Attacks in the Red Sea linked to the Israel-Hamas war will cause shipping delays and drive up the price of goods, bringing a new inflation risk to the global economy.
Shipping companies are diverting cargoes after Iran-backed Houthi militants attacked commercial vessels plying the Red Sea. The vessels will have to sail around Africa instead of taking the shorter route through the Suez Canal.
According to data gathered by the logistics giant Kuehne+Nagel through early Wednesday, 103 container vessels were rerouting from the Red Sea around Africa. Companies are also starting to look at using rail and air routes instead as the waterway is deemed too perilous to pass.
This rerouting will mean higher shipping costs and longer delivery times, say Bloomberg Economics analysts. The Red Sea is one of the world’s most important shipping lanes, carrying about 14% of global maritime trade. Among the economies most affected by the trade disruptions would be Greece, Jordan, Sri Lanka and Bulgaria, the analysts said.
The cost of insuring vessels that will transit the Red Sea jumped again this week after mounting attacks in the region forced some ships to avoid the vital waterway.
Cover has now surged to about 0.5% of the value of a ship’s hull, according to three people involved in the market. That’s a sharp increase from earlier this month, when costs were about 0.1% to 0.2% of the hull value.
So-called war risk insurance is generally quoted as a percentage of the value of the ship for the period that a vessel is trading in risky areas. That figure has climbed more than tenfold from before the attacks escalated in earnest. On Monday, London insurers expanded the regions within the Red Sea that are designated as risky — a move that effectively boosts the area in which war cover is needed.
AP Moller-Maersk and most of the other top container shipping lines have said they will pause shipments through the area. Crude prices rose on Monday when the oil and gas giants BP and Equinor said they would take a similar approach — adding to global inflation risks. Many are choosing to sail thousands of kilometres around the tip of Africa instead.
Benchmark Brent crude oil climbed towards $80 a barrel on Wednesday after rising more than 3% in the previous two sessions, reflecting the concern over shipping.
The Red Sea is a vital trade conduit for oil, and has gained importance for barrels from Russia en route to Asia after European buyers shunned them because of the invasion of Ukraine.
Asia-Europe trade hit
As well, more than 20% of the containers passing through the Suez Canal carry goods from Asia to European and Mediterranean nations, according to the logistics intelligence firm project44. Diverted ships would have to sail around Africa to reach Europe, adding a minimum of seven to 10 days to the journey, they estimated.
Still, there are reasons to believe the disruptions will have only a moderate economic impact, Bloomberg Economics said.
While the cost to send a 40-foot container from Shanghai to Rotterdam has jumped 44% from the end of October before the attacks began, and by more than 26% to Genoa, they remain well below levels in 2021 and 2022 during the pandemic, data compiled by Bloomberg show.
The effect on inflation in Europe will be limited as markets and shipping companies adjust to the new situation, according to Bloomberg Economics.
Chinese exports have also been weak all year and could slow next month, as factories typically wind down early in the year due to the end of Christmas demand and before the Lunar New Year break in Asia. However if the disruptions continue or worsen, it could put more downward pressure on that trade.
Exports from China to Europe fell in each month since June, while export growth from Japan to Western Europe slowed to 1.1% in November from a year earlier.
The US has announced a new task force intended to protect commercial vessels traveling through the Red Sea. Countries participating include the UK, Bahrain, Canada, France and Italy. Both Japan and China have military bases in Djibouti, near the Red Sea, but have not said they would take part in the naval effort.
“The best the world can hope for may be a moderate risk scenario, in which shipping is diverted for at least several months until the security situation in the Red Sea stabilises,” the Bloomberg Economics analysts wrote.
This may not be the optimal scenario but it is happening at a time when there is more shipping capacity and it’s better than some of the alternatives, they added.