Mar Rosso

Red Sea crisis, what is (really) happening in 3 points

Red Sea crisis, the escalation is there and the chaos, for now, persists with obvious consequences for the whole world: what is really happening in this strategic region for trade? Weeks of attacks by Iran-backed Houthi militants on ships in the Red Sea have disrupted shipping in the Suez Canal, the fastest shipping route between Asia and Europe that carries 12% of global container traffic.
For the European economy, which is trying to avoid recession as it tries to curb high inflation, a prolonged disruption would pose a new risk to its outlook and could derail central banks' plans to start cutting interest rates.
interest this year.
However, the damage caused by trade deviations involves everyone, including China, and is already impacting various commodity sectors vital to the world's economies.
In 3 points, the summary of the alarm raised by the crisis in the Red Sea.
1.
Global and European economy: is there a Red Sea effect? The ongoing maritime crisis in the Red Sea, triggered by Houthi missile attacks in retaliation for Israel's war on Gaza, will get worse before it gets better, according to global freight platform Freightos.
In an informational webinar on January 18, the head of research of the Freight Rate Monitoring System, Judah Levine, explained that the knock-on problems for shipping companies and ports will continue, but may ease after the Chinese Lunar New Year.
Essentially, according to the expert, what is happening is that the longer delivery time (on average between seven and 14 days) imposed by the route around southern Africa means that empty ships and containers are unable to return to the ports of export to Asia, resulting in stockpiling or costly redistribution to other ships to fill orders.
This is then passed on to customers, resulting in prices rising to $4,000 per container on routes that were less than $1,000 per TEU just a few months ago.
According to Xeneta, freight rates between the Far East and Northern Europe have increased by 124%.
As a result, all goods and cargo traveling in containers will not only reach their destination late, but the price will now reflect these increased costs.
This will mean higher prices on shelves which, in turn, will lead to an overall increase in inflation.
So far, however, there is warning but not alarm.
The price of oil, the most obvious channel through which the problems of the Middle East could affect the economies of Europe and beyond, has not yet taken off.
As International Energy Agency Executive Director Fatih Birol told Reuters this week, crude supplies are solid and demand growth is slowing.
Furthermore, a modest economic picture also makes it more difficult for companies – especially in Europe – to pass on to consumers any cost increases they encounter, for example by having to change route around Africa.
However, there are risks that something really goes wrong and they especially threaten the old continent on the energy side.
Using an IMF estimate of the freight impact, Oxford Economics projected that increases in container shipping prices would add 0.6 percentage points to inflation a year from now.
The ECB expects euro zone inflation to fall from 5.4% in 2023 to 2.7% this year.
“While this suggests that a prolonged closure of the Red Sea would not prevent inflation from falling, it would slow the rate at which it returns to normal,” Oxford Economics concluded.
The focus is maximum on gas and oil, also considering that in recent days Qatar has stopped some LNG tankers heading to Europe.
It is also important to note that European countries have imported more oil from Middle Eastern producers through the Suez Canal since the EU imposed sanctions on Russia over the conflict in Ukraine.
According to transportation data analyst Vortexa, a diversion resulting from the Red Sea disruptions could lead to a 58% to 129% increase in the time normally taken by oil tankers to travel along the world's major routes, including India to Europe and the Middle East to Europe.
2.
China is vulnerable: this is how the Red Sea strikes the dragon Chaos in one of the world's busiest shipping lanes has highlighted the vulnerability of China's export-dependent economy to supply bottlenecks and demand shocks external.
In a speech at the World Economic Forum in Davos, it is no coincidence that Prime Minister Li Qiang stressed the need to keep global supply chains "stable and fluid", without specifically referring to the Red Sea.
Han Changming, a Chinese businessman, exports cars to Africa and imports off-road vehicles from Europe.
Before the Red Sea COAS he told Reuters that the cost of shipping a container to Europe has risen to around $7,000 from $3,000 in December.
The disruptions have wiped out our already meager profits, he added, noting that rising shipping insurance premiums are also taking a toll on Fuzhou Han Changming International Trade Co Ltd, the company he founded in 2016.
Some companies, such as US-based BDI Furniture said they were relying more on factories in places like Turkey and Vietnam to mitigate the impact of the disruptions, adding to recent moves by Western countries to reduce dependence on China amid geopolitical tensions.
According to the Middle East Institute, a Washington-based think tank, the Suez Canal is a primary route for China's westward shipments of goods, which comprise about 60% of its exports to Europe.
The stakes for the dragon are high: the danger is that other companies will follow suit and re-evaluate their risk reduction strategy, potentially opting to move production closer to home (and therefore not to China), an approach known as “near-shoring”.
Some companies' discomfort with the Red Sea disruptions is ultimately compounded by the fact that many are facing a logistical challenge ahead of the Lunar New Year in February, when some 300 million migrant workers will go on holiday and nearly all factories in China will close, creating a rush in the previous weeks to receive the shipped goods.
3.
Is food inflation the next global “bomb”? Chaos in the Red Sea is starting to disrupt shipments of agricultural products from coffee to fruit and threatens to halt the slowdown in food inflation.
Ships loaded with food are among those avoiding Houthi attacks in the main waterway by sailing around Africa.
But unlike gas, oil and consumer goods cargoes that have been affected, longer shipping times risk making perishable foods unsellable.
This is scaring the industry.
Italian exporters worry that kiwis and citrus fruits will spoil along the way, Chinese ginger is becoming more expensive and some shipments of African coffee have suffered short delays.
Grain is being diverted from the Suez Canal and a livestock transporter bound for the Middle East has changed course, Bloomberg reported.
Italian exporters, who sell about $4.4 billion of agricultural products to Asia, are worried that turning to Africa will damage freshness and increase costs for fruits such as apples, kiwis and citrus, said Massimiliano Giansanti, president of the agricultural group Confagricoltura Although the impact is limited so far, it reminds us how fragile food supply chains can be.
Shipping problems are also a concern for European exports of products such as pork, dairy and wine, as well as imports of tea, spices and poultry – although the extent of this impact is unclear – according to CELCAA, which represents agri-food traders.
Furthermore, countries such as Uganda and Vietnam account for a large share of Europe's coffee imports, and the Red Sea is a crucial artery for this trade.
Majid Mahboob Paracha, director of international trade at Shahpur Industries which sells Pakistani pink salt, said his customer base has shrunk because buyers are unwilling to pay higher freight rates, costing to ship a container to Europe which have quadrupled compared to the norm.
There is no doubt that the global food sector is under stress and the price alarm is realistic.
Also for Europe.

Author: A.W.M.

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