The Red Sea Crisis Deepens: Global Shipping Reroutes Around Africa

15 March 2024

Three months into 2024, the Red Sea crisis has evolved from an emerging threat into a full-blown disruption of global trade. The rerouting of commercial shipping around the Cape of Good Hope is now the norm rather than the exception, with consequences that are reshaping freight markets, straining supply chains, and reviving difficult questions about the security of maritime chokepoints.

The Scale of Diversion

The numbers are stark. Transit volumes through the Bab-el-Mandeb strait have fallen by nearly 57.5 per cent compared with late 2023. Between 7 and 8 per cent of global container capacity has been diverted to the longer Cape route, adding approximately 11,000 nautical miles and 10 to 14 additional sailing days to each Asia-Europe voyage. The cost per voyage has risen by approximately $1 million in fuel alone, before accounting for lost scheduling efficiency and increased crewing costs. The cost to ship a 40-foot container from Shanghai to Genoa has climbed from approximately $1,400 in November 2023 to $6,300 by late January 2024.

King Abdullah Port in Saudi Arabia has seen throughput decline by more than 80 per cent, a devastating illustration of the collateral damage to regional economies. Egypt’s Suez Canal revenues—a vital source of foreign currency—are falling precipitously.

War Risks, Deviation, and The Polar

The crisis is generating a fresh wave of charterparty disputes and legal questions. The Supreme Court’s recent decision in Herculito Maritime Ltd v Gunvor International BV (The Polar) [2024] UKSC 2, handed down in January, is of direct relevance. That case concerned the seizure of the MT Polar by Somali pirates while transiting the Gulf of Aden pursuant to a voyage charter that specified a route via Suez. The Supreme Court held that where a charterparty contains an express agreement to transit a particular route, the owner cannot rely on a general liberty clause to deviate and proceed via the Cape of Good Hope in order to avoid war risks—unless there has been a qualitative change in the nature of the risk.

The Polar is directly applicable to the current crisis. Owners whose charterparties contain express Suez routing provisions must consider carefully whether the Houthi attacks represent a sufficient qualitative change to justify deviation. The answer is likely to depend on the specific facts—the vessel’s flag, cargo, and connections to Israel or its allies, and the nature and intensity of the threat at the time of the decision to deviate. Owners who deviate without adequate justification risk claims for breach of the charterparty.

The question of who bears the additional costs of Cape routing is also generating disputes. Under a time charter, additional voyage costs generally fall on the charterer, but the position under voyage charters is less straightforward. The scope of deviation rights under the Hague-Visby Rules—Article IV, rule 4 permits deviation to save life or property, or any “reasonable deviation”—is being tested in a context its drafters could scarcely have imagined.

Freight Rate Impact

The diversion is functioning as a de facto reduction in global shipping capacity. Vessels that would otherwise complete an Asia-Europe round trip in approximately five weeks are now taking seven or more. The result has been a sharp tightening of available tonnage and a corresponding surge in freight rates. The China Containerized Freight Index has risen by up to 150 per cent since the onset of the crisis. Fuel tanker day rates from the Middle East to the Netherlands have more than tripled, from $23,000 to $73,000 per day.

The Capacity Paradox

The timing of the crisis has introduced a curious paradox into the container market. A record 530 new container ships are estimated to enter service this year, easily surpassing the 350 deliveries in 2023. Under normal circumstances, this influx of new tonnage would weigh heavily on freight rates. Instead, the Red Sea diversion is absorbing the excess capacity almost entirely, converting what should be a bearish year for shipowners into one of unexpected strength. This is, of course, a fragile equilibrium. If and when the Red Sea reopens to normal traffic, the market will face the full force of the newbuilding deliveries.

Conclusion

For the shipping industry, the Red Sea crisis is a reminder that geography still matters, that chokepoints remain the Achilles heel of global trade, and that the assumptions underpinning much commercial planning can be upended by events beyond the industry’s control.