Coffee and tea shipments are being rerouted to avoid the Red Sea following repeated drone and missile attacks. Ongoing US-UK airstrikes failed to halt Yemen-based Houthi rebels who this week hit a Greek-registered bulk carrier, a Malta-based cargo ship, and an American-owned cargo ship in the Gulf of Aden.
The USS Laboon downed an in-bound anti-ship cruise missile on Jan. 14.
Shippers are heeding warnings to avoid the Bab el Mandeb strait at the southern entrance to the Red Sea where there have been 30 attacks on merchant vessels in the past six weeks.
Rerouting is inconvenient and costly but unlikely to seriously disrupt global supply chains. Indian Tea Exporters Association Chairman Anshuman Kanoria said tea exports to Europe and the US are negatively impacted. Fifteen additional days are required for the westbound shipments, and container availability has “fallen significantly, leading to a huge surge in ocean freight rates.”
According to Reuters, coffee deliveries to Europe from Vietnam and Indonesia have been delayed up to three weeks, and container freight rates have increased by 150% on Asian-European routes
The latest Drewry World Container Index (published Jan. 11) shows rates increased 15% in the second week of January to $3,072 for a 40ft equivalent unit (FEU), an increase of 44% compared to the same week last year. The WCI average is 88% higher than pre-pandemic 2019, when rates averaged $1,420 per FEU. The cost of shipping a 40ft container of tea from Shanghai to Rotterdam spiked 116% to $4,406, which is $196 higher than the 10-year average rate.
Since December, a passage from the Gulf of Aden through the Suez Canal has become 1,200 treacherous nautical miles. On Jan. 15, 90 ships were steaming through the danger zone, according to Lloyd’s List.
Lloyds tracked 23 vessels that had stopped or reversed course following the US-UK airstrikes, with 67 yet to clear Yemen southbound. Qatar announced on Jan. 15 that it would no longer send liquid gas through the Red Sea. Many container ships are at anchor or diverting course toward South Africa. Russian-controlled LNG carriers, oil tankers, bulk carriers, and coastal tankers continue to transit the Red Sea.Shipping companies rerouting to avoid the dangerous straits face higher labor and fuel expenses and costly war risk insurance premiums. Operating a container ship costs between $25,000 and $85,000, excluding fuel, which adds up to $130,000 daily. The Suez Canal saves approximately 7,000 to 8,000 nautical miles compared to the journey around the Cape of Good Hope.
Over 20,000 ships carry approximately 12% of global trade through the Suez Canal each year, 30% of all international container traffic, and more than $1 trillion in goods.
Peak Coffee Shipping
Coffee shipments peak between January and May after the South American harvest concludes in October. Container availability was already an issue as Brazil’s export hubs struggled to export record amounts of soy, corn, and sugar. Brazil’s November green coffee exports were up 8.5% y/y to 235,000 MT.
While European-bound containers from the Americas transit the Atlantic, European-bound containerships from India and Asia with coffee and tea onboard generally cross the Red Sea. Robusta, harvested in Africa and Southeast Asia between November and February, ships after it is picked, dried, milled, sorted, and graded. Processing takes a few weeks. Shipping may not occur for several months.
The peak shipping season for tea is late spring.Arabica inventories are currently low, forcing growers to ship during uncertainty. The International Coffee Organization reports higher global exports. In November, ICE-monitored arabica coffee inventories fell to a 24-year low of 368,000 bags.
War risk premiums spike
Coverage is still available, but the market is assessing the impact as the conflict escalates, according to Lloyd’s List. “The market will now go into rangefinder mode, with insurers having to guess the reactions of their competitors second and gauge how much shipowners still seeking to route via the Red Sea are willing to pay,” according to Lloyd’s, a publication that has tracked registered shipping since 1734.
The cost of insuring ships had increased significantly compared to October when shippers paid APs (additional premiums) based on 0.05% of the vessel’s hull value. Underwriters are now charging APs of 0.3% to 0.35% of hull value “uplifts” of 250% on Israeli shippers targeted by Houthi militants. This adds $450,000 per trip based on a VLCC valued at $150 million.
The London Insurance Market’s Joint War Committee (JWC) widened the high-risk area in the Red Sea following drone and missile attacks by Houthi rebels in Yemen. JWC members first met shortly after a Dec. 11 missile strike on the Strinda, a 20,000-dwt Norwegian vessel.
Shippers urged Western military powers to do more than defend the vulnerable sea lanes. In mid-January, the US and the UK, with support from Canada and European nations, launched consecutive air and cruise missile strikes at launch facilities, radar stations, and warehouses storing drones. Houthi leaders scoffed at the assault that left untouched mobile launch vehicles that constitute most of the Iran-backed strike capability.
There are growing fears the conflict between Israel and Gaza-based Hamas will spread to Yemen and possibly include Iran, making a Suez passage too dangerous to consider.
The Houthis say they will immediately allow the free flow of ships if Israel agrees to a ceasefire in Gaza.