Investment Comment
2nd February 2024
Could Houthi rebel attacks reignite inflation fears?
The Red Sea, a vital artery for global trade, has become a turbulent battleground in recent months. Houthi rebels, locked in a bitter conflict with the Saudi-led coalition in Yemen, have launched a series of attacks on commercial vessels traversing the vital waterway. The chart below shows the impact of these disruptions. Whilst not closed, the number of ships using the Red Sea has fallen by over 40%, with ships opting to take the longer route around Africa. The attacks have raised economic concern, especially in Europe, threatening to derail fragile economic growth and reignite inflation fears.
Ships using the Suez Canal vs Ships passing the Cape of Good Hope
Source: The International Monetary Fund: Portwatch, Artorius
There are potentially twofold impacts of the disruption: higher costs of goods and disruption to supply chains. Both impacted the global economy in Covid and whilst the source of disruption is different, economists are once bitten twice shy.
Disruptions in the Red Sea force ships to take the longer route around the Horn of Africa, adding at least a week to the average journey of ships from China to Europe. The Kiel Institute for the World Economy estimates that the Houthi attacks have added $2,500 to the cost of shipping a container from Asia to Europe and have contributed to a 1.3% decline in global trade. These expenses inevitably translate to higher prices for consumers, particularly for goods imported from Asia.
The price of transporting a 40ft container from and to China
Source: Bloomberg, Artorius
The above chart shows that we are nowhere near pandemic levels - but, with no end in sight to the current situation in the Red Sea, there is real concern that this uplift in shipping costs is an early warning sign of further price rises yet to come.
In addition to the inflation impact, longer shipping times from Asia to Europe are disrupting supply chains and delivery times.
A round trip from Asia to Europe via the Suez Canal takes 52 days which allows ships to compete 7 round trips per year, in contrast trips via Africa mean a 30% increase in travel times to 68 days which equates to 5.4 round trips per year, a 23% reduction in capacity. For manufacturers operating on tight schedules this could spell chaos: production lines stall, inventories shrink and deadlines are missed.
CEOs of both Tesco and Sainsbury’s have warned that the situation may lead to further price rises, Next and Ikea have both said that some products are likely to be unavailable for purchase, while Tesla have shut their German factory for two weeks.
Adding to these issues is the situation with the Panama Canal, used by most ships travelling from China to the US west coast, which is being restricted by low water levels caused by drought, and the rush to move goods before Chinese factories shut down for the week-long Lunar New Year holiday starting on 10th February.
While western stock markets are either at or near all-time highs, with inflation falling and talk of recessions fading we need to be reminded that the post-pandemic world is still a fragile place and there are many worries, both known and unknown, still to be navigated.
Josh Young de Ferrer Portfolio Manager
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