Red Sea Crisis Affects World Trade: Sea Transport Costs Rise 170% | economy

Attacks by Yemeni Houthi rebels on merchant ships sailing through the Red Sea to the Suez Canal are causing the biggest disruption to global trade since the pandemic. At least 18 shipping companies, including Swedish giant Maersk, have already redirected their routes from South Africa to avoid passing through the strategic Gulf of Aden, an optional change that significantly increases costs and lengthens…

Attacks by Yemeni Houthi rebels on merchant ships sailing through the Red Sea to the Suez Canal are causing the biggest disruption to global trade since the pandemic. At least 18 shipping companies, including Swedish giant Maersk, have already redirected their routes from South Africa to avoid passing through the strategic Gulf of Aden, an optional change that significantly increases costs and lengthens journeys between Asia and Europe. The impact on freight prices has been automatic: They have nearly tripled since the attacks intensified in mid-December, which rebel forces claim are punishing Israel for the war in Gaza. Rising transport costs threaten the global economy with a fresh shock to inflation, although experts are confident the impact will be limited.

The hike in transport prices comes at a delicate time for the economic situation, marked by uncertainty and a hangover from the rise in inflation (and its effects) that was beginning to subside. Freight booking platform Freightos.com estimates that the cost of transporting products in a 40-foot container (12 meters long, 2.3 wide and 2.4 high) from Asia to northern Europe is now $4,000 (3,650 euros), up 173% since mid-December, Bloomberg reported. Reports say for cargo from Asia to the Mediterranean, the price has risen to 5,175 euros and some companies are charging up to $6,000 on routes that will depart in mid-January. From Asia to the US, rates are lower, rising 55% to $3,900.

Meanwhile, another benchmark index, the Shanghai Containerized Freight Index (SCFI), which measures transportation rates for products imported from China, rose 161% since Dec. 15, from $1,029 to $2,694 (2,500 euros).

All of these prices are nearly double what they were before affecting global trade in 2019, but are still below the highs of the coronavirus. During the biggest fall of that year, the price of the SCFI index exceeded $5,000, double the current level.

However, the impact of the current crisis in the Middle East is significant. Shipping companies are changing their itineraries to avoid the Red Sea, a route through which between 12% and 15% of world trade moves, often past the Cape of Good Hope. “About 18 shipping companies have decided to divert their ships around South Africa to reduce attacks on ships and limit their impact on seafarers,” said the Secretary General of the International Maritime Organization. (IMO), Arsenio Dominguez, in a speech before the UN Security Council. For freighters this means adding an average of 10 days to their trips and spending more on fuel. The crisis caused a 25% drop in commercial traffic through the Suez Canal.

Attacks against the trade route began in November, shortly after Israel’s ground invasion of Gaza following a terrorist attack by the fundamentalist organization Hamas on October 7. And they have gotten worse since December. “The initial intent was for ships connected to Israel, but based on the information we received in recent events that no longer appears to be the case,” Dominguez warned. Since mid-November, 23 merchant ships have been attacked; Despite the fact that the United States has launched an operation to patrol the area, the last one against the Danish giant Maersk took place last weekend.

Maersk announced this week that it will once again suspend routes transiting the Suez Canal, following in the footsteps of German shipping company Hapag-Lloyd. Meanwhile, French CMA-CGM announced a 100% fare increase on routes between Asia and the Mediterranean. Companies increase their rates when their cargo capacity and the frequency of trips are reduced, in this case, because the journey is lengthened significantly by changing the itinerary.

A boom in the stock market

Investors interpret that by raising rates, they will achieve greater profitability even as transit time and fuel costs increase. And its effect has been seen in the stock markets. Goldman Sachs has raised its recommendation to buy shares of Maersk, which has risen 30% in the past month. In the case of Hapg-Lloyd, shares have risen nearly 50% over the same period.

Ensuring security in this area is very complicated. Bab el Mandeb Strait, the main entrance to the Red Sea, between the Arabian Peninsula and the Horn of Africa, measures only 30 kilometers, so ships have to pass slowly and in line, with little ability to maneuver. Thus, they become easy targets for drones launched by the Houthi militia, which opposes the official Yemeni government and controls 30% of the territory. The aim of the rebels, whose main sponsor is Iran, is to punish ships that trade with Israel, although recent attacks appear to be broadening the scope.

To what extent could these disruptions change the supply of products in Europe? In the first ten days of the year, traffic in the Suez Canal has fallen by 28% compared to the same period in 2023, according to data from the International Monetary Fund (IMF) and the University of Oxford’s platform Portwatch. That is, 3.1% of world trade is being redirected from the Red Sea to other routes.

“Longer journey times, from 7 to 14 additional days depending on the route, translate into longer delivery times for importers and if calendars are changed, they are carrying multiple vessels at the same time, although we have no evidence at the moment. Not that this is happening,” explains Judah Levin, chief analyst at Freitos on its website. The expert explains that shipping companies are adding ships to their rotation and sailing at higher speeds to compensate as much as possible for increased voyage durations.

“Even if there is congestion or lack of supply, transportation companies are in a much better position now than they were during the pandemic,” he adds. There were also supply issues between 2021 and 2022, but because demand far outstripped supply: “The industry now has a certain overcapacity,” meaning, there is a lot more margin.

Michelin stops

But the industry is already feeling some of the strain. Tire maker Michelin announced a week ago that it would shut down production at four of its plants in Spain due to a shortage of rubber, a key raw material for tire production.

Transportation costs have a major inflationary impact. According to the IMF, the constraints recorded during the pandemic have increased inflation by one percent. These costs represent 7% of the cost of long-distance imports under normal circumstances (increasing to 25% in 2020). Rhys Davis, a consultant at consulting firm Flint Global, said a few days ago guardian That the impact of the Red Sea crisis on inflation will probably be limited: “The effects in the economy go through very slowly, 12 months after the peak (in freight costs), so if the disruption over time is limited, as we hope, by other disinflationary effects. will be offset.”

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