How is the Red Sea crisis affecting trade?

The United Nations Conference on Trade and Development (UNCTAD) has expressed profound concerns over the escalating disruptions in global trade, particularly stemming from geopolitical tensions affecting shipping in the Black Sea, recent attacks on shipping in the Red Sea affecting the Suez Canal, and the impact of climate change on the Panama Canal.

At what scale is the disruption driving up the cost of shipments?

UNCTAD underscores the critical role maritime transport plays as the backbone of international trade, responsible for more than 80 percent of the global movement of goods. The recent attacks on Red Sea shipping, coupled with existing geopolitical and climate-related challenges, have given rise to a complex crisis affecting key global trade routes. UNCTAD estimates that the weekly transits going through the Suez Canal decreased by 42 percent over the last two months.

Specifically, the world’s largest shipping firms have added thousands of miles to their journeys after diverting container ships around the Cape of Good Hope on the southern tip of Africa. This is because Iran-backed Houthi rebels in Yemen continue to lay siege on commercial vessels that dare to snake through the 30km wide Bab-el-Mandeb strait between the Arabian peninsula and the Horn of Africa. This has been the state of affairs from the backend of last November to date.

According to the UN trade and development body, the ongoing conflict in Ukraine has triggered substantial shifts in oil and grain trades, reshaping established trade patterns.

“Simultaneously, the Panama Canal, a pivotal conduit for global trade, is grappling with diminished water levels, resulting in a staggering 36 percent reduction in total transits over the past month compared to a year ago,” UNCTAD said in a statement, adding, “The long-term implications of climate change on the canal’s capacity are raising concerns about enduring impacts on global supply chains.”

How important is the Red Sea in the grand scheme of things?

The Suez Canal, which is used by vessels travelling from Asia via the Bab-el-Mandeb strait, handles 12 percent of global trade. Most of its freight—nearly half—comprises containerised goods.

“The crisis in the Red Sea, marked by Houthi-led attacks disrupting shipping routes, has added another layer of complexity,” UNCTAD says. “Major players in the shipping industry have temporarily suspended Suez transits in response. Notably, container ship transits per week have plummeted by 67 percent compared to a year ago, with container carrying capacity, tanker transits, and gas carriers experiencing significant declines.”

Rerouting shipments around the Cape of Good Hope lengthens shipping times to about 10 days thanks to the 6,000km added to journeys connecting Europe with Asia.

According to UNCTAD, the surge in the average container spot freight rates during the last week of December, by plus $500, in one week, was the highest ever weekly increase. Average container shipping spot rates from Shanghai this week are up by 122 percent compared to early December.

The rates from Shanghai to Europe for instance more than tripled, shooting up by 256 percent. Rates to the United States West coast also increased above average, although they do not go through Suez. They increased by 162 percent.

“Here, we see the global impact of the crisis, as ships are seeking alternative routes, avoiding the Suez and the Panama Canal,” UNCTAD notes, adding, “The cumulative effect of these disruptions translates into extended cargo travel distances, escalating trade costs, and a surge in greenhouse gas emissions from shipping having to travel greater distances and at greater speed. 

What cost implications are we looking at here?

Avoiding the Suez and Panama Canal necessitates more days of shipping, resulting in increased expenses. The price per day of shipping and insurance premiums have surged, compounding the overall cost of transit. The money spent on extra fuel for every round trip between Europe and Asia is, for one, empirically said to have shot up to $1m. Additionally, ships are compelled to travel faster to compensate for detours, burning more fuel per mile and emitting more Co2, further exacerbating environmental concerns, UNCTAD adds.

The UN trade and development body underscores the far-reaching economic implications of these disruptions. Prolonged interruptions, particularly in container shipping, pose a direct threat to global supply chains, potentially leading to delayed deliveries and heightened costs. While current container rates are approximately half of the peak during the Covid-19 crisis, passing on higher freight rates to consumers takes time, with the full impact expected to manifest within a year.

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