In today's Finshots, we revisit the problem in the Red Sea to see if things are getting any better.

The Story

You probably already know this. But there’s a problem in the Red Sea.

The Red Sea is an important international maritime trade route connecting two continents — Asia and Europe. And for the longest time, it’s been the preferred route for shipping companies moving goods and merchandise between these two points.

However, late last year tensions began emerging in the region courtesy of a rebel group based in Yemen called the Houthis. The Houthis began disrupting shipping lanes and attacking vessels with the explicitly stated goal of crippling trade linked to Israel and its backers. They wanted Israel to back off from Gaza. And when that didn’t happen, the Houthis began threatening pretty much every vessel moving through the region forcing shipping companies to ditch the route altogether.

This in turn has forced companies to reroute their cargo through the Cape of Good Hope — adding 15–20 days to shipping times. Costs have increased by as much as 60%. And insurance premiums (considering the added risk) have been inching upward as well.

It’s also affecting businesses and consumers in unexpected ways.

Consider the Indian Pharma company Glenmark Life Sciences. Last month, the company posted a drop in profits (for the last quarter of FY24) compared to the same quarter the year before and most of the drop was attributed to the external API business.

If you’re not following any of this, let us explain.

API means Active Pharmaceutical Ingredient and India is kind of a leader in this segment. We manufacture APIs in-house and ship them to countries in Europe and the US. The APIs are then used to create drugs or medication. It’s good business. Or at least it used to be until recently.

Since the rebel attacks in the Red Sea, we can’t use the same shipping routes anymore. What was once an 11,000-odd km trip is now a nearly 20,000 km trip. So if pharma companies in India already have long-term contracts with entities in the US and Europe, then they’ll have to bear the brunt of the added costs and delays. But there’s an even bigger problem. Some APIs are temperature sensitive. You simply can’t ship them with delays. So this demand can evaporate almost overnight affecting both pharma companies in India and the US.

Also, this isn’t unique to the pharma industry by the way. Textiles, automakers and fertilizer companies have all been affected in similar ways.

And it’s affecting consumers directly as well.

You probably didn’t notice this. But there was this tiny problem in February. Several people in parts of Asia, Europe and Africa experienced slow internet speeds briefly when a ship's anchor dragging along the seafloor cut the undersea cables that provide internet and telecommunications service around the world. The crew dropped anchor after the Houthis targeted the vessel in the Red Sea. And the ensuing damage affected network infrastructure that supports a good chunk of the world's communication.

And oh, the problem isn’t just the damage. Fixing it can be even more challenging considering it’s not exactly a friendly place to visit at the moment. So, countries have to plan for redundancies and these redundancies can cost money and time.

Also, it’s not just about the financial cost. You also have to consider the ecological impact.

Imagine you’re running a shipping company that sends cargo from Asia to Europe every week. Normally, you use four ships to do this, and it works perfectly. But suddenly, there’s this uncertainty in the Red Sea and you have to use the Cape of Good Hope. This increases travel time, and you can no longer keep up with your weekly schedule using just four ships because they take longer to return. To make sure you still deliver cargo every week, you now need to add two more ships to your fleet, making it a total of six ships. However, each ship emits pollution when it burns fuel.

So the added emissions can also do damage.

And that leaves us with one big question — Where do we go from here? Well, for starters, the US and its allies have been on a mission to disrupt Houthi operations in the Red Sea. And by all accounts, it seems the coalition has managed to wear down the rebels a tad bit considering the intensity and scale of Houthi attacks these past few weeks i.e. they haven’t been as destructive.

However, the problem with this equation is that it's still not exactly safe to traverse the Red Sea. Take for instance the case of the ship that dropped anchor and broke the communication cables. This UK-owned vessel was one of the few ships that dared to take the perilous route despite the threat from the Houthis. They were trying to "chart a path for shippers at the delicate bottom of the economic pyramid—those carrying goods too cheap or perishable to merit a costly diversion around Africa".

But that risk didn't pay off and the ship eventually sank releasing its cargo (thousands of metric tons of ammonium phosphate sulfate fertilizer) into the sea.

So yeah, as long as Houthis don’t explicitly promise a complete cease-fire and stand true to the promise, it’s unlikely any shipping company is going to risk it.

Will the Houthis reason with the world?

Well, it’s hard to say. They are not exactly a political faction. They’re really just a rebel group seemingly backed by Iran and negotiating with any rag tag group can be challenging. In the meantime, however, major shipping companies have all but ruled out the possibility of taking to the Red Sea in the next few weeks.

Here’s the latest update from the shipping giant Maersk

The complexity of the situation in Red Sea has intensified over the last few months. To safeguard our crew, vessels, and your cargo, we are rerouting around the Cape of Good Hope for the foreseeable future. However, the risk zone has expanded, and attacks are reaching further offshore. This has forced our vessels to lengthen their journey further, resulting in additional time and costs to get your cargo to its destination for the time being.

In simple words they’re saying, the costs are only going to go up in the second quarter of this financial year. You all better buckle up.

So yeah, this problem isn’t going away anytime soon and if anything, the full impact of these disruptions will be likely felt only in the next few months.

Until then…

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