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How Red Sea crisis hits global supply chain

Published : Tuesday, 23 January, 2024 at 12:00 AM  Count : 552
Kamal Uddin Mazumder
Shipping is the lifeblood of the global economy. Some 11 billion tons of goods are transported by ship each year. Without shipping, intercontinental trade, the bulk transport of raw materials, and the import and export of affordable food and manufactured goods would simply not be possible. For an economic region such as the European Union, shipping accounts for 80% of total exports and imports by volume and some 50% by value. Waterways have been considered the main modes of trade for hundreds of years, mainly due to the convenience and low cost of transporting goods. But recently, this safe path has become unstable. In addition to man-made problems in the waterways, the climate change crisis has added to this, which has made imports and exports more volatile.

The Israeli-Palestinian conflict in the Middle East has expanded beyond two nations. Yemens Houthi rebels, expressing solidarity with Palestine, have been targeting Israel-linked ships in the Red Sea in response to the latters devastating war in the Gaza Strip. The crisis deepened after the intensification of counter-attacks on the rebel groups by the UK and the US. The mounting tension has huge ramifications for countries such as Bangladesh, which uses the route to send products to Europe, accounting for 45 percent of the countrys overseas sales in the last financial year.

The Suez Canal, which connects the Red Sea to the Mediterranean, is the shortest route between Europe and Asia. Around 12 percent of global trade passes through the Suez Canal, representing 30 percent of all global container traffic, especially from South Asia, and more than $1 trillion worth of goods annually. According to the White House, 8 percent of the global grain trade, 12 percent of seaborne-traded oil, and 8 percent of the worlds liquefied natural gas trade pass through the Red Sea.

The shipping lines are now diverting to a much longer route, around Africas Cape of Good Hope,following attacks last month on commercial vessels on the Red Sea, one of the worlds busiest shipping routes.William Bain, trade expert of the British Chamber of Commerce, said: "About 500,000 containers were going through the Suez Canal in November, and that had dropped 60 percent to 200,000 in December." The Shanghai Containerized Freight Index (SCFI) report says that due to the conflict in the Red Sea, each ship has to spend an extra 10 days to reach its destination. By doing this, the cost of 25,000 dollars per 20-foot container has exceeded 3,000 dollars. In this situation, due to an increase in time on the one hand and a cost increase on the other, the price of oil and gas will increase much more than before.

Global freight rates are rising again. The industry analysts warned that the security threat in the Red Sea could see prices double over the next few weeks. Meanwhile, major shipping lines announced plans to impose additional surcharges ranging from $700 to $1,500 per TEU container from January. For example, French company CMA CGM imposed a "Peak Season Surcharge" (PSS) of $500 per TEU from January 1 to all European ports from all Asian ports, including India, Pakistan, Bangladesh, and Sri Lanka. The decision already greatly impacts the cost of shipping goods, and if it becomes an extended crisis, it could spark a hike in the price consumers pay for imported goods, which is expected to fuel subdued inflation again.

The crisis will not only hit Bangladesh, but Bangladeshs competing countries will also find themselves in a similar situation. However, one positive news is that Bangladesh does not use the Red Sea to import goods. China is the top supplier for Bangladesh, making up 26.1 percent of the countrys $68.45 billion imports in 2022-23, central bank data showed. India came in second with a share of 13.9 percent. The next major suppliers are Malaysia, Indonesia, Brazil, Qatar, the United States, Singapore, Japan, Saudi Arabia, the United Arab Emirates, and South Korea. Ahsan H. Mansur, executive director of the Policy Research Institute of Bangladesh, said exports have been affected more than imports due to the Red Sea conflict, as most of the exported goods from Bangladesh are bound for Europe and the US.

In relief, Bangladeshs flag carrier vessels have also remained unaffected until now. The Houthis say they will target ships linked only to Israel, so the risk of vessels carrying the Bangladeshi flag may be low since Bangladesh is a Muslim-majority nation. Moreover, the shipment time for fertilizer and fuel is likely to remain unaffected as Bangladeshi suppliers use different routes. Bangladesh imports fertilizer mainly through the Cape of Good Hope and the Arabian Sea. So, the shipping time is not going to increase in this situation.

However, as the Red Sea, one of the busiest shipping routes to Europe, has become more dangerous due to Houthi attacks and strikes by the US and its allies against them, the world may see another supply chain crisis.Energy supplies could be substantially disrupted, leading to a spike in energy prices. This would have significant spillovers to other commodity prices and heighten geopolitical and economic uncertainty, which in turn could dampen investment and lead to a further weakening of growth.

The writer is a Security and Strategic affairs analyst



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