Why we should worry about the Red Sea crisis

Targeting trade: A photo of a cargo ship that was hit by a bomb-carrying drone in the Red Sea last week. The number of containers moving through the area has reportedly dropped by 60%. — AP

Maritime transport, often described as the lifeblood of international trade, plays a paramount role in global logistics.

According to the United Nations Conference on Trade and Development, maritime transport is estimated to account for nearly 80% to 90% of global trade in 2022.

It is a preferred mode of transport because of its cost-effectiveness compared to the faster yet more expensive alternative of using aircraft.

For instance, maritime cargo with a transportation cost of US$300 would cost US$1,200 when transported by aircraft.

Consequently, maritime transport is widely recognised as the optimal choice, especially for voluminous cargo. Given its significant impact on global trade, it is crucial to sustain affordable sea-freight rates.

A study conducted by Martincus in 2014 for Economic Letters underscores the magnitude of this issue, revealing that a mere 1% increase in freight rates can result in a substantial 6.5% decrease in firms’ export values.

This prompts reflection on the potential consequences of uncontrollable freight rates, suggesting that such a scenario could have far-reaching implications for the stability and viability of global trade. With the escalation of geopolitical tensions, particularly the shift from Gaza to the Red Sea, where Houthi rebels are targeting vessels that transit the area, ostensibly as an expression of support for Palestine, there is a need for cautious anticipation regarding the positive outlook and stability of transportation and logistics in general.

The geopolitical landscape, marked by such disruptions, underscores the importance of vigilance and strategic planning to navigate potential challenges in the transportation and logistics sectors.

The ramifications of these disruptions are extensive. The decision to reroute vessels via the Cape of Good Hope to circumvent the Middle East, on average, extends journeys by 10 days.

Analysts foresee a substantial increase of US$1mil in costs per ship because of the incurred delays and higher bills.

This redirection has already taken a toll on global trade, which witnessed a 1.3% decline in December that is predominantly attributed to reduced shipments through the Red Sea.

According to a report from the German economic institute IfW Kiel, there has been a 60% decrease in the number of containers travelling through the Red Sea region.

The figures have plummeted from approximately half a million in November to a mere 200,000 last month.

As global supply chains undergo tightening, the looming risk of bottlenecks fuelling inflation becomes pronounced, drawing parallels to the challenges encountered during the pandemic.

The impact of these developments is unavoidable, as is evident in recent data from Bloomberg Intelligence, which vividly portrays the gravity of the challenges confronting global trade, particularly along the critical Red Sea routes.

Container freight rates have surged dramatically, highlighted by the Asia (Mainland China) to Europe route index skyrocketing by approximately 80% compared to December 2023.

Similarly, significant increases were observed on the China to US East Coast route, with a substantial climb of 40%.

Notably, the Mainland China to Mediterranean routes experienced a substantial hike, more than doubling the previous rates.

Indeed, these disruptions are inevitably making a substantial impact on major global trade routes. In December 2023, global traffic reached an astounding 14.866 million twenty-foot equivalent unit (TEU) shipping containers.

The Asia-North America routes contributed significantly, with 1.8 million TEUs, while the Asia-Europe routes amounted to 1.26 million TEUs, underscoring the critical Notably, the price of a crucial commodity, if not the most significant one – crude oil – has started to surge.

Before the first US-led strikes on Yemen on Jan 12, the price of crude oil had already increased by at least 6%, reaching US$78 per barrel as of Jan 18.

Compounding the situation, insurance costs have also spiked because of heightened risks for ships navigating the affected waters.

According to Bloomberg analysts, underwriters are now charging up to 1% of a ship’s value for those traversing the waterway, marking a 10-fold increase compared to the period before the attacks.

Adding to the complexity, several ship insurers are now considering exclusions for vessels from the United States, Britain and Israel, as ships from these countries have become the primary targets for Houthi militant strikes.

Indonesia is not immune to this turbulence, and the impact of this phenomenon on the country’s economy could manifest itself both directly and indirectly.

According to a study by IFG Progress in 2022, it was estimated that freight rates contribute to inflation with a rate of 0.032%.

This implies that a 1% increase in freight rates could result in a 0.03% increase in input prices, subsequently affecting the inflation rate.

As of Jan 18, the freight rate from Mainland China to the Mediterranean had surged by over 100%.

It stood at US$5,440 per foot-long equivalent (FEU) on Jan 18, compared to US$2,414 per FEU on Dec 22, 2023. If this trend persists, the ongoing increase could potentially push up input prices for Indonesia by more than 3%.

Furthermore, the indirect impacts may take some time to materialise for Indonesia. The contributions of Europe, North America and the Middle East to Indonesia’s total exports are quite substantial.

The export value from the European Union is approximately US$35bil, while US$28bil comes from North America and around US$10bil from Middle Eastern countries.

Traditionally, these exports are channelled through the Red Sea corridor. The duration of the conflict remains uncertain, but it is imperative that multilateral pressure be directed toward achieving peace in the Middle East.

Countries worldwide are still grappling with the aftermath of the pandemic and the strain from ongoing inflation, which could be further exacerbated if the chaos in the Red Sea cannot be effectively mitigated.

Collective efforts on an international scale are crucial to addressing the complexities of the situation and fostering stability in the region. — The Jakarta Post/ANNIbrahim Kholilul Rohman and Rizky Rizaldi Ronaldo are researchers at IFG Progress. The views expressed here are their own.

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