Global shipping costs are rattling supply chains

The impacts of climate and conflict have once again highlighted the vulnerability of global shipping networks. Last year, one of the worst droughts in Central America forced crossings across the Panama canal to decrease by 36%.¹ Shipping rates for Very Large Gas Carriers (VLGC) crossing the canal increased from $130 per ton to $250 per ton during the first eight months of 2023.² Most recently, following the outbreak in conflict between Israel and Hamas in late 2023, Iranian-backed Houthi rebels operating out of Yemen have been carrying out targeted drone attacks on cargo vessels transiting through the Red Sea. The result of these attacks has disrupted maritime trade through a shipping lane responsible for 12-15% of global trade and 20% of global cargo trade.³

Impacts of Red Sea crisis on shipping costs

In light of the heightened risk of sailing through the Red Sea, many cargo operators have diverted their shipping lanes through the Cape of Good Hope, while Western-led military operations have been patrolling Red Sea lanes to intercept new attacks on transiting ships. Diversions through the Cape of Good Hope cost operators an additional 10 days at sea to reach Europe, compared to the Red Sea route through the Suez Canal.⁴ In addition, diverted shipping is exposed to greater journeys along East and West African coastlines where pirates currently operate. As a result, insurance premiums have increased adding further pressure on shipping costs between Asia and Europe. Since December 2023, Drewry East to West (Shanghai to Rotterdam) spot container rates have increased over 100%.⁵

Vulnerabilities on ports and supply chains

The current vulnerabilities of global maritime trade are having a mixed impact on ports in Europe. European Atlantic ports have benefitted from rerouting around Africa at the expense of European Mediterranean ports. Total throughput at Athens Piraeus Container Terminal's piers II and III fell by 12.7% year on year in January, while key transhipment ports in Portugal and Spain as well as the gateway ports of Antwerp and Rotterdam have seen an increase in throughput since the beginning of the year.⁶ While major European ports may be able to absorb shocks, transhipment ports on the coasts of Africa may not have the capacity to meet the surge in demand. This may exacerbate pre-existing supply chain disruptions across sectors such as the automobile industry.

While European businesses such as exporters, manufacturers and retailers are already seeing increases in shipping costs and logistical delays, tangible inflationary impacts on consumer goods are expected to have a lagged impact. The OECD estimates that a persistent doubling of shipping costs can add up to 0.4 percentage points to inflation across OECD countries in the longer term.⁷ A recent survey on UK businesses highlighted that firms are already experiencing cash flow issues and component shortages as a result of current difficulties in global shipping.⁸ Businesses that already bolstered their inventories prior to December 2023, particularly in logistics hubs in Europe, are likely to remain more resilient during this phase. This was recently suggested by Samsonite CFO Reza Taleghani in an interview when discussing the Red Sea crisis and any challenges to businesses: “We have inventory exactly where we need it to be. All of our facilities, even if there is a week or two delay, are not that big of a deal.”

Exposing key fragilities of the global trade network requires a rethink of global supply chains

Challenges and vulnerabilities across the global shipping network have exposed key fragilities in the current state of global supply chains. With an increasing amount of choke points at risk of climate and conflict crises, there is an imperative for businesses and governments to explore new models to diminish risks to supply chains. Back in September 2023, interest in Eurasian rail connectivity circumventing the Red Sea, was explored as part of the India-Middle East-Europe Economic Corridor (ICMEC) counterbalancing China’s Belt and Road initiative (BRI).⁹ Airfreight is also being considered as an option, though it has its own unique set of capacity challenges. Additionally, building resilience through bolstering inventories closest to their end customers improves businesses ability to navigate future crises across global shipping networks. Economist Impact’s survey on trade and supply chain business executives suggests that businesses are indeed ramping up additional inventory as a buffer against future supply chain disruptions.

Shipping rates will continue facing upwards pressure in Europe due to new environmental regulations

The EIU expects instability in the Red Sea not to extend beyond 2024, and shipping rates across a large part of global trade networks to stabilise from the end of the year.¹⁰ On the other hand European trade will still face upward pressure on trade costs due to new environmental regulation being introduced over the next three years. Starting in 2024 maritime emissions will progressively fall under the EU Emissions Trading Scheme (ETS).¹¹ Maritime trade towards Europe will also be influenced by the CBAM - a policy introducing import duties on specific carbon intensive goods entering the European single market. This will be effective from 2026 onwards.¹² The combined impact of ETS and CBAM will de-facto introduce carbon taxation for maritime goods entering the EU. Therefore, if the Red Sea crisis subsides, shipping price pressures will shift from insurance premiums to carbon taxes.

Global trade faces a challenging future with disruptions causing cost increases, uneven impacts, and the need for more resilient supply chains. Additionally, future environmental regulations in Europe will further exert upward pressure on trade costs. Finally, and more worryingly, the Red Sea crisis has highlighted the ability of state and non-state actors to apply pressure on choke points in global trade routes for geopolitical motives. While the Red Sea crisis is likely to subside in the short term, other high volume trade routes, such as those in the South China Sea, may be at risk.