Red Sea attacks threaten cheaper goods

Maersk and other big shipping lines have paused transits through the Red Sea after Houthi missile and drone strikes on merchant ships in the Bab el-Mandeb strait. The strait carries twelve per cent of the world's seaborne trade, including a large share of container traffic between Asia and Europe. The shock to supply chains threatens to undo the recent fall in goods prices.

How the threat escalated

The Houthis, the Iran-backed movement that controls much of northern Yemen, began targeting shipping after the war between Israel and Hamas broke out in October. In November they seized the Galaxy Leader, a car carrier, and took it to a Yemeni port. Attacks with drones and missiles followed through early December, some on vessels with no obvious link to Israel. Maersk suspended Red Sea voyages on 15 December, and within days Hapag-Lloyd, MSC and CMA CGM had followed, as had BP for its oil tankers.

Washington's answer came on 18 December, when the Pentagon announced a multinational naval task force to escort and protect ships in the southern Red Sea. Maersk said on Christmas Eve that it was preparing to resume some sailings under that protection. Other carriers have been more cautious, and insurers will want evidence that the patrols work before they price the route as safe again.

The long way round

Sending ships around the Cape of Good Hope adds ten to fourteen days to a voyage, burns thousands of tons of extra bunker fuel and ties up container capacity worldwide. Spot freight rates from Shanghai to Rotterdam have jumped, and marine insurance surcharges have soared. Central bankers had only just begun to cheer the mending of supply chains. Now trouble at sea has handed them an unwelcome dose of goods inflation.

The mechanism works through ship availability more than fuel. A liner service between Asia and northern Europe runs a fixed rotation of vessels to deliver a weekly sailing, so adding two weeks to each round trip means finding extra ships to keep the schedule. Those ships have to be pulled from other routes or chartered at short notice, which lifts rates well beyond the Suez trades. Containers are stranded at sea for longer too, so boxes run short at Asian ports just as factories ship goods ahead of the Lunar New Year holiday.

The Americas are not insulated. Drought has forced the Panama Canal to restrict daily transits this year, and some shipments from Asia to the east coast of the United States had switched to the Suez route to avoid the queues. With both canals compromised, those cargoes face a choice between delay and the long haul around Africa. Egypt also loses: it earned a record of more than $9 billion from canal fees in its last fiscal year, and every diverted ship is revenue forgone by an economy already short of dollars.

Precedents from Suez

The canal has been shut before, with lasting consequences. After the Six-Day War of 1967 it stayed closed for eight years, trapping a group of ships in the Great Bitter Lake and pushing shipowners to build supertankers large enough to make the Cape route pay. More recently, the Ever Given ran aground in March 2021 and blocked the canal for six days, adding to a backlog that helped drive container rates to records later that year. That episode showed how a short disruption can ripple through schedules for months.

Why the damage may be contained

The strongest argument against alarm is that the shipping industry has too many ships. Carriers ordered heavily during the pandemic boom, when rates were extraordinary, and record numbers of new container vessels are being delivered this year and next. Longer voyages absorb much of that spare capacity, which is a cost, but it means the system is far less stretched than it was in 2021, when every vessel was already in use and ports were jammed.

Freight is also a small share of the final price of most goods. A container holds thousands of pairs of trainers or hundreds of televisions, so even a doubling of the rate adds little to each item. The inflationary effect in 2021 came from a combination of soaring freight, factory shutdowns and a surge in demand for goods. This time demand is soft and factories are running, so a freight shock alone would lift prices at the margin without reproducing that spiral.

Europe is more exposed

The burden will not fall evenly. Most container traffic between Asia and Europe goes through Suez, whereas American imports from Asia mainly cross the Pacific to the west coast. European retailers and manufacturers that rely on components from China and South-East Asia face longer lead times and higher costs, and some may run short of stock in the late winter. Euro-area inflation fell to 2.4 per cent in November, close enough to the European Central Bank's target that a fresh goods shock would complicate the debate about when to cut rates.

Energy adds a second channel. Tankers carrying diesel and jet fuel from refineries in the Gulf and India to Europe also use the canal, and Europe has leaned more heavily on those suppliers since its ban on seaborne Russian oil products took effect in February. A lasting diversion would raise the delivered cost of the fuels that European hauliers and airlines burn, feeding into transport prices well beyond the container trade.

The indicators to watch are spot container rates on the Asia to Europe lanes, which respond within days, and the delivery-time components of the purchasing managers' surveys, which show whether delays are reaching factories. Whether shipping lines return to the Red Sea under naval escort, and whether insurers follow, will decide how long the diversion lasts.

A few regional skirmishes have been enough to push international freight costs back up within weeks. If ships keep avoiding the Red Sea into the new year, goods prices in Europe will probably feel it first. Expect a jump in European import costs and longer delivery times in the first quarter, visible in the surveys by February, with a lift to consumer prices that is real but measured in tenths of a percentage point rather than in whole points.