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How mounting attacks on Red Sea ships may hit global trade, including Canada

Click to play video: 'U.S. shoots down missiles, drones fired north from Yemen: Pentagon'
U.S. shoots down missiles, drones fired north from Yemen: Pentagon
WATCH: U.S. shoots down missiles, drones fired north from Yemen: Pentagon – Oct 19, 2023

A mounting number of attacks by Yemen’s Houthi rebels on ships in the Red Sea amid the Israel-Hamas conflict is raising concerns about the impact on global trade — including in Canada.

Two of the world’s largest shipping companies, Maersk and Hapag-Lloyd, said Friday they were pausing operations in the critical trade route. That could lead to a domino effect on goods passing through the Red Sea, where about 10 per cent of the world’s trade flows through.

Although Canada doesn’t directly operate any cargo vessels in the Red Sea, the domestic shipping industry has direct relationships with those companies and others that bring goods to and from world markets.

“Any major disruption to trade flows in that area could have a downstream effect on the movement on goods to and from Canada in the future,” said Chris Hall, president and CEO of the Shipping Federation of Canada.

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What's happening in the Red Sea?

Since Israel began its military response to Hamas’ brutal attacks on Oct. 7, the Iranian-backed Houthi rebels in Yemen have escalated their attacks on commercial and military vessels in the Red Sea. The attacks, involving drones and ballistic missiles, were reportedly targeting ships heading to Israel in an effort to stop its assaults on the Gaza Strip.

In one instance last month, the Houthis used a helicopter to seize an Israeli-linked cargo vessel, the Galaxy Leader, and its crew, an operation that was captured on video.

But in the past few days, the attacks have been on cargo ships with no apparent connection to Israel. The most recent saw a ballistic missile strike the MSC Palatium III, a Liberian-flagged container ship that later caught fire. It was not immediately clear if anyone onboard was hurt.

Click to play video: 'Yemen’s Houthi rebels seize Israeli-linked ship in Red Sea, Iran denies involvement'
Yemen’s Houthi rebels seize Israeli-linked ship in Red Sea, Iran denies involvement

That strike came hours after another one on the Hapag-Lloyd-owned Al Jasrah vessel, which is also flagged to Liberia and was heading from Egypt to Singapore.

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The private intelligence firm Ambrey said a “projectile” hit the port side of the ship and caused a fire onboard.

A company spokesperson told Global News that no crew was injured in the attack, but that it was “pausing all container ship traffic through the Red Sea until Monday,” when it will “decide for the period thereafter.”

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Maersk said a missile launch on Thursday did not hit its Gibraltar vessel, which was travelling from Oman to Saudi Arabia, despite Houthi claims it did so. The company said alleged videos of a strike actually depicted a fire aboard a different Maersk ship in 2018.

However, Maersk said it has instructed all vessels bound to pass through the Bab al-Mandab Strait on the southern tip of the Red Sea “to pause their journey until further notice” as a result of the “near-miss incident.”

“The recent attacks on commercial vessels in the area are alarming and pose a significant threat to the safety and security of seafarers,” a company spokesperson told Global News in a statement.

How is global trade affected?

The Red Sea has the Suez Canal at its northern end and the narrow Bab el-Mandab Strait at the southern end leading into the Gulf of Aden. It’s a busy waterway with ships traversing the Suez Canal to bring goods between Asia and Europe, as well as North America.

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Those goods range from high-end manufactured components to personal goods, industrial supplies and food products.

A huge amount of Europe’s energy supplies, like oil and diesel fuel, come through that waterway as well, according to the International Chamber of Shipping, which represents 80 per cent of the world’s commercial fleet.

Hall points out that global trade was recently affected by a very different crisis in the region, when the Ever Given ship ran aground and blocked the Suez Canal for nearly a week in 2021.

“The disruption to trade flows in that area was so significant that it was several months after that before trade patterns got back to normal,” he said.

The canal’s blockage forced some ships at the time to take the lengthy alternate route around the Cape of Good Hope at Africa’s southern tip, requiring additional fuel and other costs. Hundreds of other ships waited in place for the blockage to end.

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At the time, analysts predicted the blockage disrupted about US$9.6 billion in global trade per day, and oil prices in Europe rose due to fears of shortages.

Click to play video: 'Suez Canal blockage could drive up gas prices'
Suez Canal blockage could drive up gas prices

In Canada, it led to a backlog of container ships waiting to unload, as everything from port schedules to trucking routes were also impacted by the mounting delays.

A similar outcome could happen now if the security situation in the Red Sea worsens, Hall says.

“Will it be immediate? Likely not,” he said. “But could there be an effect a little bit further down the road? That’s quite possible.”

He added Canada and the rest of the world was already seeing security implications on global trade due to Russia’s invasion of Ukraine, which affected grain shipments out of the Black Sea that feed dozens of other countries.

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What might happen?

Analysts say the biggest immediate impact of the Houthi attacks has been a rise in insurance costs for commercial shippers.

Lloyd’s List Intelligence told the Associated Press that insurance costs have doubled for shippers moving through the Red Sea, which can add hundreds of thousands of dollars to a journey for the most expensive ships.

For Israeli ship owners, they have gone up even more — by 250 per cent — and some insurers won’t cover them at all, the firm’s insurance editor David Osler said.

Those higher costs are unlikely to be transferred to consumers unless the attacks ramp up significantly, according to international experts.

“At the moment, it’s just an inconvenience that the system can handle,” Osler said. “Nobody likes to be paying hundreds of thousands of dollars more, but you can live with it if you have to.”

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Click to play video: 'Yemen’s Houthi rebels claim responsibility for Israel attacks'
Yemen’s Houthi rebels claim responsibility for Israel attacks

The U.S. has stepped up its military presence in the Red Sea, and in recent weeks its ships have shot down missiles fired from Yemen that officials say were launched by the Houthis toward Israel.

U.S. Defense Secretary Lloyd Austin on Friday spoke to his British counterpart about the escalating Houthi attacks, noting the threat posed to “civilians and global shipping,” according to a readout from the Pentagon. The U.K. also has military vessels in the area.

Hall says shippers are unlikely to permanently avoid the Red Sea as it’s the most direct — and therefore cost-effective — route in the region. He and other industry figures say steps will be taken to protect those shipping routes before taking the costlier and lengthier step of rerouting.

“There’s one that that trade does not like, and that is unpredictability,” Hall said.

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—With files from the Associated Press

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