Red Sea Disruption Could Have ‘Significant Consequences?’

Paresh Jadhav

12 months ago

Recent attacks on ships in the Red Sea have caused several of the world’s leading shipping companies to either temporarily halt journeys or take longer routes, potentially causing delays and increasing costs.

Increased inflation would thwart efforts by central banks to ease monetary policy and make their job of managing inflation easier.

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Global growth

Shipping is a cyclical industry, with earnings fluctuating in tandem with global economic expansion. Recently however, this growth trend has been temporarily derailed due to several factors, such as the Covid-19 pandemic, Russia’s annexation of Ukraine and significant central bank tightening measures.

Red Sea disruption could become another headwind to global economic growth; and if Iran-backed Houthi rebels step up attacks against oil tankers and bulk carriers carrying raw materials like iron ore, energy prices could skyrocket and reignite inflationary pressures.

Maersk, MSC, Hapag-Lloyd, CMA CGM, ZIM and ONE — six of the world’s biggest container shipping firms — have been forced to temporarily suspend some shipments and divert ships away from a strait linking Arabia with Africa, increasing journey times and costs as capacity is restricted; retailers such as Next Plc and M&S have warned they might pass some of this cost onto customers.

Shipping

The Red Sea is an essential trade route, carrying around $1 trillion annually through it. But due to attacks by Iran-backed Houthi militants in Yemen on vessels belonging to some of the world’s biggest shipping companies, some have avoided its waters altogether by rerouting vessels around Africa instead – this has caused ocean freight rates to spike significantly and inflation concerns are being raised as a result.

Alternative routes to Europe and Asia typically take longer, adding a few weeks to delivery times. Some carriers have also instituted surcharges for fuel costs.

Thomas O’Brien of Leeds-based family business Boxer Gifts has seen costs soar 250% due to this disruption, which he sees as having serious repercussions for consumers and businesses reliant on just-in-time deliveries; security risks increased through insurer premium increases could hit business that rely on just-in-time deliveries; protracted shipping disruption would push up inflation above central bank targets even more rapidly than before.

Oil

Thomas O’Brien runs family-run company Boxer Gifts, designing games and seasonal presents for customers. Boxer relies heavily on global shipping – yet attacks against ships in the Red Sea has forced traders to use longer routes around Africa that extend shipping times significantly and increase freight rates significantly.

Shipping companies have suspended journeys through the strait in response to Houthi attacks, while an international task force to stop militants was formed to counter them. But long-term disruption could have “significant repercussions”, warns Vincent Clerc of Maersk.

Shipping route disruption could result in product delays and higher costs for consumers living in low-income countries, adding inflationary pressure as central banks’ tight monetary policies take hold. A prolonged disruption could also increase volatile oil prices leading to global economic slowdown according to HSBC economist Simon Williams.

Middle East

Houthi rebel attacks on shipping in the Red Sea pose a grave risk to global trade, since 12 percent of oil passes through Bab el-Mandeb strait annually, as do over one trillion dollars’ worth of goods; making this region an essential element of our global economy.

Shipping companies are already bearing the brunt of rising fuel and insurance costs due to this dispute, yet its ramifications could have even greater repercussions for global economic stability if allowed to persist further.

Tesco Plc, Next Plc and Marks & Spencer Group Plc retailers are suffering due to shipping delays and higher shipping rates that increase product costs.

Maersk, the world’s leading container shipping giant, has been forced to reroute ships away from the Red Sea due to attacks by Yemeni Houthi rebels and has decided instead to travel around Africa instead of re-establishing safe passage through it. Re-establishing safe passage could take months and have “significant repercussions for global economic growth”, it says. Meanwhile, the U.S. is working toward building up a multinational force to protect ships in this area but has had limited success so far.

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