| 26 February 2024, Monday |

Red Sea crisis weighs on already disrupted global supply chains

Global supply chains continue to face relentless challenges without any relief. Initially, trade wars caused disruptions, and subsequent Covid-related restrictions further exacerbated the strain on these interconnected global networks.
Now, it is the Israel-Hamas war that is distorting them further.

Oil tankers are idling, and cargo ships are rerouting around Africa as Red Sea shipping comes to a complete stop as violence related to the Israel-Hamas conflict threatens to destabilise the world economy.
Global energy prices have jumped as tensions escalated around the vital shipping route.

“It’s more a risk factor that we had hoped had gone and had passed away, in that namely supply chain frictions is back in play. It depends now all on how long the tensions will last, on whether the Suez Canal will really be blocked for good,” said Carsten Brzeski, Chief Economist At ING Markets.

“But if you just look at the numbers: the Suez Canal accounts for more than 10% of global trade, more than 30% of container transportation. So if this canal is really blocked, it means bad news for world trade, bad news for the global economy and bad news for inflation,” added Brzeski.

Economic costs of Red Sea attacks

On Monday, two major European oil and gas companies said their tankers would steer out of the waters off the coast of Yemen, a necessary stop for ships that use the Suez Canal to connect Europe and Asia.

They follow prominent container shippers who left the region last week as Houthi rebels backed by Iran escalated their attacks in support of Hamas.

Businesses from BP to A.P. Moller-Maersk face longer trips.

More major firms have now decided to pause shipping through the Red Sea and instead use the longer and more expensive Cape of God route.

The disruption will weigh on firms that carry consumer products and commodities like coal, maise, and energy supplies.

Businesses that have decided to pause shipping through the Red Sea include CMA shipping, Euronav, Evergreen, Frontline, Happag-Lloyds, HMM, Maersk, MSC, Ocean Network Services and OOCL.

Gas prices in Europe rose by 13% in response to the clearest indication yet of an interruption in energy supplies since the start of the Gaza war.

Tuesday saw increases in Brent oil futures, which had risen as high as 3.9% on Monday.

While considerable wiggle room exists in the world’s supply chains to accommodate the current stresses on capacity, the abrupt shutdown of the Suez Canal in 2021 demonstrated the networks’ vulnerability when important linkages fail.

What is the world’s response?

Countries are under pressure to respond as international trade comes under threat.

The US Secretary of Defence announced that the US and its allies, which include the UK, Canada, France, and others, had decided to form a naval task force to fend against assaults on ships in the area.

India, too, has deployed ships to support the global response.

Lloyd J. Austin, U.S. Secretary of Defense, said: “This is an international challenge that demands collective action.”

The US Defence Secretary has called a ministers meeting to decide the next action.

However, it’s more complex, as the region’s Gulf allies have differing views on the best course of action.

No respite anytime soon

As Israeli warplanes continue to batter the shattered Gaza Strip, Yemen’s Houthis pledged to resist a US-led naval expedition and continue striking Red Sea cargo in support of the Palestinian enclave’s ruling Hamas organisation.

As major shipping firms are forced to reroute, Washington established a task group on Tuesday to protect Red Sea commerce, raising concerns about long-term disruptions to global trade.

Defying a US-led military campaign, the Houthis pledged to continue targeting Red Sea ships.

A little over 12% of all maritime traffic in the world travels via the Suez Canal and the Red Sea.

Since most Middle Eastern fuel is exported via the Strait of Hormuz, observers noted that the impact on the oil supply has been little thus far.

But shipping costs are sure to jump and add to inflation woes.

The sudden disruption in global supply chains added to the uncertainty when the world’s major central banks look at a return to normalising monetary policy.

“If it’s just short-lived, consumers won’t notice anything, maybe, except for higher energy prices. It’s going to be temporary,” said ING Markets’ Brzeski.

“If it lasts longer, we will see that inflation goes up again, not at the same magnitude as we had it in 2021. But clearly, we would then have a completely new narrative, no longer the narrative that inflation is on its way down but that inflation will rebound in the first month of 2024,” he added.

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