08-Jan-2024
Breaking News:
Red Sea Crisis and Impact on Global Trade
Major global shipping companies are adjusting their routes away from the Red Sea in response to recent attacks on commercial vessels. These incidents targeted foreign-owned commercial and containerized vessels navigating the Bab al-Mandab strait, a critical pathway to the Suez Canal essential for transporting goods, particularly oil and liquefied natural gas.
The ongoing Red Sea Crisis centred around attacks on commercial vessels in the Bab-el-Mandeb strait, has prompted significant shipping firms to halt shipments, sparking concerns about potential repercussions on global trade. The redirection of vessels around the Cape of Good Hope due to the crisis is significantly increasing shipping distances and costs from Asia to Europe. This disruption may contribute to renewed inflationary pressures on the global economy.
The Red Sea trade route is pivotal, with the Suez Canal handling approximately 12% of global trade, including containerized goods and oil shipments from the Persian Gulf to Europe and North America. Rerouting ships around the Cape of Good Hope adds substantial distance, approximately 3,000-3,500 nautical miles, and 10 days to shipping durations, potentially impacting turnaround times at key European ports. This redirection incurs additional costs, including up to $1 million in extra fuel for each round trip between Asia and Europe, alongside rising insurance costs.
The impact on global supply chains is significant, especially for consumer goods, with expected delays and increased shipping rates. Concerns also arise about potential rises in oil prices, impacting inflation. Delays are anticipated for tankers carrying diesel and jet fuel, as well as container shipments of various goods. Certainly, global oil prices have increased due to Red Sea disruptions, but they are still lower than in recent months.
Shipping costs play a significant role in inflation, as observed during the COVID-19 pandemic, where supply chain bottlenecks contributed about 1 percentage point to inflation, with freight costs comprising around 7% of long-haul import expenses. The impact on inflation is expected to be limited if the disruption is time limited. The current crisis occurs in a different economic context than the 2021 Suez Canal blockage, with the world experiencing cooling inflation as central banks implement higher interest rates to address demand.
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