How heightened tensions in Red Sea is impacting trade?

Red Sea Crisis: Global merchandise trade faced setbacks in 2023, primarily due to disruptions in the Red Sea, a crucial trade route, impacting trade volumes, as noted by Ngozi Okonjo-Iweala, Director-General of the World Trade Organization (WTO). Speaking at the business forum during the 13th Ministerial Conference in Abu Dhabi, Okonjo-Iweala revealed that, coupled with a broader global economic slowdown, these disruptions likely resulted in a less than 0.8 per cent increase in global merchandise trade volumes for 2023. 

This falls short of the 1.7 per cent growth initially projected by the WTO in April. The forecast for 2024, however, remains stable at a 3.3 per cent growth rate. Okonjo-Iweala also highlighted the immediate impact of shipping disruptions in critical waterways like the Red Sea and the Panama Canal, influencing growth rates and contributing to global inflationary pressures. The WTO is actively working on an updated global trade forecast, set to be released in March, aiming to provide a more nuanced analysis of the continually evolving trade landscape. The recent sinking of the UK owned bulk carrier Rubymar after a Houthi missile attack has once again heightened the tension across the region.  

Impact On Capital Goods

According to Avinash Pathak, Research Analyst at LKP Securities believes that the impact of ongoing crisis around the Red Sea on the capital goods is causing process of order conversions along with an increase in logistics costs. 

“The effect of disruptions extends to various facets of the industry leading to an undesirable inventory buildup. Consequently, the sector could grapple with the dual challenges of managing excess inventory and a deceleration in the conversion of prospective orders, impacting the overall business dynamics and performance of these enterprises,” Pathak said. Pathak further added that the impacted companies are making provisions for the same while the long terms prospects remain positive in the sector.

Possible Impact of Ongoing Crisis

Global rating agency S&P Global in its latest report also said that higher prices and shipping issues have contributed to further upward pressures on average global selling prices in February and were cited by survey contributors as a key driver of price hikes alongside rising wages. “Goods prices consequently rose globally for a seventh month in February. Contained container crisis However, risks of a steep jump in prices due to the supply disruptions remains low,” the report stated.  

Contained Container Crisis.

However, risks of a steep jump in prices due to the supply disruptions remains low.

First, having lengthened globally for the first time in a year during January, supply chains were largely unchanged in February, even shortening slightly on average, to suggest that the worst of the Red Sea impact may already be over. The S&P Global’s report also said that the peak disruption in late December and January, as ships were re-routed around Africa rather than passing through the Red Sea and Suez Canal. Since then, shipping has started to settle into these new trading routes. 

“Spot container rates are hence also starting to fall again, having risen earlier in the year. Second, the overall incidence of safety stock building remains very low by standards seen during the pandemic, though this needs to be clearly monitored. Third, price growth remains modest, with February's global suppliers' delivery times index pointing to some alleviation of cost pressures in the near future,” the S&P global said. 

According to experts, it seems likely that the Red Sea impact will prove fleeting in its impact on global manufacturing production and prices, albeit worthy of close monitoring in the months ahead. Furthermore, there are some economies which continued to be harder hit by Red Sea related shipping delays than others in February, with the UK notable in seeing. In contrast, supplier leading times shortened in the US and Eurozone, and were largely unchanged across Asia.