Bogdan Maioreanu, eToro analyst: Red Sea trade disruption is not a new supply chain crisis

The Middle East tensions are indirectly affecting other regions of the globe, Europe included. The Red Sea freight route, one of the most important for the freight of goods from Asia to Europe traffic, is affected by the Houthis rebels attacks on ships. With the 2021 supply chain crisis, including the Suez Canal obstruction, still fresh in our minds, is 2024 cut to repeat history?

Shipping accounts for around 80% of global trade and the disruption is real. Since November 2023, Iran-backed Houthi rebels in Yemen have repeatedly tried to board vessels or hit them with missiles. The situation led to a steep increase in insurance costs for companies. Insurance broker Marsh says rates have risen as much as 70-fold since early December. The premium to insure a $100m container ship has jumped from $10,000 to about $700,000. According to the BBC. For example, Denmark-based Maersk and Germany’s Hapag-Lloyd — two of the world’s largest container lines — have already decided to reroute around South Africa, 10 days longer, to protect their crews, ships and cargo. This is why we have already seen a steep decrease in the number of ships and the volume of freight passing the Bab-el-Mandeb strait and the Suez Canal. Compared with the weekly average last year the volume through Suez Canal is down to 55% according to IMF Portwatch. According to the same source, about 11% of the maritime freight volume is passing through the area.

The need to circumvent the hot zone led to an increase of the freight costs too. The Shanghai Containerized Freight Index increased from below 1000 EUR in December last year to over 3500 EUR today. And this will spill over Asian and African import goods prices and will lead to a surge in inflation. Imports from China except Hong Kong were almost 32% of the EU imports from the main 10 partners in November 2023 according to Eurostat. If we add the imports from India, South Korea and Japan the total jumps to 43% of the imports. In 2022 China amounted to almost 21% of total EU imports. For Romania, Chinese imports were also 20% of total non-EU imports.

But there is another side of the story. Longer routes will increase the risk of losses in shipments of fresh fruit, live animals and other perishable goods, which means extra costs for some businesses. Also, shipments between Europe and Asia and Africa will be delayed due to lengthening of the trade routes. Therefore we might see some products missing from the shelves or an increase in prices.

So far the impact is limited, but are we cruising toward a new supply chain crisis like in 2021? Most likely not. Then we saw an explosion of global consumer goods demand at the same time as unprecedented global supply disruption. Now the impact is more localised to Europe, which accounts for only around 25% of the global GDP. It is more specific to container freight, with little impact on bulk or air freight rates so far, especially with China commodities demand weak. Also, this time the demand is very different from 2021, with the EU manufacturing PMI currently at a recessionary 44, and producer prices falling 9%. In addition, freight capacity is less of a problem now.

Following the 2021 crisis, the freight industry ordered new ships. This new capacity amounts to 25% of current capacity and is due to be delivered in the next three years. The data suggests that despite the disruption, this time we will avoid another major supply chain crisis like the one in 2021, which was a serious obstacle to restarting economies after the pandemic and led to an inflationary spike that created major problems for central banks.