Aerial view of the Bab el-Mandeb Strait, where the ships were attacked. Photo: CHP
When Joe Biden launched the missile, the US-led naval coalition to protect container ships from attacks by Houthi rebels in the Red Sea was expected to end disruption to global trade.
Instead, the problems have only gotten worse since the initiative was announced just before Christmas.
Houthi rebels blew up an unmanned vessel in a shipping lane on Thursday, just as a top US admiral acknowledged the attacks were continuing unabated. In a briefing to reporters, Vice Adm. Brad Cooper said the naval coalition had shot down 19 drones and missiles launched by the Houthis in less than a month. Iran, which backs the rebels, sent its own warship into the strait on Monday. Bab al-Mandab, a narrow shipping canal leading to the Red Sea.
Analysts warn that the ongoing attacks are a new inflationary risk that could keep prices higher for a long time.
“This is a whole new level of madness for global trading,” says Michele Bockmann, chief analyst at Lloyd's List Intelligence. “It's a very focused mission, backed by Iran with drones and missiles and a level of sophistication that ships have never had to deal with before.”
In the past, attacks on container shipping have typically been carried out by pirates on fishing boats. The Houthi attacks, which erupted after the war between Israel and the Gaza Strip, are much more high-tech.
This significantly increases the cost of protecting them. This disruption poses two big inflation risks.
First, higher shipping costs. Freight costs between Europe and Asia have already risen 163% since mid-December as attacks force many ships to take costly detours around Africa to avoid the Red Sea.
Shipping giant Maersk, which briefly resumed trade in the region, announced earlier this week it would suspend transit through the Red Sea indefinitely. Most container ships that normally sail through the Suez Canal are now rerouting around the Cape of Good Hope, extending the journey by thousands of miles.
About 30% of the world's container trade passes through the Suez Canal, meaning higher costs delivery along this route will be significantly impacted.
“Some goods will take longer to arrive in the coming months as they are diverted onto longer routes, and this may have a negative impact on availability and prices as a result of higher transport and delivery insurance costs,” says Helen Dickinson, chief executive of the British Consortium retail trade (BRC).
Companies are already warning of temporary shortages due to the problems. Next chairman Lord Wolfson said on Thursday that UK stock deliveries could be delayed by up to 2.5 weeks if the disruption continues. Furniture giant Ikea also warned of possible delays late last year.
Delivery costs are still a fraction of the levels recorded during the worst supply chain crisis of the pandemic, but Brockmann warns: “We expect that there will be further jumps.”
The second inflation risk is the prospect of rising oil prices.
In normal times, about 7 million barrels of oil pass through the Bab al-Mandab Strait every day. That trading volume has more than halved since Dec. 18, according to Goldman Sachs.
So far, the redirection of this oil around the Cape of Good Hope has caused only a moderate increase in oil prices. On Thursday, the price of Brent oil exceeded $77 per barrel, which is about $4 higher than since December 12.
However, Björn Schildrop, chief commodities analyst at SEB bank, said oil could rise to $90 a barrel if the Bab el-Mandab Strait was completely cut off.
Rising oil prices are weighing on oil prices gasoline and energy, which in turn means inflation could remain high for a long time.
Although Europe receives a larger share of its goods through Suez, the US will feel a larger inflationary hit due to higher oil prices. oil prices, says Eric Britton, chief executive of Fathom Consulting. This is because fluctuations in gasoline prices have a greater impact on the US inflation rate.
The timing of the Red Sea attacks is terrible. After the war in Ukraine, trade through Suez grew to its highest level in at least 23 years. According to the Suez Canal Authority, more than a million tons of cargo oil tankers passed through Suez every day during the first eight months of 2023.
«European countries are importing more oil from the Gulf and elsewhere to compensate for the loss of Russian oil exports,» says James Swanston, a Middle East expert at Capital Economics. “In addition, Qatari LNG [liquefied natural gas] exports to Europe are growing.”
Extremely low water levels in the Panama Canal also mean ships are being diverted through Suez.
Inflation risks will be a concern for Bank of England rate setters and policymakers elsewhere in the world.
The disruption is not yet enough to affect consumer price indexes (CPI), the official measure of inflation. But if the situation escalates, the consequences could be significant, says Ben May, director of global macro research at Oxford Economics.
If current freight prices continue, global inflation could be 0.6 percentage point higher than it would otherwise be a year from now, he warns. Current forecasts from Oxford Economics put that as the difference between inflation of 3.4% and 4% by January 2025.
The interest rate cuts built into the US, UK and European markets are likely to become impossible, May says.
Meanwhile, according to Capital Economics modeling, a jump in oil prices to $100 per barrel will extend the Bank of England’s month of struggle to reduce inflation.
Analysts don't expect oil prices to rise to that level. at the moment, but they are closely watching to see if the conflict extends beyond the Bab al-Mandab Strait.
Iran's involvement means it is possible that trade disruptions could spread to the Strait of Hormuz, the narrow shipping channel at the mouth of the Persian Gulf that Iran has threatened to close in the past.
Goldman Sachs said the closure of Hormuz would cause oil prices to rise 20% in the first month, «and could become even sharper thereafter.»
It would also block LNG exports from Qatar, which would have huge consequences . for gas supplies to Europe. The UK gets 30% of its LNG from Qatar.
This scenario is extremely unlikely, not least because Iran is unlikely to want to anger Qatar. But one thing is clear: the risks are enormous.
“This is so unstable. Who knows, if an oil tanker is damaged and there is a spill, then all bets are off,” says Bockmann.
It all depends on how long the attacks in the Red Sea last. Vice Adm. Robert Murrett, professor of practice at Syracuse University's Maxwell School and deputy director of the Institute for Security Policy and Law, warns that they could easily stretch into 2024.
“According to Houthi, this is all due to the fact that what's happening in the Gaza Strip,” says Murrett. “And operations in the Gaza Strip could last until the end of this calendar year.”
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