Red Sea crisis may disrupt global economy for a year! Shipping rates to stay high in H1.

The Red Sea crisis is causing the first deterioration in the supply chain for manufacturers in the Eurozone and the UK in a year. The January supplier delivery time index sharply dropped below fifty, indicating that most manufacturers are facing the challenge of extended supplier delivery times. This not only exacerbates inflationary pressures in Europe but also further impacts global manufacturing.

Recently, the global shipping giant, Da Feng Shipping, suspended ships from passing through the southern route of the Red Sea due to safety risks. The Red Sea, as one of the busiest routes globally, connecting Asia and Europe via the shortest route, sees over 18,000 ships passing through annually, accounting for 40% of Eurasian shipping. As a result, geopolitical risks are affecting the transportation of crude oil and natural gas from the Middle East to Asia, leading to a new high in international oil prices in nearly two months.

Shipping delays have already affected Chinese exports, causing congestion at ports during the peak shipping period before the Spring Festival. Due to increased freight costs, the European economy is facing the immediate impact, resulting in persistent inflation. Prominent companies like Tesla and luxury car manufacturers have announced production cuts to cope with supply chain pressures.

Currently, the situation in Yemen remains uncontrolled, and the tension is escalating. The US military base located in the northeast of Jordan, near the Syrian border, was attacked by drones, resulting in casualties among US troops. Although Iraqi militia groups claimed responsibility for the attack, the US believes it is backed by Iran. Both parties in the US Congress support taking a tough stance, and the situation could further escalate.

Experts suggest that if the Middle East situation continues, with the involvement of countries like Iran and Lebanon, it could lead to a significant rise in oil prices, further impacting the global economy. JP Morgan CEO Damon warns that there is a risk of the Middle East conflict spreading to other regions.

There are three possible scenarios: the most optimistic is that the disruption will start easing in the first quarter of this year; relatively optimistic is that the disruption will ease by the end of the first half of this year; the most pessimistic is that the disruption will continue into the second half of this year. Regardless of the scenario, the turmoil in the Red Sea is unlikely to disappear overnight. Even if ships can resume transit in the first quarter, it will take time to ease the blockage in the supply chain, and rerouted ships already in transit must complete longer journeys. The disruptions in the Red Sea will have a long-term impact on the global supply chain.

At least until the first half of this year, container shipping rates will remain high. Due to the uncertainty of the Red Sea conflict, the risks of rising contract rates are difficult to mitigate. The global shipping market's uncertainty about trade manufacturing will continue to plague the global economy. Currently, a political agreement is needed to fully resolve the shipping interruption. The good news is that the impact of this supply chain crisis is relatively small, mainly due to three factors:

Firstly, global market demand is much lower compared to the pandemic period. Secondly, container ship capacity is now larger, with over two million standard containers delivered just last year. Lastly, there is no shortage of port labor in land logistics, unlike the labor shortage during the pandemic, and there should be no tension or shortage in truck storage and transportation capacity.

However, the impact of inflation still requires long-term observation. The international situation is ever-changing, coupled with the unpredictability of human behavior. In this era of uncertainty, any conflict may trigger risk-averse behavior among global businesses or consumers, exacerbating the already mitigated trend of inflation.

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