Assessing the costs of the Red Sea attacks

The attacks on commercial shipping off the coast of Yemen have significantly reduced traffic on one of the main arteries for global trade. By mid-January six of the world’s top ten container carriers had diverted away from the Red Sea (with these firms accounting for around 60% of global capacity). Several oil tanker operators have similarly advised their vessels to avoid the region.

The most immediate impact of the disruption was a spike in sea freight prices and the extension of delivery times from Asia. Higher shipping costs could put modest upward pressure on inflation over time (potentially adding up to 1% point to inflation over the year ahead). But the impact should be much more limited than in the aftermath of the pandemic, and the reaction in energy markets has been muted so far.

What is the potential impact on supply chains?

• The Suez Canal is one of the world’s busiest shipping lanes, accounting for 12% of global goods trade flows. It is particularly important for trade between Asia and Europe, with 19% of UK goods imports (by value) typically passing through Red Sea.
• The re-routing vessels around Africa and the Cape of Good Hope will significantly lengthen journey times, adding 10 to 14 days to the usual 35-day trip between Asia and Northern Europe (and adding 27 days on routes to the Mediterranean).
• Extended journey times and delayed arrivals could also reduce capacity coming out of Asian ports in the coming weeks, as ships are not where there were supposed to be, potentially adding to disruption.
• The disruption was initially focussed on container ships carrying manufactured goods or components, but media reports suggest other vessel types (including bulk carriers) are increasingly avoiding the area too, potentially affecting the supply of a range of commodities (such as foodstuffs or metals).
• A number of firms have already told us of increased delivery times on expected shipments, including specialist chemicals firms, a machinery and equipment manufacturer and a publishing firm. Media reports suggest some European automotive groups have paused production due to shortages of components.