Red Sea Crisis: How Shipping Woes Hit E-commerce
The global shipping market has been impacted by geopolitical tensions, particularly in the Red Sea crisis. Following the start of the Israeli attack on Palestine towards the end of 2023, the Houthi group, based in Yemen, attacked multiple commercial ships near the southern tip of the Red Sea. Since November 2023, there has been an increase in these attacks, which have persisted into the new year.
This poses a serious threat to international trade, as 10–15% of it travels via the Suez Canal, a sea-level passage that links the Red Sea and the Mediterranean Sea. The Smart Cube's director of supply chain intelligence and procurement, Ritesh Kumar, offers some observations on the circumstance. All this led to shipping companies altering routes to avoid the Suez Canal and the Red Sea. Detouring around the Cape of Good Hope has extended voyages and increased shipping times by at least 14 days. Trade flows between Europe and Asia, which primarily ship through the Suez Canal, have been particularly affected. Although most international trade is not directly affected by the situation in the Red Sea, local shocks can indirectly affect other countries, potentially affecting trade flows and shipping costs.
How Is The Red Sea Crisis Impacting Supply Chains?
The Red Sea crisis has caused global shipping disruptions, with companies relocating to a longer route around the Cape of Good Hope and West Africa, causing delays of seven to 10 days. Freight costs have risen sharply, with spot rates on the China to Mediterranean route rising by over 70%. This financial impact will affect organizations' supply chains. The disruption is expected to impact the price of various commodities, including oil, which is one of the world's most important routes for oil shipments. The ongoing disruption and vessel redirection will cause delays in oil shipments, leading to a rise in the commodity's price.
How Is Red Sea Crisis Affecting Shipping Costs?
Container shipping costs have risen by two-and-a-half to three times since early December, with prices surging nearly five-fold along routes through the Suez Canal, particularly from Asia to Europe. Costs from China to the U.S. have also more than doubled. Ocean spot rates, one-time fees paid by shippers to transport a load at current market pricing, have soared due to the Red Sea crisis. West Coast and East Coast saw a significant spike of approximately 140% and 120% respectively compared to November 2023.
The extent of this increase in spot rates is unclear, and there is no resolution in sight. Costs along other routes could also rise as capacity is redirected, potentially exacerbated by shipping orders being rolled forward in anticipation of longer delays.
Will the Red Sea Crisis Fuel Inflation?
The Red Sea crisis is expected to impact shipping costs, potentially rekindling inflation concerns. However, cyclical factors could either mitigate or reinforce the upward pressure on prices. During weaker consumer demand, shipping costs could be absorbed by profit margins rather than reflected in higher output prices. The reductions in global shipping capacity risk interrupting the disinflationary trend and pushing traded goods prices higher for a period. J.P. Morgan Research estimates that disruptions could add 0.7 percentage points to global core goods inflation and 0.3 percentage points to overall core inflation during the first half of 2024 if container shipping costs persist.
This could also impact the global industry, reinforcing concerns that the global industry is starting to weak and could struggle to post a modest 1–2%ar gain in the first half of the year.
How Have The US And Other Western Nations Responded To Red Sea Crisis?
The US has repelled attempts to board cargo ships and shot down Houthi drones and missiles. The US has assembled a coalition called Operation Prosperity Guardian (OPG) to safeguard vessels in the southern Red Sea. The coalition includes the UK, Bahrain, Canada, France, Italy, the Netherlands, Norway, Seychelles, and Spain. Houthi leader Mohammed al-Bukhaiti has threatened to confront any US-formed coalition. The direct military threat is limited, but there are concerns that a successful Houthi strike could escalate the situation and imperil peace talks between the rebel group and Saudi Arabia.
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