The stock market is breathing a sigh of relief after a raft of shipping companies confirmed they will now be avoiding a risky route through the Red Sea following an attack on a ship by Yemen’s Houthi rebels last month.
Danish company A.P. Moller-Maersk halted the transit of its commercial ships following the attack on a vessel at the end of December—a pause that turned indefinite on Tuesday when Maersk issued a notice re-routing ships through the Cape of Good Hope in South Africa “until further notice.”
“An investigation into the incident is ongoing and we will continue to pause all cargo movement through the area while we further assess the constantly evolving situation,” Copenhagen-based Maersk said in a statement.
The move lifted Maersk’s shares, which gained 6.4% and 5.1% on Tuesday and Wednesday, respectively. The company’s shares were up nearly 3% on Thursday at noon.
Since the Houthis began stepping up attacks in December—bringing the tally to at least 23 now—several other companies have also taken measures to put alternate shipping paths in place and avoid the Red Sea and Gulf of Aden region.
Germany’s Hapag-Lloyd has said it will avoid the region until at least Jan. 9, leaving two of the world’s leading shipping companies to find alternate routes.
Early to follow suit were the likes of Mediterranean Shipping Company (MSC) and CMA CGM, which began diverting shipments last month when attacks began.
The latter, a French shipping group, said it would therefore have to hike rates as much as 100% from Asia to the Mediterranean region from Jan. 15, CNBC reported Wednesday.
Collectively, the companies that have halted Red Sea trade for the time being account for upwards of 40% of the vessel market share.
“Due to this incident and to protect the lives and safety of our seafarers, until the Red Sea passage is safe, MSC ships will not transit the Suez Canal Eastbound and Westbound,” MSC said in a statement in December.
The same month, BP became the first oil company to temporarily suspend the transit of its tankers through the Red Sea—indicating the increasing need for greater maritime security in the region.
Impact of the re-routing
The trade route through the Red Sea connects to the Suez Canal, which handles nearly a third of all global container ship cargo, making it crucial for shipments between Europe and Asia.
Prolonged disruptions in trade could result in possible increases in shipping and delivery costs just as economies started seeing some success in cooling inflation down.
“The sailing time increases when going via Cape of Good Hope instead of Suez Canal,” a Maersk spokesperson told Fortune via email. “This means more fuel consumption, longer deployment of assets for a journey (daily costs for vessel, containers, crew). The extra costs can be compensated by surcharges for transports on the affected trade lanes which we have announced already.”
Still, analysts don’t expect the scale of disruption to be like that seen during COVID-19, which caused freight rates to surge. Goldman Sachs expects Maersk’s 2024 base case to be “a ‘muddle-through’ scenario instead of deepening price competition,” according to CNBC.
What prompted the Houthi militant attacks?
Iran-backed Houthi militants in Yemen began targeting vessels with links to Israel in response to the conflict in Gaza.
Such attacks have happened a handful of times in the past, however, their frequency has increased since the start of the Israel-Hamas war.
In response, the U.S. and its allies kicked off Operation Prosperity Guardian around mid-December.
Warships have since begun patrolling the area and the U.S. forces have even opened fire on Houthi rebels, killing many of them, the Associated Press reported.
American Defense Secretary Lloyd Austin said in a December release that Houthis’s violence at sea “threatens the free flow of commerce, endangers innocent mariners, and violates international law.”
A group of countries including the U.S., U.K. and Japan also issued a warning Wednesday to Houthi rebels on possible military action if they don’t stop their attacks.
