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How the Red Sea Crisis Affects the Global Economy (Analysis)

LONDON (CNN) — The attack by Iran-backed militants in the Red Sea blocked one of the world’s major trade routes for most container ships carrying everything from car parts to Crocs from one corner of the globe to another. A corner.

A prolonged closure of the waterway connecting the Suez Canal could cripple global supply chains and push up prices for manufactured goods at a critical time in the fight against inflation. The Suez Canal accounts for 10% to 15% of global trade (including oil exports) and 30% of global container traffic.

The Houthis in Yemen claim to be retaliating for Israel’s war against Hamas in Gaza. The U.S. military and its allies have stepped up maritime security, but attacks continue: 21 Houthi missiles and drones were shot down late Tuesday.

U.S. and British forces upped the ante on Thursday, attacking more than 60 Houthi targets in what President Joe Biden said was a direct response to the threat posed to “freedom of navigation in one of the world’s most important waterways.”

As the crisis continues, risks to the global economy increase. Retailers have warned of delays and the cost of shipping goods is rising.

Tesla said it would halt most production at its massive electric car factory in Germany as the attack disrupted the supply of parts. Retailers warn of shipping delays and the cost of shipping goods by sea is rising.

Oil prices are also rising on concerns that a wider regional war could disrupt supplies – with Brent and WTI rising around 3% on Friday. Energy markets were already on edge after Iran seized an oil tanker in the Gulf of Oman on Thursday.

The World Bank warned in its semi-annual report released on Tuesday that disruptions to major shipping routes were “eroding slack in supply networks and increasing the likelihood of inflationary bottlenecks”.

Six of the top ten container shipping companies, namely Maersk, MSC, Hapag-Lloyd, CMA CGM, ZIM and ONE, have largely or completely avoided the Red Sea due to the Houthi threat.

The danger to crews, cargo and vessels forced shippers to reroute vessels around South Africa’s Cape of Good Hope, causing delays of up to three weeks.

This has significantly increased shipping costs, which may ultimately impact consumer prices. “The longer the shock lasts, the greater the stagflationary impact on the global economy,” Allianz chief economist Mohamed El-Erian wrote in X magazine last week, referring to low growth. Or a toxic combination of no economic growth and high inflation.

If the war between Israel and Hamas turns into a wider regional conflict, or if the Houthis decide to redirect their attacks against tankers and cargo ships transporting vital raw materials such as iron ore, grain and timber, the global economy will still be affected. . More serious.

“In the context of escalating conflicts, energy supplies may also be severely disrupted, leading to a rebound in energy prices,” the World Bank report added. “This would have a significant impact on the prices of other commodities.”

Capital Economics said threats to energy prices were the biggest risk.

“While the current shipping disruptions themselves are unlikely to change the downward trend in global inflation, a sharp escalation in potential military conflict could cause energy prices to surge, affecting consumers,” Simon wrote, adding that McAdam, an economist at the consultancy, and Lily Millard stood firm, in a report last week.

Oxford Economics also expects inflation to continue to slow, but still sees upside risks to prices. Ben May, the company’s head of global macroeconomic research, said in a Jan. 4 report that global inflation could rise if container shipping costs remain at current levels, nearly double their levels in early December. About 0.6 percentage points.

delivery delay

Some European carmakers have moved goods near the Cape of Good Hope. A spokesman for the European Automobile Manufacturers Association said: “This has resulted in increased costs and a delay of approximately two weeks.”

Retailers such as Swedish furniture company IKEA have warned of possible shipping delays and shortages of certain products. Similarly, British clothing retailer Next said last week: “If traffic difficulties in the Suez Canal continue, there may be some delays in the delivery of stock at the beginning of the year.”

Crocs also reports that items shipped to Europe are taking two weeks longer than usual to arrive. The footwear maker does not expect a “material impact” on its business at this time, but told CNN it will “continue to monitor developments closely.”

This isn’t the only one. Companies around the world are on tenterhooks, hoping the chaos will end soon, but if it doesn’t, they’ll start reworking the contingency plans they deployed last time during the pandemic.

Abercrombie & Fitch plans to use air freight when possible to avoid delays, according to an email to suppliers seen by Bloomberg. “We will change shipping methods and/or shipping routes when necessary to maintain the flow of goods,” a company spokesperson told CNN.

IKEA

IKEA warned that there could be shipping delays and shortages of some products due to disruptions from the Red Sea.Photo credit: Nathan Howard/Bloomberg/Getty Images

The situation is likely to worsen in the coming weeks as shippers rush to get orders out of China ahead of factory closures for the Chinese New Year holiday.

“The next five weeks leading up to the Lunar New Year on February 10 are critical for shipments,” said Philip Damas, principal at Drewry Supply Chain Advisors, in comments recorded and posted online on Monday. It will be very difficult for people and the shipping industry.”

However, he noted that overall excess shipping capacity means spot freight rates – the price for a one-time shipment of goods, rather than a pre-agreed price – “will fall again after the Lunar New Year”.

full crisis

In addition to higher spot rates due to the Red Sea attack, carriers have also added emergency surcharges.

Judah Levine, director of research at logistics firm Freightos, estimates the “total price” per container on major trade routes originating in Asia is between $5,000 and $8,000, 2.5 to 4 times higher than “normal” for this time of year. .

However, Levin noted that this number is still 45% to 75% lower than the “peak of the epidemic” in late 2021. At the time, demand for goods from homebound consumers was increasing but supply bottlenecks were running into them, from container shortages to port congestion.

port angel

December 4, 2023, Port of Los Angeles, USA. Photo credit: Eric Thayer/Bloomberg/Getty Images

The collapse of the Suez Canal exacerbates existing shipping problems, and traffic in the vital Panama Canal is already limited by a severe drought.

“Companies trying to move goods around the world are in a situation of total crisis: they cannot rely on the Panama Canal or the Suez Canal,” said Carolina Klint, European commercial director at professional services firm Marsh McLennan.

Before the attacks intensified in the Red Sea, some shipping companies that normally passed through the Panama Canal had rerouted to the Suez Canal, according to logistics company CH Robinson.

Matthew Burgess, the company’s vice president of global ocean services, said global shipping capacity will remain limited for some time. “Due to the additional time required to use the Cape of Good Hope route, there will be a shortage of flights between Asia and Europe for at least the next eight weeks,” he told CNN.

“As we have seen in previous global shipping disruptions, shortages of empty containers can occur quickly, adding further delays as companies may have to wait another two to three weeks to obtain empty containers.”

At least for now, major European and American ports such as Rotterdam, Los Angeles, New York and New Jersey have had limited impact from the Red Sea crisis. But they remain wary of the possible consequences.

“This is another disruption to the supply chain,” Gene Seroka, executive director of the Port of Los Angeles, told CNN. “This is not going to go away in three or four weeks.”

CH Robinson’s Burgess said even if the attacks stopped today and most ships could pass through the Red Sea, the previous effects would likely linger for some time. “The disruptions and delays that have occurred will take considerable time to resolve.”

Editor’s note: This article was updated on Friday, January 12.

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