Shipping – why does it matter that the Red Sea is shut?

Key takeaways

  • 30% of global traffic flows through the Red Sea, which has recently been disrupted
  • Drewry’s World Container Index increased by 61% to over $2,600 from $1500 since November 2023
  • The closure may bring about inflationary pressure to consumers, with alternative routes increasing shipping time by up to 10 days

The closure of the Red Sea has sent shockwaves through the global shipping industry, disrupting crucial trade routes and raising concerns around the potential impacts on consumers. The shutting, largely down to Geo-political tensions in the region, has immediate consequences for maritime commerce which accounts for around 80% of global trade. 30% of global container traffic flows through the Red Sea. To put this into perspective, this means around 1.95 billion metric tonnes were shipped by sea using data from 2021.

One of the most significant impacts is the disruption of major shipping lanes that connect Europe, Asia and Africa. The Red Sea serves as a vital passage for oil tankers, container ships, and other vessels transporting goods between the East and the West. With this route closed, shipping companies are forced to seek alternative paths, often resulting in longer and more expensive journeys.  More than 100 container ships have been rerouted, adding 6,000 nautical miles to the journey which takes between 7 to 10 days additional time disrupting sometimes fragile supply chains.

 

 

 

 

 

 

 

 

Consumers are likely to feel the repercussions of this closure as shipping costs rise. Increased expenses for transportation and insurance could lead to higher prices for imported goods, affecting a wide range of products from electronics to everyday necessities. Ultimately, the cost burden may be passed on to consumers, potentially contributing to inflationary pressures and giving central banks reason to hold interest rates higher for longer.

The closure of the Red Sea highlights the interconnected nature of the global economy, emphasising the vulnerability of supply chains to unforeseen disruptions. As countries and businesses navigate these challenges, they may reconsider their dependence on specific routes and explore strategies to enhance resilience in the face of geopolitical uncertainties or natural disasters.  Either way the longer this goes on, the more damage it has the potential to cause.

Bowmore portfolios

Whilst we do not have direct exposure, we are exposed to broader risk assets and following such a difficult 2 years for markets this is another unsettling and potentially significant geo-political issue for us all to face, not least central banks.  This has the potential to raise prices and force central banks to hold interest rates higher, which in turn could lead to increased recessionary pressure.    On the face of it, something happening miles away to the UK might be something just to read about and not worry about but for us this event coupled with central bank minutes and other triggers are increasing the probability of further volatility and the changes we are making within portfolios will help ensure we are positioned for this.

Shipping delays can have profound and cascading effects on the global economic areas:

1. Supply Chain Disruptions:
2. Increased Costs
3. Inventory Issues:
4. Consumer Impact
5. Market Speculation
6. Global Economic Growth
7. Employment Concerns
8. Business Reputation

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