- The disruption to traffic via the Red Sea/Suez Canal route could continue for months.
- The higher freight costs and the delays in deliveries could reignite inflation.
- Central bank interest rate cuts could be delayed by a few months if monetary policymakers see an uptick in inflation.
The Houthi attacks on commercial shipping in the Red Sea have forced many tanker and container ship operators to reroute voyages via Africa, which has increased travel times, delayed goods delivery, disrupted supply chains, and raised shipping costs.
Traffic Disruption
The disruption to traffic via the Red Sea/Suez Canal route could continue for months and ultimately result in sustained higher freight costs and a shortage of container ships, which are now bound on longer routes via the Cape of Good Horn, analysts say.
The current chaos is likely to continue for weeks—or months—until the shipping and maritime transportation industry settles on a “new normal”.
Until then, the higher freight costs and the delays in deliveries could reignite inflation and make the road to easing interest rates bumpier than central banks thought it would be a month ago.
Red Sea Diversion
Traffic via the Suez Canal has nosedived since the middle of December, per data from PortWatch, a platform launched by the International Monetary Fund (IMF) in partnership with Oxford University.
The route saw last week the lightest vessel traffic since April 2021, when container carrier Ever Given ran aground in the Suez Canal, blocking shipping in both directions.
Oil tanker traffic has also been impacted by the threat to commercial shipping near the Bab el-Mandeb Strait and the Red Sea, prompting oil majors and top trading houses to divert traffic to the longer route via Africa.
Shell was the latest to halt all shipments via the Red Sea last week. In the middle of December, another UK-based supermajor, BP, temporarily suspended all shipments via the route, “in light of the deteriorating security situation for shipping in the Red Sea.”
Higher Costs
The longer route raises freight rates and ties up tankers and container carriers for longer than originally planned, meaning not only that the customers would receive their goods some two weeks later than anticipated, but also that more vessels would be needed to replace those still shipping oil, fuel, containerized, or frozen goods on the longer routes.
This will strain supply chains and could lead to higher end-product prices, which would fuel inflation just as central banks started to signal rate cuts are in the cards.
Interest rate cuts are coming, the Fed and other central banks continue to say. But those cuts could be delayed by a few months if monetary policymakers see an uptick in inflation.
Europe could be particularly vulnerable to inflation, considering that the Suez Canal is its key maritime trade route from Asia.
Container rates on the most affected Asia-Europe route have more than tripled since December, while the global average has doubled, Rico Luman, senior sector economist at ING, wrote in an analysis earlier this month.
A major escalation of the tensions in the Middle East could lead to high oil prices, too, and Europe is closely watching the developments for a potential impact on energy prices and inflation.
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Source: OilPrice
