Key Takeaways:
Houthi attacks on maritime vessels connected to Israel will persist due to the Gaza war, success in maritime disruption, and Israeli operations in Lebanon. Iran benefits from this disruption through regional support for its proxies, particularly the Houthis.
Russian and Chinese shipping companies are likely to exploit the situation, while Chinese firms will gain from Houthi assurances for safe passage, profiting from disrupted ports.
Oil markets remain largely unaffected unless further attacks or oil spills occur.
NATO allies, the U.S. and the UK are expected to increase military operations to degrade Houthi capabilities due to ineffective current defence strategies.
The ongoing insecurity provides opportunity for Turkish sales in the GCC, as well as Western firms.
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Context
Houthi attacks on maritime shipping continue in the Gulf of Aden, Bab el-Mandeb Strait, and the Red Sea following Israel’s war in Gaza after the 7th of October 2023. The Red Sea is a critical maritime corridor responsible for 15% of global maritime trade volume. Maritime vessels continue to use the Cape of Good Hope because the combined costs of crew bonuses, war risk insurance, and Suez transit fees make transit more cost effective than the Suez Canal, let alone the potential for being attacked.
Figure 1: Maritime chokepoints across the Arabian Peninsula
Impacts in the Middle-East
Maritime disruption is a serious threat to the economic diversification of the Gulf Cooperation Council (GCC), specifically the Kingdom of Saudi Arabia (KSA). Transit stops at Jeddah’s Islamic Port, responsible for up to 75% of Saudi maritime trade, are down significantly; transit stops fell from 218 (November 2023) to 124 (February 2024) at Jeddah. A rapid decrease in docking fees at Saudi ports jeopardises new capital investment in the logistics sector because of reduced business confidence. Foreign Direct Investment (FDI) inflows in Saudi National Industrial Development and its Logistics Program requires secure maritime routes along the west coast.
At present, GCC states openly avoid Western maritime initiatives to combat the Houthis because of the risk of Houthi attacks on Saudi ports, public support for the Palestinians in GCC countries, and a resumption of open combat amidst an ongoing ceasefire in Yemen.
Shipping Impacts
Across the global economy, container shipping companies continue to profit in the immediate term whilst hikes in shipping costs, re-routing, and port congestion continue to exert inflationary pressure on the construction sector and agricultural market in Europe. Shipping companies such as Maersk continue to report enormous profits, as container freight rates increased from 1, 406 (USD per 40ft container) to 5, 937 (USD per 40ft container) between November 2023 and January 2024 because of the increase in demand for available freight.
However, disruption extends beyond the Far East-Europe maritime corridor including exports between South East Asia and China. Red Sea disruption is causing increased maritime congestion at ports in Southeast Asia and therefore intra-Asian trade. Higher time lags for the delivery of goods risks inflationary pressure across the Asian electronics industry because of a possible contraction in the supply chain.
Oil Market Impacts
Oil markets continue to remain unaffected by Houthi attacks on oil tankers such as Sounion (21st August). The Bab el-Mandeb Strait accounts for 10% of oil transits, however, alternative routes exist and high oil production amongst non-OPEC oil markets, such as the U.S., Brazil, Canada, Guyana, and Iran (2023) has offset the impacts on potential bottlenecks by the Russo-Ukraine war. As such, OPEC producers have considerable idle production capacity reassuring oil markets that there remains an effective and guaranteed response to potential, albeit unlikely, future Houthi attacks on Saudi oil fields.
However, the unknown status of Sounion has the potential to shift investor confidence in oil markets. Aspides, the EU Mission to the Red Sea, confirmed the successful tug of Sounion to safety (16th September) although no port has accepted the oil tanker. Any major oil spill would highlight the potential for future economic and environmental disruption to a potential trade route that would affect investor confidence significantly.
Shift in Houthi Maritime Strategy
Houthi attacks on maritime shipping have evolved because of the Houthi-Iran relationship which has strengthened since 2015. Maritime attacks started during the first two years of the Saudi-led Coalition’s intervention in Yemen (2015-2016), yet strategic capabilities were limited to the Bab al-Mandab Strait rather than the Gulf of Aden and Red Sea.
However, Iran’s Islamic Revolutionary Guard Corps-Quds Force (IRGC-QF) supplied the Houthis with increasing volumes of ballistic missile components, UAVs, WBIED, and artillery. Houthi attacks have rebounded since the Stockholm Agreement (2020-2021) with the subsequent capture of Al-Hudaydah port in 2022, although attacks have levelled out following the UN brokered ceasefire (2022). The sophistication of Houthi attacks continues to increase with missiles and UAVs that are not new to the Houthis, having been used to attack Saudi and Emirati territory since 2015, although new to the Houthis in maritime warfare.
Increase in Targets
Israel’s war in Gaza has increased the number of targets for the Houthis. Before the war, the Houthis targeted the Saudi-led coalition warships, IRG and Saudi ports, and affiliated maritime vessels because of the support by Riyadh, Abu Dhabi, and allied forces for the Internationally Recognised Government (IRG). Following November 2023, the Houthis have targeted any vessels ‘loosely associated’ to Israel’s conduct in Gaza. Maritime vessels by ownership, intended port destination, investor board relations, or their neutrality on Israel’s operations are justifications for Houthi maritime attacks.
Russia & China
Initial Houthi attacks on Chinese and Russian-owned vessels have stopped. Aside from the Houthis’ attack on Panama-flagged Chinese-owned ship Huang Pu in March 2024, Beijing has avoided direct confrontation with the Houthis in the Red Sea. Chinese multi-vector diplomacy – as part of a bid to maintain relations with all non-state actors in the Middle East and North Africa – has safeguarded Chinese shipping from Houthi attacks. The Chinese foreign ministry emphasised the importance of safeguarding civilian ships but did not name the Houthis for escalating the Red Sea crisis and condemned recent U.S. - UK strikes against Yemen.
Chinese shipping firms have won significant economic opportunities because of Houthi assurances to Chinese commerce. Following October 2023, Zhong Gu Ji Lin and Zhong Gu Shan Dong relocated their ships to the Red Sea. Chinese shipping firms gained a price advantage relative to Western shipping firms since total insurance premiums and fueling costs are considerably lower for Chinese shipping companies using the Suez Canal than Western shipping companies using the Cape of Good Hope.
Russia is suspected of assisting the Houthis in targeting Western shipping through arms shipments and intelligence sharing. KSG’s intelligence collection process concluded this to be the case. Tehran has also brokered talks between Moscow and the Houthis to discuss the supply of Yakhont missiles (P-800 Oniks) to the group. Houthi officials have publicly stated that Russian oil tankers will not be targeted in the Bab el-Mandeb Strait.
International Response: U.S-Coalition & EU Maritime Operations
The response to Houthi attacks remains significant, albeit ineffective. Naval coalitions, the U.S. Prosperity Guardian (commenced in December 2023) and EU Aspides (February 2024), aim to deter and assist maritime vessels damaged by Houthi attacks. The U.S. and the UK, however, continue to rely on offensive action to complement defensive deterrence; in February 2024, the group struck 36 Houthi targets across 13 sites in Yemen.
NATO: The Southern Flank
The strong participation of NATO member states in Operation Prosperity Guardian and Aspides underlines NATO’s concern for its’ Southern flank, in large part because of energy security. NATO members continue to import more oil and gas from MENA since Russia’s invasion of Ukraine in February 2022 (see Figure 2).
Figure 2: Northbound oil and petroleum volumes transiting via the Suez Canal
and SUMED pipeline (2018-2023)
Maritime disruptions threaten the supply and price of petroleum to NATO economies. Expected cuts to the supply of petroleum by OPEC+ in addition to growing Ukraine scepticism amongst leading NATO states such as Germany (that has drafted significant military cuts to annual military aid to Kiev) adds considerable pressure on NATO member states to mitigate the impact of Houthi attacks on energy security.
Maritime disruption also threatens NATO’s economic security because of the economic shift to the Indo-Pacific, and the inextricable reliance that these Western Nations have on Indo-pacific markets. The Red Sea and Suez route is also essential for U.S. (and allied) theatre simultaneity between the Euro-Atlantic and Indo-Pacific. Simply by preventing, slowing or threatening the movement of forces, KSG wargaming demonstrated that:
Houthi disruption reduces the deterrence of a Chinese invasion of Taiwan (given a reduced ability of the U.S. to convincingly aid Taiwan)
Houthi disruption lowers U.S. allies in the Indo-Pacific’s confidence in U.S. security provision (Japan, Taiwan, Philippines, and Indonesia).
Reduces investor sentiment in South East Asia.
KSG consultations with government officials, military personnel and finance experts confirmed the findings of the wargames.
Forward Look
Houthi Attacks
KSG assesses that Houthi attacks will continue to target maritime vessels ‘loosely affiliated’ with Israel because of the ongoing war in Gaza, success of maritime disruption, and Israeli operations in Lebanon. Therefore, Houthi attacks on southern and central Israel are likely to increase.
Iranian Motives
Iran is likely to benefit from maritime disruption in the Red Sea in two ways:
Sympathy by Arab populations for Iranian proxies unable to demonstrate in support of Palestine because of security restrictions by Arab regimes in Egypt, Jordan, and the GCC.
Increased popular support in the Arab World for the Houthis inside Yemen against the IRG in Aden.
In the immediate term, the Houthis will likely increase missile attacks on southern (Eilat) and central Israel (Tel Aviv) as a response to the assassination of Hassan Nasrallah and a land invasion up to the Litani River. However, KSG notes that the assassination of Nasrallah significantly degrades Hizbullah and therefore Houthi capabilities in the long term because of the interdependence of the Iranian proxy network.
Russia and China
KSG assesses that Russia is likely to continue assisting the Houthis in a limited capacity because of the targeted attacks on Western commercial interests. Sustained attacks on Western shipping bring a moderate risk of inflation across European markets in agriculture and construction. The risk of inflation heightens domestic pressure across NATO member states to reduce military aid to Ukraine especially in Germany. Russia’s supply of weapons and intelligence to the Houthis may increase should NATO states permit Ukraine’s use of NATO missiles inside Russian territory.
KSG assesses that Russian and Chinese shipping companies will continue to rely on the Red Sea more than Western shipping firms, and will seek to exploit those economic opportunities presented by Houthi disruption. Houthi support for Russian and Chinese shipping companies continues to see an increase in Chinese tonnage via the Red Sea. KSG forecasts that the proportion of Russian and Chinese vessels returning to the Red Sea will rise. Russian and Chinese firms will be able to access lower insurance premiums and compete against Western firms in the shipping and construction sector.
KSG assesses that Chinese shipping companies are likely to expand initial efforts to service Red Sea ports. Chinese operators will increase their presence in ports negatively affected by Houthi attacks (Doraleh in Djibouti, Hodeidah and Aden in Yemen, and Jeddah in KSA). KSG assesses that security assurances will give Chinese shipping firms a competitive advantage over Western shipping firms should Houthi attacks continue into 2025.
Oil Markets
KSG forecasts that oil markets will continue to remain unaffected by maritime disruption assuming the status of Sounion is positive and Houthi targets remain the same. The Houthis continue to target bulk shipping containers rather than oil tankers with the exception of three oil tankers across Q2 and Q3 of 2024: Sounion, MV Blue Lagoon I, and MV AMJAD. Oil prices increased marginally after the attack on Sounion with recent spikes in oil prices related to a minor uptick in Chinese demand and production cuts by OPEC+ rather than business uncertainty around the Red Sea disruption. However, the status of Sounion will shape the relative weight investors give to ongoing maritime disruption. Any oil spill has the potential to alter the perceived importance of Houthi attacks for investors holding shares in oil and gas markets.
KSG assesses that Saudi Aramco will maintain a competitive advantage in the export of petroleum to European markets in the short run because of pipeline capabilities that bypass the Bab el-Mandeb Strait. Aramco will rely on the East-West pipeline which allows Aramco to minimise transit costs unlike its Emirati and Kuwaiti competitors that transit petroleum to Europe via the Cape of Good Hope. Chinese shipping firms are likely to exploit their immunity from Houthi attacks, and Saudi oil firms are likely to use Chinese containers to transport high volumes of oil via Red Sea terminals: Yanbu and Muajjiz. KSG assesses that any relative competitive advantage by Aramco over Emirati and Kuwaiti oil firms will depend on the efficacy of upcoming production cuts by OPEC+ (Iraq and Kazakhstan) and a Chinese fiscal stimulus. However, KSG notes that uncertainty over the Israel-Iran war has the potential to inflate oil prices should Israel target Iranian oil or nuclear fields with U.S. assistance.
European and Asian Markets
KSG forecasts that inflationary pressure is likely in European construction and agricultural markets, in addition to Asian electronic markets because of the transfer of higher shipping costs to the consumer. Hikes in shipping costs, re-routing, and port congestion will continue to exert inflationary pressure on those markets significantly affected by Red Sea disruption. Inflationary pressure will have a time lag to transfer to consumer prices.
Defence
Continued Houthi attacks and the limited success of Western operations reinforce existing trends among GCC states' to develop their military capability. Turkey has emerged as the premier partner for GCC states and KSG expects Turkish armament firms to continue their expansion into the Gulf armaments market. The ongoing insecurity provides opportunity for Turkish sales in the GCC, as well as Western firms. However, KSG consultations concluded that Turkey has (and will continue to have) an advantage in this market.
NATO
KSG assesses that NATO members will be pressured to increase military action against Houthi targets to improve energy security and ameliorate naval concerns. Houthi attacks will likely continue until the end of the financial year because of Israeli operations in Lebanon. KSG assesses that defensive alliances (Operation Guardian and Aspides) remain ineffective at present. Therefore, the U.S. and UK will likely increase offensive action against Houthi economic and military assets in Hodeidah and Sana’a.
Real Estate and Infrastructure
Real estate and infrastructure investments in the UAE and KSA are highly unlikely to be directly affected by Houthi attacks given the withdrawal of their armed forces. However, the reduction in maritime traffic is likely to lead to operational delays, and elevated risk premiums, which could deter financing. The uncertainty might also shift investors away from large-scale real estate investments, especially in Saudi Arabia’s ambitious mega-projects like NEOM, as prolonged instability could disrupt supply chains and project timelines. Furthermore, the tourism sector, which Saudi Arabia is aggressively developing through initiatives like the Red Sea Project, is likely to see continued negative impacts as security concerns deter international travellers - particularly when combined with Egypt’s own established tourism sector facing similar risks. This in turn may affect investor confidence in long-term hospitality investments.