Freight, oil climb as Red Sea attacks shut down shipping

The Coalition accused Labor of “dithering” over a US request for support, which emerged just days before Congress voted to transfer three nuclear submarines to Australia, and linked the crisis to the spectre of rising energy costs.

“This trade route through the Red Sea is critical to oil supplies and that links directly with petrol prices … [that] clearly may go up,” Acting opposition leader Sussan Ley said.

Defence Minister Richard Marles and Mr Albanese have insisted Australia’s priority is to support the US in Asia.

Mike Green, chief executive of the US Studies Centre and a former national security official under George W. Bush, warned that a blocked Gulf of Aden and Red Sea “would have a very significant economic impact on the entire Indo-Pacific”.

The Albanese government’s insistence on saving the nation’s stretched military and naval resources for Asia-Pacific deployment rather than joining the US-led Red Sea force weakened the deterrence effect, he said.

“China, Korea and Japan all get half or more of their hydrocarbons through those shipping lanes, so three of Australia’s four most important trading partners will be affected profoundly,” Dr Green said.

British oil and gas producer BP joined a growing list of international shipping and energy companies to shun the vital Red Sea and Gulf of Aden corridor, which provides rapid passage between Europe and Asia via the Suez Canal.

The higher shipping costs to avoid the conflict and “war surcharges” will add to the price of imports into Australia, where containers are already being delayed by widespread strikes at stevedore DP World.

Oil prices jumped 4 per cent before later retreating as more energy companies and tankers said they would avoid the area because of attacks from the rebel militia, who support a ceasefire in Gaza.

‘Highly escalated security situation’

Denmark’s Maersk, Germany’s Hapag-Lloyd, the Geneva-based Mediterranean Shipping Company, France’s CMA CGM and Korea’s HMM are all avoiding the Suez Canal.

Maersk said it was deeply concerned about the “highly escalated security situation” in the southern Red Sea and adjacent Gulf of Aden after one of its vessels was targeted by a missile, while BP said it had decided to “temporarily pause all transits through the Red Sea”.

Maersk has told all vessels scheduled to pass through the Bab al-Mandab Strait, which connects the Red Sea with the Gulf of Aden, to pause their journeys until further notice.

Shipping lines carrying goods to and from Europe to Asia – which is used as a transit hub for goods coming to Australia – will need to travel south via South Africa’s Cape of Good Hope, which takes about 10 days longer if they avoid the Suez Canal.

While only about 16 per cent of Australia’s container imports come from Europe, according to Shipping Australia, an industry group that represents shipping lines, prices for some imports are expected to rise.

Paul Zalai, director of the Freight and Trade Alliance, which represents importers and exporters, said shipping lines were expected to pass on the cost of using more fuel if they went around the Cape of Good Hope as well as war surcharges.

“There will be extra costs,” Mr Zalai said, adding that any price increases would ultimately be passed onto consumers.

Deliveries of container goods to Australian ports are already being delayed by strikes at stevedore DP World. Maersk will impose an “emergency risk surcharge” of $US50 per 20-foot container for vessels travelling to Israel from January 8 to cover higher insurance costs.

The disruptions in the Red Sea could encourage companies to order goods well ahead of time, and store them in warehouses, which also pushes up costs, rather than relying on “just in time” deliveries, Mr Zalai said.

The Suez Canal Authority said on Sunday that 55 vessels had used the Cape of Good Hope route since November 19, compared with 2128 vessels using the canal over the same period.

Jim Wilson, spokesman for Shipping Australia, said that while the disruption to shipping routes was “not great for world trade”, it was not expected to be as severe as during the Suez Canal crisis in 1956. This is because there were now more nations producing goods and commodities, and more ships, while ocean freight rates – which soared during the pandemic – have returned to pre-COVID-19 levels.

“At the moment, freight rates are comparatively low, availability of ships are high, cargo demand is relatively low, and fuel prices are moderate,” Mr Wilson said. Prices of very low sulphur fuel oil, which is used by shipping vessels, are currently running at about $US600 per tonne, down from $US1100 per tonne in mid-2022.

“Re-routing will take capacity out of the market and will put extra costs into the market, so there will be upward pressure on freight rates,” Mr Wilson said.

Most of Australia’s bulk exports such as grain, coal and iron ore go to Asia, so are less affected than imports.

Just under one-third of the world’s global container trade travels through the Suez Canal, according to analysts at Morgan Stanley, who say the increase in shipping liners’ share prices over the past few days reflects expectations of rising prices for ocean freight. Shipping patterns are also being shaken up by a drought around the Panama Canal, which connects the Atlantic and Pacific Oceans, that has reduced water levels.

Mr Austin said the US would team up with Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles and Spain to create Operation Prosperity Guardian, a multinational security effort to ensure freedom of navigation through the Red Sea and Gulf of Aden.

“Countries that seek to uphold the foundational principle of freedom of navigation must come together to tackle the challenge posed by this non-state actor launching ballistic missiles and uncrewed aerial vehicles at merchant vessels from many nations lawfully transiting international waters,” he said.

Assistant Minister of Defence Matt Thistlethwaite said yesterday the government was still considering its position on the new naval force.

“Australia’s maritime support is very much focused on our region at the moment, the Indo-Pacific region, and we work very closely with the United States and other allies, predominantly on freedom of navigation exercises through the South China Sea,” he said.

Dr Green said the government’s basic premise – that unlike during the ’80s and ’90s when Australia could support the US in the Middle East at a “time when the People’s Liberation Army was not operating aggressively – is correct.

“However, couple that with the ADF and Navy’s stretched resources right now, and then it becomes a more plausible argument,” he said. “But I wouldn’t want your readers to think ‘we’re done in the Middle East’.

“There is definitely a deterrent signal in operating with partners in other parts of the world. [And] it doesn’t mean the Middle East is irrelevant to strategic competition in the Pacific.”

‘Not a crisis in US-Australia relations’

Dr Green said the US administration will “understand” Australia’s situation, but he cautioned that some in Washington will be watching for signs of a “pattern forming” under the Albanese government.

They will look at Australia’s decision to refrain from sending hardware to the Red Sea, as well as last week’s UN vote on Gaza.

“They’re unrelated – the Gaza vote and this decision in terms of the logic – but we’re talking about the same part of the world and the US asking for help.

“It’s not a crisis in US-Australia relations by any means, but it’s something DFAT and the embassy in Washington should be attentive to,” Dr Green said.

Brent crude, another important benchmark for oil prices, settled at $US77.95 a barrel. Crude prices are still down more than 20 per cent from the highs reached in September amid rising US shale supply and increasing scepticism around production cuts by the Organisation of the Petroleum Exporting Countries.

“We see a modest move in the 3 to 5 per cent range on West Texas and Brent overnight which is consistent with what we have seen [in the oil price lately]. So a bit of a bounce in late trading session doesn’t mean prices spike materially from here,” Mr Rennie said.

Westpac forecasts Brent will trade around $US77 a barrel by March 2024 and at $US85 a barrel by the end of next year, which is based on Saudi Arabia’s production cuts extending into the new year.