The Red Sea crisis hits world trade: the cost of maritime transport soars by 170%

Attacks by Yemeni Houthi rebels on merchant ships heading to the Suez Canal through the Red Sea are causing one of the biggest disruptions to global trade since the pandemic. At least 18 shipping companies, including the Swedish giant Maersk, have already redirected their routes through South Africa to avoid passing through the strategic Gulf of Aden, an alternative change that significantly increases the cost and lengthens journeys between Asia and Europe. The impact on freight prices has been automatic: they have almost tripled since the attacks intensified in mid-December, which the rebel militia claims are aimed at punishing Israel for the war in Gaza. The escalation of transport costs threatens the global economy with a new inflationary setback, although experts are confident that the effect will be limited.

The increase in transport prices comes at a delicate time for the economic situation, marked by uncertainty and the hangover of an inflationary escalation (and its effects) that was beginning to subside. The load reservation platform Freightos.com estimates that transporting products in a 40-foot container (12 meters long, 2.3 wide and 2.4 high) from Asia to northern Europe now costs $4,000 (3,650 euros), 173% more than mid-December, reports Bloomberg. For cargo from Asia to the Mediterranean, the price rises 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 rise less, 55%, to $3,900.

Meanwhile, another of the benchmark indices, the Shanghai Containerized Freight Index (SCFI), which measures transportation rates for products imported from China, has increased 161% since December 15, going from $1,029 to $2,694 ( 2,500 euros).

All of these prices are roughly double what they were in 2019, before the pandemic hit global trade, but are still well below coronavirus highs. During the moments of greatest collapse that year, SCFI index prices exceeded $5,000, double current levels.

Even so, the impact of the current crisis in the Middle East is considerable. Shipping companies are changing their itineraries to avoid the Red Sea, a route through which between 12% and 15% of world trade circulates, often skirting the Cape of Good Hope. “A significant number of shipping companies, around 18, have already decided to reroute their ships around South Africa to reduce attacks on ships and limit the impact this has on seafarers,” said the secretary general of the International Maritime Organization. (IMO), Arsenio Domínguez, in a speech before the UN Security Council. For freighters this means adding 10 days on average to their trips and more spending on fuel. The crisis has caused a 25% reduction in commercial traffic through the Suez Canal.

Attacks against this trade route already began in November, shortly after Israel's ground invasion of Gaza following the terrorist attacks by the fundamentalist organization Hamas on October 7. And they have worsened since December. “The initial objective was ships linked to Israel, but based on the information we have received in recent events that no longer seems to be the case,” Domínguez warned. Since mid-November, 23 commercial ships have been attacked; The last one occurred last weekend, against the Danish giant Maersk, despite the fact that the United States has launched an operation to patrol the area.

Maersk announced this week that it will once again pause the routes that transit the Suez Canal, following in the footsteps of the German shipping company Hapag-Lloyd. Meanwhile, the 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 journeys are lengthened considerably by having to change itineraries.

Stock Market Rises

Investors interpret that by raising rates, they will achieve greater profitability even if transportation time and fuel costs increase. And that has been reflected in the stock markets. Goldman Sachs has just raised its recommendation to buy Maersk shares, which have risen 30% in the last month. In the case of Hapag-Lloyd, the shares have appreciated almost 50% in the same period.

Guaranteeing security in the area is very complicated. The Bab el Mandeb Strait, the main access 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 the drones launched by the Huthi militia, which opposes the official Government of Yemen and controls 30% of the territory. The objective of the rebels, whose main sponsor is Iran, is to punish ships that trade with Israel, although due to the latest attacks it seems that this objective is increasingly expanding.

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

“The longer duration of the trips, from 7 to 14 additional days depending on the route, translates into longer delivery times for importers and can congest the ports if, when the calendars are altered, they carry several ships at the same time, although for the moment We have no evidence that this is happening,” explains Judah Levine, Freightos main analyst on their website. The expert explains that shipping companies are adding ships to their rotations and sailing at higher speeds to compensate as much as possible for the increase in voyage duration.

“Even if there was congestion or lack of supplies, transportation companies are much better positioned now than during the pandemic,” he adds. Between 2021 and 2022 there were also supply problems, but because demand soared far above supply: “The industry now has a certain overcapacity,” that is, there is much more margin.

Michelin stops

But some tensions are already being felt in the industry. The tire manufacturer Michelin announced a week ago that it will make production stops at its four plants in Spain due to a lack of rubber, the key raw material for the manufacture of tires.

Transportation costs have a great inflationary impact. The bottlenecks recorded during the pandemic added one percentage point to inflation, according to the IMF. These costs represent 7% of the costs of long-distance imports under normal circumstances (in 2020 they shot up 25%). Rhys Davies, advisor at the consulting firm Flint Global, stated a few days ago in Guardian that the impact of the Red Sea crisis on inflation will probably be limited: “The effects creep into the economy quite slowly, up to 12 months after the peak (in freight costs), so if the disruption is limited Over time, as we hope, it will be offset by other disinflationary impacts.”

Follow all the information Economy and Business in Facebook and xor in our weekly newsle
tter

_