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The World Is Going Into The Red From The Red Sea Crisis

BY: Ariel Cohen

The Houthis, an Iranian-backed proxy terrorist group in Yemen, trained and equipped by the theocratic dictatorship in Tehran, have unleashed chaos on the global supply chain and sent shockwaves through international markets. Now that the US is attacking Iranian targets proxies in Syria and Iraq while the UK and US are bombing Houthis in the Red Sea targets. The cost to the global economy is ticking upwards.

Nearly 30 percent of global container shipping navigates through the Suez Canal via the Red Sea, with 15 percent of global trade passing through the Red Sea, mostly destined for Asia. This traffic includes not only strategic resources like oil and gas but also everyday goods and commodities that keep the global economic engine humming.

Beginning in November 2023, the Houthis launched indiscriminate attacks on commercial ships traversing the Bab al-Mandab Strait, a crucial 20-mile-wide chokepoint for maritime traffic entering and exiting the Red Sea in its South. These attacks have already rattled the global energy market. The Houthis justify these actions on the ground that they are targeting vessels associated with Israel in response to its war on Hamas in the Gaza Strip. Western governments indicate that Houthis are attacking indiscriminately.

 

Cargo insurance has seen a sharp increase in rates for voyages that pass through the Red Sea. While rates were typically around 0.6 percent of the value of the cargo before the crisis, they are now up to 2 percent. Insurers have also added war risk premiums on top of the standard rate, raising the price of taking the Suez Canal route even further.

Shipping rates from North Asia to the East Coast of the U.S. have jumped 137% to $5,100 for a 40-foot container from early October, while rates from North Asia to the West Coast have jumped 131% to $3,700. China also faces issues stemming from Red Sea disruptions, as shipping costs to Europe have more than doubled to about $7,000 from $3,000 in December, 2023’s $3,000, posing a huge threat to its export-driven economy.

 

An estimated 12% of global trade passes through the Red Sea every year, worth more than $1 trillion. Shipping giants like Maersk and Hapag-Lloyd have begun suspending services through this area altogether opting for a longer detour around the Cape of Good Hope, which can use an additional $1 million worth of fuel cost per trip.

 

These shipping giants have already incurred nearly $200 million in extra fuel costs alone. The fallout from the shipping crisis is rippling through various sectors. The U.S.-based BDI Furniture has announced that it would ask freight brokers to bypass the Suez Canal and ship goods across the Pacific Ocean to California. The German chemical giant Gechem GmbH & Co KG has cut back on producing dishwasher and toilet tablets due to shortages of necessary chemicals.

In the EV industry, TeslaTSLA +1.9% is halting most of its production at its Berlin because of shortages linked to the rerouted shipments. Volvo Car is also pausing production at its Ghent facility in Belgium due to supply delays.

Revenues from Egypt’s Suez Canal are down 40% from the beginning of the year compared to 2023, equivalent to a loss of approximately $300 million. This has serious economic implications for Egypt as the Suez Canal has long been a crucial source of foreign currency for the country.

The effect of the crisis on inflationary pressure remains unclear. While the New York Federal Reserve’s Global Supply Chain Pressure Index did not suggest a significant uptick in December or January, the effects of shipping disruptions can manifest with a delay. Similarly, while the European Central Bank has maintained its projection for eurozone inflation to decrease from 5.4% in 2023 to 2.7% this year, a prolonged shutdown of the Red Sea would likely slow down the speed at which the rate of inflation returns to normal.

East African countries like Ethiopia, Somalia, and Kenya are especially at risk from the crisis. They are highly reliant on wheat imports from the EU, Russia, and Ukraine, which transit through the Suez Canal. Although the shipping costs tracked by the International Grain Council’s Grain and Oilseed Freight Index remains below its pandemic peak, prolonged disturbances will force consumers in this region to bear the brunt of rising food prices.

This crisis is the most severe supply chain disruption since the COVID-19 pandemic, jeopardizing the global economic recovery and potentially leading to inflation as freight and oil prices rise. The total cost of this crisis is already in the billions of dollars, and it is set to not only continue to climb, but be primarily borne by developing countries least equipped to handle it.

Even a conservative estimation of these losses, calculated by combining the lost tolls in the Suez Canal, increased externality spending in international shipping, higher international transaction costs, and higher needless fuel and food costs, is astronomical. For Europe alone, the current sum is at approximately 1 billion dollars. This amount climbs higher when one considers still forthcoming data from East Asia and America at the time of this article’s publication, and soars further if potential losses are included, and and included. Losses will multiply so long as the crisis lingers. Only the US and its allies ensuring a rapid end of the crisis will stop the hemorrhaging.

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