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OPINION

Updated December 19th, 2023 at 21:31 IST

New Red Sea blockage may be both longer and milder

The Red Sea has seen occasional pirates, but the Houthis’ missiles and drones are unprecedented.

Reuters BreakingviewsYawen Chen
Suez Canal
Suez Canal | Image:UnSplash
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Jump ship. The Red Sea has another blockage. Two years after a single container ship caused a six-day stoppage to traffic via the Suez Canal, conduit for 12% of the world’s trade flows, indiscriminate attacks by Yemen’s Iran-aligned Houthi militants are prompting transportation and commodities giants like Maersk and BP to take much longer routes via Africa. This delay could last much longer, but its impact may prove less severe.

The Red Sea has seen occasional pirates, but the Houthis’ missiles and drones are unprecedented. According to Freightos data, carriers representing nearly 60% of normal capacity have opted to re-route around South Africa’s Cape of Good Hope. That adds at least 10 to 14 days of travel time. In a worst case scenario, shipping carrying toys, shoes and clothes from Asia will take over a month to reach the East Mediterranean and Europe, from just 13 days previously.

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When the Ever Given blocked the Suez Canal in March 2021, it had a drastic effect on transportation costs, which then played a part in fuelling wider inflation. Rates on the Asia to North Europe trade lane climbed up to $20,000 per container relative to the historical average of $1,500 per container, according to Flexport. Investors betting on a repeat have sent shares in $26 billion shipping company Hapag-Lloyd up 25% since it paused all planned transits of the Red Sea on Dec. 15. Maersk shares have jumped 10%.

Still, that’s way off their highs of a few years ago. And the 2023 macro outlook is different. The 2021 rate surge was fuelled by a lack of ships, congestion at ports and limited shipping staff due to Covid. In 2024 inflation is falling back and global growth is likely to slow sharply. The upshot is a record number of new and larger container ships, with close to 12% of global container vessel capacity expected to come online next year, per Barclays analysts. That helps explain why shipping rates on Asia-Europe lanes have only risen to about $3,000 per container, way off the 2021 peak. While the Red Sea is a key chokepoint for the transport of oil and gas, oil prices only increased 2% on Monday and are still below $80 a barrel.

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That’s not a reason to chill out, despite a U.S.-led alliance of countries proposing to join forces to patrol the area. It may take weeks for new navy ships to be deployed, and one shipping expert told Reuters Breakingviews that one of their scenarios points to the re-routing timescale lasting six months. Yet even then the scope for the Red Sea’s latest blockage to prompt a fresh inflationary spike looks limited.

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Published December 19th, 2023 at 21:26 IST

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