The Red Sea shipping crisis has rekindled inflation concerns due to supply chain disruptions and increasing freight costs. Over 30% of global trade transits through the Suez Canal, making the Red Sea shipping crisis a serious point of contention in the global shipping market. The Red Sea shipping crisis, spurred by Houthi rebel assaults on cargo ships and tankers, is compelling numerous vessels to bypass the Suez Canal, a critical global waterway. Instead, they must now undertake a lengthy detour around southern Africa, adding 4,000 miles to their journeys, significantly extending transport times and raising freight expenses.
Nora Szentivanyi, Senior Economist at J.P. Morgan, notes that extended delivery times create adverse supply shocks, with rerouted ships facing a 30% increase in transit times, equating to a 9% reduction in global container shipping capacity. Europe-based auto plants are already halting production temporarily due to delays in Asian car part deliveries. Auto component makers, especially those reliant on China-Europe and China-U.S. exports, are similarly affected.
Container shipping costs have surged dramatically since early December, particularly along routes passing through the Suez Canal, such as Asia to Europe, which have seen a five-fold increase. Ocean spot rates, reflecting current market prices, have sharply risen amidst the Red Sea shipping crisis. Spot rates from China to the U.S. West Coast and East Coast surged approximately 140% and 120% respectively compared to November 2023.
Looking ahead, shipping costs may stay elevated as disruptions persist. However the silver lining is that once the disruptions subside, rates could decrease quickly due to excess global container ship supply due to the orders made during the pandemic.
Shipping cost increases are expected to eventually translate into higher prices for imported goods, contingent on the duration and severity of the Red Sea shipping crisis, potentially reigniting inflation concerns.
