How big is the Red Sea crisis for the global economy?

Recently, the Red Sea has been in the spotlight. The frequent attacks by Yemen's Houthi armed forces on merchant ships "linked to Israel" in the Red Sea region have not only forced a number of shipping giants around the world to divert, triggering concerns about the stability of international shipping and the global supply chain. How important are the Red Sea lanes? What will be the impact on the global economy?

Detour to the Cape of Good Hope

International giants suspend Red Sea routes

The Red Sea is located between northeast Africa and the Arabian Peninsula, connecting the Mediterranean Sea through the Suez Canal in the north, connecting the Gulf of Aden through the Mandeb Strait in the south, guarding the traffic arteries of Asia, Africa and Europe, and is the only way for ships to and from the Atlantic Ocean (4.020, -0.04, -0.99%) and the Indian Ocean. It is also known as one of the busiest, most important and most controversial waterways in the world.

Now, a global shipping crisis is unfolding here.

Due to the intensive attacks by the Houthi armed forces on a number of merchant ships passing through the Red Sea Mander Strait to Israel, local time on December 15 to 16, including Swiss Mediterranean, Denmark Maersk, France's CMA, Germany and other global shipping giants announced to avoid the Red Sea route. Energy giants such as BP also pressed the "pause button" on oil tanker traffic in the Red Sea on Wednesday.

On December 20, the reporter learned from the world's largest maritime freight forwarder Kuexun Group that some ships of a number of shipping companies have chosen to detour the Cape of Good Hope, including Mediterranean Shipping, Masky, COSCO Shipping, Orient Overseas, Hapal-Lloyd, CMA, ONE, Hyundai Merchant Marine, Wanhai, Yangming Shipping, Nile Shipping, the President of the United States and so on.

Some freight forwarders told reporters on the 20th that they had received customer notices from shipping companies including Hapag-Lloyd and Evergreen Shipping in the past two days, announcing that they had changed from the original suspension of the Red Sea voyage to the Cape of Good Hope.

On the 20th, Maersk, the world's second largest shipping company by capacity, told reporters that for safety reasons, all ships that had previously suspended sailing and passing through the Red Sea region will now bypass Africa via the Cape of Good Hope. These vessels will continue to sail on the detour route based on practical operational feasibility. Maersk will be in touch with affected customers to provide more details.

As of Dec. 18, Maersk had about 20 vessels suspended from passing through the region, with half of them waiting east of the Gulf of Aden and the rest in the Red Sea south of Suez or the Mediterranean north of Suez.

Evergreen Shipping announced on December 20 that based on the safety inspection of cargo, ship and crew, Evergreen Shipping temporarily stopped receiving Israeli cargo and suspended the passage of Red Sea from now on. Vessels of the Red Sea regional route will sail to the surrounding safe waters to wait for notification, and evaluate whether to adjust the port of call according to the subsequent situation development; Ships on Asian routes to and from the Mediterranean, Europe and the east coast of the United States, which were supposed to pass through the Red Sea, will be diverted around the Cape of Good Hope on the southern tip of Africa to their destination ports.

Hapault also said that the situation around the Red Sea/Suez Canal was unsafe and the crew on board were at great risk, so it was immediately decided to avoid the Suez Canal and the Red Sea, to divert the ship around the Cape of Good Hope, and that the situation in the Red Sea would be reassessed regularly.

As the situation in the Red Sea remains unstable, more shipping companies are expected to join the "detours".

Rate increase

The offer in early January has doubled compared to the end of December

For international shipping companies that have suspended Red Sea routes, the best option is to re-route through the Cape of Good Hope, the southernmost tip of Africa.

According to energy intelligence agency Vortexa, if merchant vessels seek alternative routes, such as a detour around Africa's Cape of Good Hope, the journey time on major routes from the Middle East to Europe and from India to Europe would increase by 58 to 129 percent. The biggest increase in the time it takes for goods to reach their destination was on the Middle East Gulf to Mediterranean route, which increased by 129% from 17 days to 39 days.

Citic Futures also pointed out that the rerouting of cargo ships will increase the sailing time from the Far East to Northwest Europe by about 9 days, increase the time of a voyage by about 18 days, and reduce the turnover efficiency of ships by about 19%.

By adopting the detour scheme, the transport distance of ships and the transport market have increased significantly, and the turnover efficiency of ships has decreased, resulting in the shortage of shipping capacity on the Asia-Europe route in the short term.

Based on this, shipping companies have announced surcharges, with global shipping companies such as Maersk, MSC, CMA CGM and Hapag-Lloyd all saying they would impose additional charges on ships diverted by the Red Sea ship attacks. These include Transport Disruption Surcharge (TDS), Red Sea Surcharge (RSC), Emergency Operations Surcharge (EOS), Operations Recovery Surcharge (OCR), Peak season Surcharge (PSS) and more.

Maersk said it expects a total additional charge of $700 for a 20-foot standard container shipped from China to Northern Europe, including $200 for TDS and $500 for PSS, and $500 for each standard container shipped to the east coast of North America. This includes a $200 TDS payment and a $300 PSS.

Recently, a number of freight forwarders told reporters that they have received updates from a number of shipping companies on the spot market rates, and the rates of many European routes and Mediterranean routes in early January next year have doubled compared with the end of December.

In addition, ships that still sail through the Red Sea need to buy more expensive insurance. It is understood that the insurance market estimates that the war risk rate has increased from 0.07% to 0.1% to 0.2%. The increase in time, fuel, insurance and other costs will inevitably lead to higher freight costs. Xia Haofei, founder of Jian Yi Yun, told reporters that the result of the initial communication of the liner company is that the freight rate of the European route rose from 1500 US dollars/container to 3500 US dollars/container in mid-January.

In addition, MSC, the world's largest liner company, announced that from January 1, 2024, the freight rate on the Mediterranean route will be adjusted to $5,000 per container. Industry insiders believe that this shows that the market has a strong expectation of rising shipping costs, and some industry analysts such as Xeneta even believe that Asia-Europe route freight rates may rise by 100%.

While freight prices are rising, energy prices are also rising.

Currently, about a fifth of the traffic through the Suez Canal is oil, either by ship or through the Sumed pipeline to Egypt, with crude oil and refined products transported in both ways totaling nearly 9 million barrels per day, or about 12 percent of total seaborne trade. Recently, as the situation in the Red Sea heats up, the European natural gas price, which has fallen for more than a year, has rebounded, and the European natural gas futures rose 13%; International oil prices, which fell for two months in a row, also began to rebound.

The cost of food and clothing is increasing

'No respite' for global inflation

It is worth noting that the situation in the Red Sea has also triggered a series of spillover effects.

The Red Sea is one of the important shipping lanes connecting Asia and Europe, and many commodities, such as oil, gas, chemical products, metal ores, grain, etc., are transported through this waterway. Therefore, the Red Sea shipping security incident will also have a certain impact on the transportation and prices of some commodities.

Taking the electric vehicle transport industry as an example, there are media reports that in view of the increased tensions in the Red Sea, Tesla electric vehicles from China to Europe by sea have chosen an alternative route, namely a detour of the Cape of Good Hope. It is reported that with the extension of the route, the transportation cost of electric vehicles will increase by about 20%. Xia Haofei said that from the point of view of China's exports to Europe, in addition to new energy vehicles, there are a large part of electronic products, clothing, toys and other goods, the added value of these goods is not high, so the high probability will choose a detour.

In addition, according to sources quoted by the media, if the Red Sea tensions do not improve, India may consider an alternative route to ship Basmati rice (also known as basmati rice) along Africa, which could increase prices by about 15 to 20 percent. The route is also likely to affect India's exports of long-grain rice to Egypt and Europe.

Finally, almost all of these price changes are reflected in the cost of food and clothing, and there is "no respite" for global inflation.

The sudden disruption to global supply chains creates uncertainty at a time when the world's major central banks are considering normalizing monetary policy. There are comments that if the shipping disruption is only brief, consumers may not feel it significantly, except for a slight increase in gasoline prices. If this continues for a longer period, inflation could rise again in the first month of 2024.