Red Sea and Panama crises continue pressuring freight rates

Over the last six months, climate and geopolitical events have disrupted seaborne trade. A record drought in Panama and the unprecedented intensity of attacks on commercial ships by the Houthi rebels in the Red Sea are straining the freight market. Almost 150 ships have been targeted along the latter trade route since the first attack was registered to a non-commercial ship last year (Figure 1, left-hand side).

While vessels in the Panama Canal need to wait for longer to cross it, oil and shipping majors have stopped their vessels from crossing along the Red Sea; and are routing them away from the region. The alternative journey around the Cape of Good Hope in Southern Africa adds around 8.5 days to the journey from East Asia to Europe.

As a result, ship transits through the Panama Canal, Bab el-Mandeb Strait and Suez Canal are falling rapidly, with daily crossings reducing by almost 30%, 65% and 45% from year to date, respectively (Figure 1, right-hand side). With vessel transit along the Panama and Red Sea trade routes amounting to almost 20% of seaborne trade, recent events are already impacting transit volumes and freight costs. The Baltic Dry Index (BDI) has risen more than 30% in March since the Houthi attacks to commercial ships began in November, while the corresponding increase for the Global Container Freight (FBX) has been 143% so far (Figure 2, left-hand side).

Energy, dry bulk and container shipping are all affected

As seaborne trade accounts for more than 80% of total global trade, these disruptions have potentially important spillovers to the world economy. In particular, trade in the Red Sea accounts for around 15% of global seaborne trade, and is important for oil and gas, dry bulk and container shipping.

Our central view is that the nature of current disruptions to the seaborne market is short-term, and trade fundamentals will shape the long-term direction of freight rates. World volume trade growth remains weak and has shown signs of stagnation over the last 12 months. As the weather outlook begins to improve in Panama, subdued trade is expected to weigh down on freight rates. For instance, the Panama Canal Authority has recently softened the restrictions on the number of ships that can cross the Canal, starting in January. Although the BDI fell briefly in January back to October levels, it is trending up again as more bulk carriers have been targeted by the Houthi rebels in the Red Sea.

The situation in the Red Sea remains fluid, but any de-escalation will likely see dry bulk freight rates dropping further and container costs limiting upside movements. However, in a severe downside scenario, we do not rule out renewed pressure on freight rates if the conflict in the Red Sea extends or escalates, leading to higher security risks for shipping majors. An intensification of the Red Sea conflict will result in higher container, dry bulk freight rates and could ultimately lead to higher energy prices.

Prolonged disruptions could strain supply chains and impact inflation rates

The global supply chain crisis of 2021-22 saw freight rates soar and queues of ships form offshore major ports. This contributed to the surge in producer prices and consumer price inflation in the US, Europe and other countries. The Global Supply Chain Pressure Index (GSCPI) estimated by the Fed has shown a strong correlation with global PPI inflation over the past few years (Figure 2, right-hand side). Renewed disruptions to supply chains and/or higher energy prices could again cause producer prices to rise which will, in turn, put upward pressure on consumer prices, squeezing consumer real incomes and potentially delaying any easing in monetary policy. This threat is probably greatest for Europe, given the importance of the Red Sea route to West-bound container traffic from East Asia. But higher energy prices would affect most countries.

However, a return to the inflation rates of 2021-22 is unlikely in all but a worse-case scenario. The inflation of 2021-22 was about far more than just freight costs and delays. Covid-19 lockdowns were continuing to cause supply-chain problems across the world. More importantly, there was a massive global imbalance between demand and supply, as super-loose fiscal and monetary policy combined with a re-opening boom in consumer demand. That is no longer the case. In 2020 supply chains were (on the GSCPI measure) almost as badly disrupted as in 2021. Yet global PPI inflation was low or negative, and CPI inflation fell, because demand had collapsed as major economies went into Covid-19 lockdowns.

We will continue to monitor the situation in the Red Sea and Panama closely and evaluate the impacts on the global economy and commodity markets.

About the Author

Cristobal Arias, Senior Cost Analyst

Cristobal Arias has over 8 years of experience in the macroeconomic research industry. He is a Senior Cost Analyst at CRU, leading its Cost Macro Service and incorporating climate-related themes on commodities traded in the freight markets.