Butterfly Effect of Red Sea Tensions: Which Sectors to Face Supply Chain Shocks First?

Since the Red Sea crisis erupted in October last year, the situation has been continuously escalating. International shipping giants continued to announce the suspension of their routes in the Red Sea from December. Over 90% of container ships redirected their routes to bypass the Cape of Good Hope in southern Africa, resulting in a 1.3% decline in global trade.

Around 15% of the world's shipping traffic, which includes 30% of the global container trade, travels through the Suez Canal to and from the Red Sea, according to Reuters. Additionally, it is estimated that global trade worth over $1tn (£790bn), which accounts for around 12% of the total global trade, passes through the Red Sea every year.

The ongoing conflict in the Red Sea has begun to inflict harm on the global supply chain, as evidenced by the persistent decrease in ship throughput. According to the head of the Suez Canal Authority, Osama Rabie, ship traffic has plummeted by approximately 30% during the period from January 1st to January 11th when compared to the same time last year.

Allan Murphy, the head of Sea-Intelligence, is cautioning that the supply chain impact caused by the Houthi rebel attacks in the Red Sea is already more severe than the initial effects of the COVID-19 pandemic on shipping.

Bank of America analysts showed that the daily goods transit volume in the critical Suez Canal, for example, has been cut in half since December.

1）Soaring shipping rates：According to recent data from Freightos Terminal, the rates for shipping goods from Asia to Northern Europe have surged by 461%, while the rates for shipping to the North American East Coast and West Coast have increased by 130% and 97% respectively. In addition, carriers have implemented surcharges ranging from $500 to $2,700 per container.

2）Rising insurance fees: The risk of cargo loss due to piracy and attacks is expected to increase with the growing Red Sea crisis, which may lead to a surge in insurance premiums. Economic think tank Global Trade Research Initiative predicts that insurance premiums could rise by 15% to 20%.

3）Longer transportation time：Routing ships around Africa increases the journey length by about two and a half weeks, according to UBS.

On shipping routes that link Europe and America with Asia, the cargo carried is not limited to energy materials such as oil and natural gas, but also includes a wide array of goods such as automobiles, apparel, home appliances, toys, grains, and foodstuffs. Given rising costs and prolonged delivery timelines, these industries may be at the forefront of potential risks to their operations or profitability:

1）Automakers: Automobile manufacturers, already grappling with supply chain issues, are confronting additional disturbances due to security concerns in the Red Sea, leading to the diversion of vessels transporting cars. Several automakers have already suspended production in Europe due to component shortages.

In addition to Tesla, Audi India anticipates a singular impact on its sales during the first quarter of this year, with an estimated 15-20% decline in its quarterly volume. Meanwhile, Volvo Car has announced a temporary suspension of production at its Ghent facility in Belgium for three days the following week, attributing the disruption to a delay in the arrival of gearboxes.

c. Ikea, the well-known furniture company, has announced that there may be a delay in the delivery of its products due to the recent strikes on vessels using the crucial Red Sea trading channel.

3）Agriculture and food: A study conducted by Chatham House found that approximately 14% of all cereals and 4.5% of soybeans traded on a global scale transit through the Suez Canal. Grain traders and analysts reported on last Friday that due to the recent attacks on shipping in the Red Sea area, there has been a significant increase in the amount of grain shipments being redirected around the Cape of Good Hope instead of utilizing the Suez Canal. According to WTO's post on X, wheat exports through the Suez Canal dropped by nearly 40% to 0.5 million metric tons during the first two weeks of January.

Unlike automotive and consumer goods cargoes, longer shipping times may render perishable foods unsellable, causing panic within the industry. If the transportation method were to be changed to air freight, it could potentially lead to a significant increase in shipping costs, causing considerable pressure and difficulties for farmers, importers, and consumers.