Can The Red Sea Conflict Trigger A 2nd Round Of High Inflation AND A Credit Event?
Spoiler Alert: Few.
In November of last year, the Houthis, an Iran-backed rebel group in Yemen, hijacked its first cargo ship in the Red Sea. The group, which has opposed Israel and its actions in the Gaza Strip, has targeted more than two dozen ships in total and has threatened to continue doing so as long as the conflict continues.
Economically, this is a big problem because the Suez Canal is the region’s most popular shipping route. According to the graphic above, roughly 30% of all global container traffic goes through the region. Given the risks of traveling through the Red Sea, many shippers have opted to avoid the route altogether and are instead traveling around the southern tip of Africa, which has added roughly two weeks to the typical delivery time.
Not surprisingly, this has caused shipping costs to skyrocket, either via the added risk of going through the Red Sea or the additional time needed to travel around the Cape of Good Hope.
Since Christmas, the cost of shipping across virtually any Asia to Europe/North America trade route has at least doubled and, in some cases, tripled. It’s reasonable to assume that until some sort of cease fire agreement is reached, these high costs will continue. Even after the conflict subsides, it’s going to take some time for conditions to return to normal. A lot of ships and a lot of shipping containers are in places that they aren’t normally and it will take time for the supply/demand of trade vessels to balance out.
While you may assume that energy is a big component of what’s being disrupted here, given its proximity to major oil producing nations, it actually isn’t. In fact, almost none of it is.
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