The Red Sea crisis exacerbates global supply chain blockages

On December 18th, the Yemeni Housai armed forces once again launched attacks on two ships in the Red Sea waters; On the 19th, a senior official of the Yemeni Husai armed forces stated that attacks on ships sailing in the Red Sea will not stop. In fact, as early as the outbreak of the Israeli Palestinian conflict in October this year, ships related to Israel have become targets of attacks by the Houthi armed forces. In addition to Israeli merchant ships, the Yemeni Houthi armed forces have also targeted the United States and launched missiles and attack drones multiple times towards Israel and American warships in the Middle East.
To avoid regional operational risks, since December 15th, four of the world's top five container shipping companies, namely Mediterranean Shipping, Maersk, Delta Lines, and Herbert Shipping, have announced a suspension of Red Sea navigation. Some shipping companies have notified the suspension of cargo loading and booking of new cabins. There are also reports that COSCO Shipping, Dongfang Overseas, and Evergreen Shipping have verbally notified the suspension of cargo loading on the Red Sea route.
The Mandela Strait, which is the focus of this discussion, is located at a crucial node connecting the important shipping route between Asia and Europe - the Red Sea and the Suez Canal. It is a transportation hub connecting Asia, Africa, and Europe, and is one of the busiest shipping routes in the world. Calculated by trade volume, about 12% of the world's international trade volume passes through it.
The Red Sea is also one of the most important transportation routes for oil and liquefied natural gas in the world. On December 18th, the world's largest oil company, BP, announced that due to the deteriorating security situation in the Red Sea, the company will suspend all oil transportation through the Red Sea. Prior to this, several oil and shipping companies have announced the suspension of transportation and navigation through the Red Sea, including well-known companies from Germany, Norway, Belgium, and other countries. Due to the deteriorating safety situation of Red Sea shipping, global liquefied natural gas trade via the Suez Canal, a major waterway, has been affected. On the 18th, European natural gas prices rose in response, with Dutch TTF natural gas futures prices rising by more than 5% to 34.875 euros per megawatt hour, and ICE UK natural gas prices rising by more than 8%.

As numerous shipping giants bypass the Cape of Good Hope at the southern end of Africa, the shipping routes have increased by 40%, the sailing time has increased by 6 to 14 days, and transportation costs have jumped by 30%, directly leading to some shipping companies being forced to increase their freight rates. In early January next year, several European and Mediterranean routes have doubled their quotes, and the freight rates for the Far East to Israel related routes have even increased to $6000/FEU, while in the first half of December, the freight rates were only over $1000/FEU In the second half of the month (starting), it was only over $2000/FEU.

Research has shown that for every 10% increase in international trade logistics costs, trade flow will decrease by 20%. The Red Sea crisis will seriously affect the safety and normal operation of global industrial and supply chains, increase transportation costs and decrease profits for producers, and only accept price increases for consumers. This further suppresses consumer demand in the global market and has a negative impact on global economic development and trade relations. Sue Tpilovsky, a shipping expert at the Royal Institute of Logistics and Transport in the UK, pointed out that suspending the Red Sea route will have a serious impact on inventory levels, costs, and the overall dynamics of the supply chain. The increased costs of crew, fuel, and insurance may be passed on to consumers. On the 17th, the German Tesla News website reported that due to the escalating tensions in the Red Sea, Tesla electric vehicles have chosen an alternative route for sea transportation from China to Europe, bypassing the Cape of Good Hope.
Industry experts have stated that with the extension of routes, the transportation cost of electric vehicles will increase by about 20%. Moreover, the Red Sea and even the wider region have been recognized by the renowned international organization, the Joint War Risk Committee, as the most dangerous waters, which means that ships passing through these waters will also need to pay higher premiums, which will inevitably further increase international transportation costs.
At present, it is difficult to determine the duration of the suspension of the Red Sea route. Although there has not yet been a global trade storm, Maersk CEO Ko Wen sheng's statement indicates that the resumption of trade routes will take at least a few weeks. Therefore, at least this delay of 2 to 4 weeks in international trade will have the most significant impact on Europe - concerns about capacity shortages this winter have intensified, and spot shipping prices are expected to rise significantly. There is also good news, as data released on the 19th showed that the eurozone's CPI rose by 2.4% in November, the lowest level in over two years, and the widely watched core inflation rate has also fallen. The easing of inflation in the Eurozone has played a certain buffering role in the next step of rising prices, especially energy, in European countries caused by the Red Sea crisis. However, it is expected that European prices will continue to maintain a high consolidation situation due to the Red Sea crisis, and the pace of economic recovery in Europe remains difficult.
During the same period, the Golden Canal connecting the Pacific and Atlantic, along with the Panama Canal, which is on par with the Suez Canal, is associated with approximately 5% of global trade volume. Due to unprecedented drought and drought since records began in 1950, its capacity has significantly decreased. Starting from December this year, the number of ships that can be booked for passage on the Panama Canal per day has decreased from 32 in July to 22, and may further decrease to 18 per day by February next year. The decrease in ship traffic leads to a decrease in traffic efficiency, an increase in traffic costs, and an extension of waiting time. It is reported that the average waiting time for ships to pass has been extended from 4.3 days in early November this year to 11.7 days in December. In order to coordinate limited passage resources, the Canal Management Bureau has allocated some passage resources for auction, which has also boosted the passage fee market, forcing shipping companies to either pay high "queue cutting fees" or choose other shipping routes. Moreover, as the Central American region enters the dry season and the expected new rainfall for the 2024 dry season may become slim due to the El Ni ñ o phenomenon, the drought situation in the Panama Canal next year may be equally severe.
The global supply chain has been hit by factors such as geopolitical conflicts and extreme weather, and it can be foreseen that the characteristics of de integration and regionalization of the world economy and international trade may become increasingly evident in the coming year.