When I was a kid, I used to love novels about pirates on the untamed seas. Growing up in northern New Mexico, the ocean was an exotic concept that I could only try to imagine in my mind. To think that there were pirates making their living preying on merchant and military ships carrying valuable goods and chests of gold fascinated my young mind. In modern times, other than during periods of wartime, the seas have been relatively safe from piracy, given the advanced weapons and communication systems that ships have access to, not to mention the speed with which they travel. Apart from a few isolated piracy acts, mainly by Somali pirate ships that have attacked smaller cargo boats in the last few years, piracy seemed to be a thing that went away in the 1800s.
However, just recently piracy has returned to the seas, not so much to steal cargo and to sell the contraband, but as a way to harass world powers and nations that are allies with Israel. Houthis, the new pirates, are firing rockets and using drones to attack ships in the Red Sea, and the Suez Canal. The Houthis, branded a terrorist group by the U.S., are supported militarily by Iran, which has been a sworn enemy of the U.S. for more than 40 years.
The U.S. and its European allies are striking back at Houthi positions in order to neutralize their activities. While there is fear that this will widen the conflict occurring between Israel and Hamas to the entire region, from a commercial standpoint, the Houthis’ attacks on shipping in that part of the world are having repercussions on global trade. The Suez Canal is a man-made canal that connects the Red Sea to the Mediterranean Sea, providing safe passage and a shortcut for cargo ships. This saves shipping costs and allows countries in various parts of the world to efficiently trade. Coupled with the drought in Central America that has caused water levels in the Panama Canal to drop, the Houthis’ attacks are affecting maritime sailing routes and ocean freight prices.
From a trade standpoint, the ocean has become a water seaway that is marked by waterways that shipping companies use to get from point A to point B. This often involves using shortcuts, such as the Suez Canal. Think about our system of global trade. Companies use production sharing to access materials, components, and labor from all over the world to produce their products. For example, an automotive plant in Europe might be using raw materials from China, and components from Mexico and the U.S. to complete the production of its vehicles. Maritime shipping is the major logistics component in bringing together these various materials.
Maritime shipping companies establish sea routes that can service thousands of customers. To do this, they lease space at ports of entry, hire crews to handle the cargo, and arrange for specific amounts of cargo containers to be available at ports of entry on different routes. Now, enter the Houthis, who attack ships taking the shortcut to their final destination using the Suez Canal. The attacks are causing large maritime shippers such as Maersk to avoid using the Suez Canal and go all the way around the Horn of Africa instead, resulting in a longer trip and higher costs. It also means that its previous system of coordinating ports, crews, and the availability of containers is disrupted.
Flexport, which is a global shipping management firm, reported in early January that out of 735 ships that were expected to use the Suez Canal, an estimated 517 have diverted or would be diverting to alternate routes. This equates to a whopping 25 percent of global shipments measured by containers. This firm estimates that shipping rates from Asia to North America have risen 75 percent between December and January. It is predicting that rates will increase by approximately 50 percent to 100 percent by the end of January. Rates from Asia to Europe have risen by 200 percent from mid-December to the first couple of weeks of January. Ocean carriers carrying this cargo are now sailing around the Horn of Africa, adding 10 to 14 days to delivery times.
With rising maritime shipping rates, we can also expect to see rising prices for consumer and industrial goods. We will continue to see firms choosing security over economy in their supply chains. This also is a major reason why reshoring – moving production back to the market in which the consumer exists – is currently very popular.
Meanwhile, the U.S. and its allies are attempting to remove the Houthi problem. However, this might prove to be difficult, as the Houthis are ensconced in countries such as Yemen, that have their own conflicts and are ill-prepared to address this internal threat. Unlike the pirates of old, the new Houthi pirates can attack far away from their targets, and by land, using modern rockets and drones. Their effect on shipping patterns would seem certain to embolden other terrorist groups that want to make a name for themselves by using piracy to poke at developed nations and their allies. Piracy is back, and we may be dealing with this threat in the years to come.