The cost of shipping goods through the Red Sea has seen a dramatic surge since late November. The Drewry World Container Index reveals a staggering 248 percent increase in costs for shipping a 40-foot container from China to Europe, reaching $4,000 at present.
Shipping giants forced to redirect
The deteriorating security situation poses major implications for global supply chains. It has caused delayed shipments, increased transit times, and higher shipping costs on energy and non-energy trade. Therefore, major shipping companies, including MSC, CMA CGM, and Hapag-Lloyd have been compelled to suspend Red Sea routes and redirect vessels. This strategic shift extends sailing time and results in additional fuel costs, contributing to the overall surge in freight charges.
However, the spike in shipping costs is not only due to the Red Sea crisis. Concerns regarding insufficient shipping capacity before the Chinese New Year holiday have further inflated prices. Additionally, ancillary costs such as surcharges and insurance have increased, creating a complex logistical landscape.
The Red Sea handles approximately 10 percent of global oil shipments and nearly one-third of global container traffic. Moreover, it handles around 12 percent of global goods trade. Moreover, about 12 percent of the world’s seaborne oil trade and 8 percent of liquefied natural gas passes through the strait. Therefore, attacks on this crucial route have escalated concerns about supply disruptions in the oil market. Analysts predict potential impacts on global oil prices and the sustainability of oil and gas exports from major regional producers. Moreover, analysts at Fitch forecast the price of Brent to hover around $85 a barrel in 2024.
In addition, the global economy faces potential challenges due to sustained disruptions around the Red Sea. Europe’s car industry could experience far-reaching implications, affecting vehicle sales and causing delays in deliveries. Hence, the broader economic repercussions may lead to a global inflation concern, particularly if the Red Sea remains closed for an extended period.
As shipping disruptions persist and shipping costs increase, the global economy may encounter obstacles, emphasizing the need for shippers to build resilience and contingency plans. Analysts warn that a prolonged Red Sea closure could add 0.7 percent to global CPI inflation by the end of 2024. Meanwhile, some experts anticipate a short-lived crisis. However, the consequences of a protracted disruption remain a cause for concern in an already complex global economic landscape.
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