Red Sea Attacks Disrupt Trade Routes, Spark Inflation Concerns

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The recent spate of Houthi attacks in the Red Sea has thrown the crucial trade routes connecting Europe, the Middle East, and Asia into disarray, giving rise to fears of renewed inflationary pressures. Major shipping companies have responded to the disruptions by rerouting vessels to avoid the Red Sea and the Suez Canal, opting for the longer journey around the Cape of Good Hope. This strategic shift has resulted in a significant surge in shipping costs and extended travel times, contributing to concerns about inflation and energy price volatility in Europe.

Shipping Cost Surge and Geopolitical Responses

The decision by shipping companies to avoid the Red Sea and the Suez Canal has led to a substantial increase in shipping costs, with prices soaring to over $6,000 from the previous month. The US and the UK responded to the attacks with airstrikes on Houthi targets in Yemen, emphasizing the importance of safeguarding international trade flow. Despite these measures, the rising cost of shipping goods poses a risk of supply chain disruption and potential consumer price hikes, especially as global inflation shows signs of stabilization.

Critical Role of Suez Canal in Global Trade at Risk

The Suez Canal, responsible for facilitating 18% of global trade, is now under threat due to the Red Sea disruptions. This vital passage supports the transit of 20% of the world’s oil and 25% of global liquefied natural gas (LNG) trade. Approximately 40% of Europe-Asia trade typically passes through the Red Sea, with an alternative route around the Horn of Africa incurring an additional $1 million in fuel costs for a round trip. Geopolitical conflicts in the Red Sea and Suez Canal, as cautioned by the World Trade Organization Director-General, Ngozi Okonjo-Iweala, could significantly disrupt the anticipated 2024 global trade recovery.

Impact on European Markets and LNG Sector Vulnerability

The European market, especially in the LNG sector, faces vulnerability due to the Red Sea attacks. Qatar, a major LNG exporter, sent over 20 billion cubic meters of LNG to Europe in 2023, comprising around 16% of European LNG imports. Commodities strategist Ewa Manthey highlighted the potential impact on these flows, emphasizing the risk to European consumers. Geopolitical strategist Velina Tchakarova noted that Indian exports have more than doubled in value due to the Red Sea attacks, affecting around 80% of India’s nearly $14 billion-a-month trade with Europe.

China-Europe Trade Corridors at Risk, Heightening Inflation Concerns

The disruptions in maritime transportation, which forms the backbone of EU-China trade corridors, could significantly impact the import-export dynamics between the two economic entities. China, as a major trading partner, could see disruptions in its exports to Europe, affecting key import categories such as telecommunications equipment and machinery. This, coupled with the heightened costs of importing goods from Asia, may result in inflation concerns for Europe. A close watch on energy commodity price fluctuations is essential, given their substantial impact on overall European inflation, as indicated by a recent IMF study highlighting the role of import prices in European consumer inflation.

SOURCE: Ref Image from Free Malaysia Today

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