How will the Red Sea crisis affect the global economy? Opinion

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 Image of a container ship. Photo: from archive

This crisis will generate an increase in transportation and production costs, which will shift from shipping companies to shippers, warehousers and distributors.

Imagine that  I cover his eyes  with a blindfold and take him to the door of my house, place him 5 centimeters from the  brick  wall of the facade and open the blindfold. You will see a brick and you can deduce that you are in front of a  construction , but could you distinguish if it is a school, a hospital, a museum or a home? This same situation is what most  of the public opinion  is experiencing in relation to the current Red Sea Crisis…, let me explain:

The consequences of the escalation of violence directed  by the Houthi rebels  on merchant ships sailing in the Red Sea have already begun to be noticeable in  maritime traffic  and yet its effects on the world economy are not yet perceptible, although it will not take long. to arrive. These attacks generate a serious risk for ships that intend to  navigate the Suez Canal , the fastest maritime route between  Asia and Europe  and through which  12%  of global maritime traffic transits (about 19,000 cargo ships per year). 

The reaction of a good part of  the shipping companies  has been to suspend their operations in the region, readjusting their trips and stopovers through the application of the well-known  “blank sailings”  (contractual condition that allows the unilateral cancellation of a stopover without penalty of any kind). 

Another  338 ships  have chosen in the last 90 days to vary their maritime route and circle the African continent through the  Cape of Good Hope,  increasing their route by 3,500 nautical miles compared to the route through Suez, and adding  12  extra days of navigation to cover the Asia-Europe route.

This unexpected increase in transit times represents an increase in operating costs,  delays in planned deliveries  and also an opportunity cost of ships and containers (the potential demand that is no longer met during those days).

For its part  , the European Commission , like the majority of public institutions and part of public opinion, maintains a  carefree attitude , considering the Red Sea attacks as specific and minor events. The way to make light of the matter has been to affirm that the ships that have chosen to deviate have avoided the large fees applied to cross  the Suez Canal.   They also allude that the reduced global demand for transportation and the absence of congestion in  the supply chain have contributed to mitigating the impact of these new circumstances.

In this way, they consider that the general increase of  more than 125%  in freight prices in the month of January is a natural correction of the market, which had to adjust after a period of  24 months  of decline. It seems that they have not understood that, if the situation continues,  current  transport prices will not be the ceiling, but the new floor.

The  lack of perspective  and reaction of our institutions is spreading a false sense of tranquility that reminds us of  Homer Simpson ‘s attitude before falling asleep at the controls of the nuclear reactor, but let’s not fool ourselves, global trade faces great uncertainty. and great stress on the global supply chain.

What has been the reaction of the main economic agents? And the immediate consequences?  

These  route readjustments and  unexpected opportunity costs are assumed by the shipping companies knowing that in turn they will be passed on to shippers and other interested parties in  the merchandise  through the application of freight surcharges, in the same way this price increase is received like water from May for being  a legitimate pretext  for the market to correct the downward trend in prices in recent months.

In relation to the ports, the diversion of a large part of the fleet around  the Cape of Good Hope gives rise to an accordion effect, since it has meant a period of inactivity in the month of January, which translates into a period of  overflowing  activity in February, once the diverted ships reach their destination. Now the hot potato is in the hands of  the port infrastructure  , which must apply extraordinary contingency plans to dispatch a large number of ships and merchandise, avoiding adding further delay to that already generated by route changes.

These delays and delays in deliveries are also already generating supply crises in  industrial production in the automotive,  retail, chemical industry, industrial components and energy sector. In fact, the large industry of  Bilbao,  Valencia and Vigo  are beginning to experience shortages of raw materials, capital goods and components, so based on the experience acquired in the  last 4 years  they are already applying contingency plans, shutdowns in the production and ERTES in part of its workforce.

For its part, marine insurance is experiencing  a moment of great demand , and is already increasing its contracting significantly, especially in hull insurance,  machinery and transport insurance,  and it seems that this increase in demand is causing an increase in insurance prices. their cousins.

 This cocktail will generate an increase in transportation and production costs , which will move from shipping companies to shippers , warehousers and distributors,  greatly affecting the price of the products to their final recipient; the citizenship.

Today it is difficult to discern the  main reason  that has encouraged these attacks in the Red Sea and although their effects have already begun to be seen, it would be better if we let ourselves be carried away by the prevailing current  of short-termism , and make the effort to give  5 Take steps  back when we are in front of the facade to gain perspective, as this will be the best way to specify where we are.

Thank  my father,  whose contribution has been essential for the preparation of these lines.

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An article by: Felipe Serrano Pérez. CEO. Lawyer specializing in Transportation and Commercial Law.  https://www. internationaltransportlawyers. com/

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