Impact of Red Sea Shipping Crisis On Global Supply Chains And Inflation Concerns

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  • The Red Sea shipping crisis, triggered by Houthi rebel attacks, is causing significant disruptions to global supply chains, leading to increased shipping costs and raising concerns about potential inflationary pressures.
  • With 30% of global container trade passing through the Suez Canal, the crisis is affecting supply chains, shipping costs, and could have implications for inflation.

The Red Sea shipping crisis, stemming from Houthi rebel attacks on cargo ships and tankers, is posing substantial challenges to global supply chains, resulting in elevated shipping costs and sparking concerns about potential inflationary impacts. The crisis has forced hundreds of vessels to avoid the Suez Canal, a critical waterway for international trade.

Impact on Supply Chains

The Suez Canal disruption is disrupting global supply chains, particularly those heavily reliant on the canal for efficient transportation. With 30% of global container trade transiting through the canal, the crisis is causing adverse effects on supply chains. Ongoing shipping disruptions in the Panama Canal due to regional droughts further compound the challenges.

Auto Industry Disruptions

Delays in obtaining car parts from Asia have led to temporary production shutdowns in Europe-based auto plants. Auto component makers, especially those with high revenue exposure to China-Europe and China-U.S. trade routes, are experiencing disruptions.

New-Energy Vehicles (NEVs) Impact

The crisis is particularly testing the resilience of the auto supply chain, especially for new-energy vehicles (NEVs), which are a key component of China-Europe trade. China’s export of NEVs to Europe, usually carried by sea, faces uncertainties in shipping times and prices.

Effect on Shipping Costs

The Red Sea shipping crisis is causing a surge in shipping costs, particularly along routes that traditionally pass through the Suez Canal. Costs from Asia to Europe have nearly quintupled, while costs from China to the U.S. have more than doubled. Ocean spot rates have sharply increased, impacting retailers relying heavily on sea freight.

Shipping Rates Increase

Shipping costs along Asia-Europe routes have seen a nearly five-fold increase. Spot rates from China to the U.S. West Coast and East Coast have spiked significantly.

Retailer Challenges

Retailers, depending on sea freight, may face increased costs. Although many retailers have hedged their freight exposure and locked in rates, renegotiations may be possible due to the crisis.

Inflation Concerns

The disruptions in shipping costs are likely to pass through to imported goods prices, potentially fueling inflation concerns. J.P. Morgan Research estimates that the disruptions could add 0.7 percentage points to global core goods inflation and 0.3 percentage points to overall core inflation in the first half of 2024.

Cyclical Factors

The duration and intensity of the crisis will influence the lag in the pass-through of shipping cost increases to imported goods prices. Cyclical factors may either mitigate or reinforce upward pressure on prices, with profit margins absorbing a portion during weaker consumer demand.

Potential Impact on Global Core CPI Inflation

A sustained rise in goods inflation could impact global core CPI inflation, potentially reaching around the 3% mark. While not expecting a rise as large as the COVID-era shock, even a modest rebound in goods inflation could affect central bank targets.

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Source: JP Morgan

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