industries. Many industries rely on just-in-time procurement and imports of inputs through global value chains spanning both Europe and Asia, making them susceptible to delays and increased costs.

Specific Industries Facing Challenges

Exporters in various sectors are already facing challenges due to the disruptions in global trade routes. Basmati rice exporters, for instance, have seen freight costs soar to USD 2,000 per 20-tonne container for destinations around the Red Sea, marking a 233% increase. Other sectors, including life-saving drugs, textiles, diesel, aviation turbine fuel (ATF), and steel, have also encountered issues. Mumbai-based exporter SK Saraf suggests that India should consider building a domestic shipping company to reduce dependency on foreign shippers and mitigate future risks.

Linking Houthi Attacks to Israel-Hamas War

Reports have linked the increased attacks by Yemen-based Houthis on commercial ships to the Israel-Hamas war in October last year. The Houthi group has been using drones and rockets to target ships passing through the strait of Bab al-Mandab, a crucial shipping route connecting the Mediterranean Sea to the Indian Ocean. The strait is vital for 30% of global container traffic and has witnessed increased tensions, including attacks and military maneuvers by regional and global powers.

Disruptions and Diversification of Trade Routes

To avoid attacks, major shipping firms have stopped using the Bab al-Mandab strait for trade with Europe via the Red Sea and Suez Canal. Instead, they are opting for a longer route around the Cape of Good Hope, increasing voyage distances by 40% and raising transportation time and cost. This closure of the route disrupts a critical trade link between Europe, India, and all of Asia. India heavily relies on this route for trade and energy imports, and the disruptions have forced exporters to diversify their trade routes.

Conclusion:

The increased attacks by Yemen-based Houthis on commercial ships have led to significant disruptions in global trade routes, impacting various industries. Companies relying on just-in-time manufacturing processes are particularly vulnerable, as delays in the shipment of components and finished products can result in production delays and increased costs. The ripple effects of these disruptions are already being felt, with increased freight costs and delays affecting exporters in sectors such as rice, textiles, and pharmaceuticals. As tensions continue to rise in the region, it is crucial for companies and governments to find alternative trade routes and build resilience in global supply chains to mitigate the impact of such disruptions in the future.