Don’t overplay the issues!

Much has been made of the inflationary impact of closing the Red Sea for container and bulk transit. In reality the impact of such a long-term closure will be quite limited – although the reorganising needed will certainly have a widely disruptive impact. We should be very careful about simply accepting that such developments would push up inflation significantly and push the OECD – especially Europe – into renewed recession. This kind of background noise is very useful for retailers in their permanent quest to raise prices and improve their bottom lines.

CONTAINER COST IMPACT
Table A summarises the actual price/cost impact on a typical consumer goods shipment from Shanghai to Rotterdam – in this case a 40-foot container with a cargo of training shoes. In the middle of last year, the headline westbound rate was placed at around US$1800. The immediate impact of diversion away from the Red Sea and via the Cape was to increase freight rates to around US$3800 – certainly a very sharp increase.

However, let’s look at the actual impact on retail pricing for a pair of trainers. If a 40-foot container can load around 6500 pairs of shoes, then the actual impact of freight charges per pair of shoes will increase from 28 cents to 58 cents. If the shoes retail at around US$120 this results in a price increase of just 0.49 per cent. This is a negligible adjustment that will have no immediate impact on economic growth and inflation. Of course, this is only one commodity grouping and there will be specific, more focused, effects in some instances. However, as an example of consumer goods this is highly representative.

WHAT ABOUT BULK CARGOES?
Lower value cargoes – dry bulk, crude oil, LNG – will also be impacted. The diversion costs via the Cape need to be factored-in, although the lack of a Suez transit charge modifies the comparison. Table B looks at a typical VLCC voyage from the Persian Gulf to Rotterdam.

The voyage costs of the diversion – when fully built-up – results in an increase in costs from around US$2.3m to US$2.7m. With crude oil prices at around US$75 per barrel this equates to a CIF price increase of around 17 cents per barrel. Once again, the actual underlying cost impact for wholesale delivered commodities is very limited. The various assumptions used in this overview calculation can be adjusted or disputed but it is clear that, by itself, the cargo diversion will not induce a significant inflationary kick to the world’s economies.

NOT JUST TRANSPORT COSTS
The actual impact can be seen to be limited and the broader hype around this subject is clearly overstated but the there are other considerations:

• Increased tonne-mileage demand from the diversion will require additional shipping capacity. It is fortunate – for the container lines, at least – that the fleet of Megamax and other large vessels is passing through a period of unprecedented expansion. The tonnage will be there to absorb the longer haul lengths in this sector. Other trades are more finely balanced, and this may well result in the upturn in freight rates being sustained – although the impact should still be limited. There also remains scope to increase trading speeds to meet such short-term needs, although there will be an impact on carbon emissions from this approach.
• There will be short term disruptions as a new equilibrium is reached and this ‘bullwhip effect’ could well see further short term increases in freight rates as a result of short-term mismatches of supply and demand.
• In the container sector, readjustment of transshipment strategies – for example a shift in focus from Egyptian Mediterranean ports to Algeciras/Tangiers will require reorganisation but there is sufficient available capacity to manage such moves. New opportunities will emerge such as using Nqura (South Africa) for transshipping Latin American and Caribbean containers. Equipment shortages may be a factor, with more containers required for a given trade if diverted via the Cape. Fortunately, there is an oversupply of containers at present.
• Voyage times will be longer and, with higher interest rates there will be a negative impact on inventory costs. Even here, the actual cost impacts on a CIF basis will be limited.
• There will be short term disruptions in the ports, but these will be insignificant in comparison with the type of chaos that was eventually managed during the Covid pandemic.
• One of the big losers will be Egypt. It is estimated that Suez Canal revenue accounts for at lease three per cent of the country’s national income. Given the precarious position of the economy this will be a major issue.

IN SUMMARY
It’s too early to assess the absolute impact of the Red Sea crisis but what is clear is that much hype has been generated on this subject. The direct cost impact will be limited, and the disruption impact should be manageable. It’s also clear that this presents a great opportunity for wholesalers and retailers to increase their prices. Ignorance of the true position offers an open goal for such interest groups. This is the real risk.