The world experienced a supply chain crisis during the coronavirus pandemic that resulted in asymmetric shortages of consumer goods and a wicked spike of inflation that followed a currency printing party during societal lockdowns. Are consumers in the United States facing another shortage of goods and renewed inflationary pressures caused by geopolitical fallout from the Israel-Hamas war due to attacks by Yemen-based, Iran-backed Houthis on “Israel-linked” merchant ships that transit the Red Sea enroute to the Suez Canal?

Stephanie Pomboy: The Bidenomics Bubble Is About to Explode – Tucker Carlson, Dec. 2023

The cost of sending raw materials and consumer goods around the world is spiking after nearly two months of disruptions in the Red Sea. Most container carriers have diverted traffic away from the region, and major players with oil tankers and other energy products are increasingly nervous. So far, 18 companies have rerouted orders to avoid the conflict, and shipping rates are at least double their 2019 pre-pandemic level. According to data from PortWatch at the International Monetary Fund, roughly 3.1% of world trade is being redirected from the Red Sea, and Flexport reported that nearly 400 container vessels that account for “more than one-fifth of global container capacity” have already diverted away from the Suez Canal or are planning to do so.

It is reasonable to assume that skyrocketing costs for blue water shipping that thus far include a ten-fold hike in insurance premiums, spiking container fees, up to $1 million more in fuel for roughly 7,000 additional miles for the round trip around Cape of Good Hope (aka Horn of Africa), and time-added compensation for seafarers will eventually be passed to consumers. The world’s second-largest shipper by market share, France’s CMA CGM, announced last week that it’s increasing container shipping rates between Asia and the Mediterranean (Europe) by up to 100% as of Jan. 15 compared to Jan. 1.

Global Shipping Rates – FreightWaves

Average Shipping Container Daily Rates for Select Routes – Axios

We got too accustomed to peaceful seas, say goodbye to the global ‘conveyor belt’… “Data from Flexport, a global shipping platform, on Jan. 9 reflects a massive diversion. Out of the approximately 735 vessels that would be expected to traverse the Red Sea, 517 are diverting, planning to divert or already diverted the key shipping corridor. That’s 25% of the world’s overall shipping capacity by container volume. Rates from Asia to North America have popped by 75% over the last month. The firm expects rates to increase by an additional 50% to 100% in the second half of January. Meanwhile, Asia to Europe rates have soared by 200% from mid-December to early January. Ocean carriers now must transit around the southernmost tip of Africa to avoid the Red Sea, increasing transit times by 10 to 14 days… Supply chain resiliency is again the key buzzword… It’s probably time again to remind our fine retailers and manufacturers to not depend on, say, just-in-time inventories coming from any part of the world.” – FreightWaves, Jan. 10, 2024

The Houthis claim that their military strikes are only directed at ships with Israeli interests and will continue until Israel ends its war in Gaza, but they have also targeted commercial ships indiscriminately since November along with military vessels trying to ensure the freedom of navigation. The U.S. military and allies are threatening to bomb the Houthis in Yemen, but Saudi Arabia along with other Gulf states reject any retaliatory response and warned it would escalate regional tensions.

U.S. CENTCOM Warning to Houthis

About 15% of global shipping traffic and 30% of container traffic passes through the Red Sea and Suez Canal, and any sustained disruption in trade could create a ripple effect throughout the world economy.

Suez disruption: a new inflation risk on the horizon… “Routing ships around Africa would increase a round-trip journey by about two and a half weeks, cutting shipping capacity and pushing up costs. ‘The longer duration of the transit via the Cape of Good Hope reduces an Asia-Europe voyage effective capacity by 25%,’ UBS estimates. Given that such a voyage could take over 10 weeks, even a short disruption would have a ripple effect that could last several months… An even more complex cost relates to shipment delays, which could push up consumer prices as goods may take longer to reach consumers. ‘We could see supply chain frictions returning, inflation going up and growth slowing. Fortunately, not at the same magnitude as during the pandemic but still painful enough,’ ING economist Carsten Brzeski said.” – Reuters, Dec. 19

Rerouting Map Via Southern Tip of Africa – Reuters

A drought in Central America has multiplied supply chain issues since the Panama Canal is operating at a fraction of its capacity and is responsible for roughly 5% of global trade. Shipping giant Maersk announced today that it will no longer utilize the Panama Canal and is resorting to “a land bridge” via railroad freight as an alternative to connect the Pacific and Atlantic Oceans.

Maersk to Implement ‘Land Bridge’ to Bypass Drought-Hit Panama Canal… Maersk says the change will result in the creation of two separate loops, one in the Atlantic and one in the Pacific. Pacific vessels will turn at Balboa, Panama, dropping off cargo heading for Latin and North America and picking up cargo heading for Australia and New Zealand. Atlantic vessels will turn at Manzanillo, Panama, dropping off cargo heading for Australia and New Zealand and picking up cargo heading for Latin and North America. For northbound vessels with routes including stops in Philadelphia and Charleston, there are currently no delays. However, southbound vessels may experience some delays. As part of the adjustments, the OC1 route will also omit Cartagena. Maersk will continue operating the PANZ service from the US West Coast to Oceania, providing coverage from both coasts. Additionally, the company will establish connections between ports in the Gulf and the OC1 service to maintain its current level of operations.” – gCaptain, Jan. 10

Maersk’s OC1 Land-Bridge Service

Fixing the Panama Canal… “According to the US International Trade Commission, the Canal ‘has 46% of the total market share of containers moving from Northeast Asia to the East Coast of the United States.’ A reduction to 24 ships per day from the normal 38 doesn’t sound like a lot, but that’s a 36% loss in annual Canal traffic. Imagine the East Coast without 17% of its Asian-sourced fuel and goods, or having to bear the cost of rerouting that traffic through thousands more miles at sea.” – Naked Capitalism, Jan. 10

An overlooked factor is that supply chains are now “longer and twistier” after the U.S. and China began decoupling from a codependent trade relationship following the pandemic experience. For now, disruptions in the supply chain have not resulted in major price increases for consumers, especially in energy markets for oil and natural gas where demand has declined along with prices due to slowing economies and global recession signals. Europe will feel economic stress sooner than the U.S. because the Red Sea links some of the largest European consumers of tradable goods to Asian suppliers.

The shipping crisis avoided the Western holiday season, but demand will ramp up soon as shippers “pull forward demand” and deal with disruptions. Large retailers were scheduled to get summer inventories in the next three to six weeks, and those shipments will likely be delayed. If the crisis drags on, and there is no indication at this point that it will not, I suspect that any impact on the U.S. consumer will begin to surface in late spring or the early summer of 2024.

Despair in Gaza as fighting intensifies despite Israel promise to scale back war… “In the latest sign of the three-month-old war spreading, U.S. and British warships in the Red Sea fended off the biggest attack yet from Yemen’s Houthi movement, which says it is acting to support Gaza. Washington and London said they shot down 21 drones and missiles aimed at shipping lanes. No one was hurt.” – Reuters, Jan. 10

 

The Impact of Shipping Disruptions in the Red Sea – Plus where are we now in the freight cycle?… “There’s a lot of oil and gas, obviously being in the Middle East, it has a lot of exposure to oil and gas and the derivative products that come out of that portion of the world. But it’s also one of the major trade lanes for container flows. And so, think of what moves in container. It’s largely manufactured and consumer goods that are largely dependent upon containers. A lot of these products are coming from Asia, and particularly China into Europe, some products going to the United States East Coast. But the predominance of the products that move through the Suez in the container freight is largely related to products out of Asia, going to Europe for European consumption.”– FreightWaves CEO, Jan. 4

Attacks in the Red Sea Are Reconfiguring Global Trade Again w/CEO Craig Fuller of FreightWaves – Bloomberg Odd Lots Podcast (transcript), Jan. 4

Plan Your Trade, Trade Your Plan

TraderStef on Twitter, Gettr / Website: TraderStef.com