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Dhaka Tribune

Asian exporters face more Red Sea risks after attacks on Houthis

Middle Eastern oil exporters also finding it harder to sell to Europe as longer route via the Cape of Good Hope entails higher costs

Update : 29 Jan 2024, 01:19 PM

The supply of several key exports from Asia to Europe is being threatened by escalating violence in the Red Sea region after a new wave of attacks on Houthi militants launched by the US and UK.

Monday’s air strikes were the latest in a series of attacks that began with missiles launched on January 12 against the Iran-backed Yemeni rebel group, which has caused chaos for shippers worldwide by disrupting traffic through a Red Sea waterway that accounted for 12 per cent of global trade before the conflict, according to a recent South China Morning Post report.

Since the strikes began, the Houthis have vowed to step up their attacks on shipping vessels. While the violence has increased the prices and lengthened the delivery time of imports like oil to Asia, exports of a number of other key goods could also be curtailed, analysts say.

Asia’s manufacturing supply chains for spare parts, such as electronic goods and automobiles, to manufacturers in Europe are being threatened by the dislocation in the shipping route on the Red Sea, which has been ongoing since late December, said Cedomir Nestorovic, professor of geopolitics at Singapore’s ESSEC Business School Asia-Pacific.

“These industries follow Just-In-Time deliveries,” Nestorovic said, referring to the supply chain management approach that aims to increase efficiency by reducing inventory. “It is extremely important for them to get timely deliveries of spare parts,” he added, noting that some European firms have even set up manufacturers in parts of Asia such as China specifically to source their industrial goods.

Manufacturers will probably be able to tide over their short-term needs by tapping into stockpiles, but those could come under pressure unless the violence subsides and normal shipping movement resumes quickly, Nestorovic said.

The Houthi militants have been attacking ships plying on the Red Sea, which connects Asia to the arterial route to Europe through the Suez Canal, delaying the transit of goods by up to two weeks or longer.

The attacks have exacerbated traffic woes on the Suez Canal, where low water levels due to a drought in the region have reduced the number of vessels that can pass through the route since July.

The Houthi attacks – carried out in response to Israel’s bombardment of the Gaza strip – and the allied actions have provoked fears that the US will become further embroiled in conflicts in the Middle East and provoke a wider regional war.

Besides spare parts, exports of refined oil products such as gas oil, a variant of diesel, and kerosene to Europe from Asian refiners are also likely to be affected. Indian and Chinese refiners have been processing discounted Russian crude oil, which has been offered to them since the start of the Ukraine war.

“Asian refiners, particularly in countries like India that need to enter the Red Sea from the Bab el Mandeb strait, are running into difficulties marketing their diesel into Europe,” said Viktor Katona, crude oil analyst at data and analytics company Kpler.

The Bab el Mandeb is a strait between Yemen, Djibouti and Eritrea that is key to shipping between the Indian Ocean and the Mediterranean Sea via the Suez Canal.

“Europe remains net short of diesel, to the extent of some 650,000 barrels per day, and has been relying mostly on India and Saudi Arabia to meet its needs. From now onwards, that will change – the US has become the largest exporter of diesel to Europe and India’s exports have shrunk substantially,” he said.

At the same time, Middle Eastern crude oil exporters are finding it harder to sell to Europe because they have to take a longer route via the Cape of Good Hope instead of the Red Sea, which has added 60 per cent to 70 per cent to their shipping costs, “making freight too expensive for many,” Katona said.

Faced with a shrinking market, the Middle Eastern exporters are lowering prices for Indian and Chinese refiners, he added.

Oil prices rangebound

Oil prices were marginally lower in early trade on Tuesday as Brent Crude futures fell 14 cents, or 0.2 per cent to US$79.92 a barrel by 0125 GMT, while US West Texas Intermediate crude futures eased 0.1 per cent at US$74.66 a barrel.

The geopolitical tensions in the Middle East, as well as supply worries following an attack on a Russian fuel export terminal over the weekend, have kept oil trading in a narrow range in recent days as these have been partly offset by slow uptake from China.

“We are likely to see these flows [of refined oil products from Asia] having to go around South Africa, increasing the voyage time for products moving from Asia to Europe,” said Warren Patterson, head of commodity strategy at ING.

“The Middle East is also a growing supplier of refined products to Europe and, given the bulk of this will transit the Red Sea, these flows will also have to divert,” he added.

European markets for refined products are likely to be tight in the short term until trade flows adjust to longer shipping times, but concerns are likely to linger over whether there is sufficient tanker capacity for the longer routes, Patterson said.

Crude oil supplies to Asia have not been disrupted by the shipping woes because they are mostly routed through the Straits of Hormuz near Iran. But importers will have to contend with the risk of retaliatory attacks by Iran and Pakistan on each other’s territories in the last week spilling over, said Nestorovic.

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