Houthi attacks on Red Sea shipping pose two big inflationary risks to Britain

When Joe Biden launched a US-led naval coalition to protect container ships from Houthi rebel attacks in the Red Sea, it was supposed to end the disruptions to global trade.

Instead, problems have only worsened since the initiative was announced just before Christmas.
Houthi rebels detonated an unmanned vessel in the shipping lane on Thursday, just as a senior US admiral admitted that attacks weren’t abating. In a briefing with reporters, Vice Admiral Brad Cooper said the naval coalition had shot down 19 drones and missiles launched by the Houthis in less than a month.
On Monday, Iran, which is backing the rebels, deployed its own warship to the Bab al-Mandab strait, the narrow shipping channel which leads to the Red Sea.

Analysts have warned the continued attacks are a new inflationary risk that could keep prices higher for longer.

“This is a whole new level of crazy for world trade,” says Michelle Bockmann, principal analyst at Lloyd’s List Intelligence. “This is highly targeted, backed by Iran with drones and missiles and a level of sophistication that ships have never had to deal with before.”

Past attacks on container shipping were typically mounted by pirates in fishing boats. The Houthi attacks, which have erupted in the wake of the war between Israel and Gaza, are far more high tech.
It makes the cost of guarding them much higher. This disruption presents two big inflationary risks.
The first is higher shipping costs. Freight costs between Europe and Asia have already rocketed by 163pc since mid-December as the attacks force many ships to take costly detours around Africa to avoid the Red Sea.

Shipping giant Maersk, which had briefly restarted trade in the area, announced earlier this week that it was suspending transits through the Red Sea indefinitely. The majority of container ships that would normally travel through the Suez Canal are now rerouting around the Cape of Good Hope, adding thousands of miles to their journeys.

Around 30pc of the world’s container trade passes through the Suez Canal, meaning higher shipping costs on this route have a significant impact.
“Over the coming months, some goods will take longer to be shipped, as they are redirected via longer routes and there could be a knock-on impact on availability and prices as a result of higher transportation and shipping insurance costs,” says Helen Dickinson, chief executive of the British Retail Consortium (BRC).

Companies are already warning of temporary shortages because of the problems. Next chair Lord Wolfson on Thursday said that if the disruptions continued, UK stock deliveries could be delayed by up to 2.5 weeks. Furniture giant Ikea also warned of potential delays at the end of last year.
Shipping costs are still only a fraction of the levels recorded during the worst of the pandemic supply chain crisis but Brockmann cautions: “We expect there to be further jumps.”
The second inflation risk is the prospect of higher oil prices.

In normal times, around 7m barrels of oil travels through the Bab al-Mandab strait every day. This trade has more than halved since December 18, according to Goldman Sachs.
So far, rerouting this oil around the Cape of Good Hope has triggered only a moderate rise in oil prices. Brent crude was above $77 a barrel on Thursday, up about $4 since December 12.
However, Bjarne Schieldrop, chief commodities analyst at SEB bank, said oil could surge to $90 per barrel if the Bab al-Mandab strait was fully cut-off.

Rising oil prices flow into petrol and energy prices, which in turn mean inflation could stay higher for longer.

Although Europe gets a larger share of its goods through Suez, the US would feel a bigger inflationary blow from higher oil prices, says Erik Britton, chief executive of Fathom Consulting. This is because movements in petrol prices have a larger bearing on the inflation rate in the US.

The timing of the Red Sea attacks is terrible. Following the war in Ukraine, trade through Suez has soared to the highest level in at least 23 years. More than a million tons of oil tanker freight travelled through Suez every day in the first eight months of 2023, according to Suez Canal Authority data.

“European countries are importing more oil from the Gulf states and elsewhere to offset the loss of Russian oil exports,” says James Swanston, a Middle East expert at Capital Economics. “On top of this, there have been increasing exports of Qatar’s LNG [liquefied natural gas] to Europe.”

Extremely low water levels in the Panama Canal also mean ships have been getting redirected through Suez.

The inflation risks will alarm the Bank of England’s rate setters and policymakers elsewhere in the world.
Disruptions so far are not enough to affect the consumer prices indices (CPI), the official measure of inflation. However, if the situation escalates, the impact could be significant, says Ben May, director of global macro research at Oxford Economics.

If current freight prices are sustained, global inflation could be 0.6 percentage points higher than it otherwise would have been in a year’s time, he warns. This is the difference between inflation at 3.4pc and 4pc by January 2025, according to Oxford Economics’ current forecasts.

Interest rate cuts priced in by markets in the US, UK and Europe would likely become unfeasible, May says.

Meanwhile, a jump in oil prices to $100 a barrel would add a month to the Bank of England’s fight to bring inflation down, according to Capital Economics’ modelling.

Analysts do not expect oil prices to climb this high at the moment, but they are watching closely to see whether the conflict will sprawl beyond the Bab al-Mandab strait.

Iran’s involvement means it is feasible that trade disruptions could spread to the Strait of Hormuz, the narrow shipping channel at the mouth of the Persian Gulf, which Iran has threatened to close in the past.
Goldman Sachs has said a Hormuz closure would trigger a 20pc surge in oil prices in the first month, “and could become more extreme thereafter”.

It would also block LNG exports from Qatar, which would have massive implications for European gas supplies. The UK gets 30pc of its LNG from Qatar.

This scenario is highly unlikely, not least because Iran is unlikely to want to anger Qatar. But what is clear is that the risks are huge.

“This is so volatile. Who knows, if an oil tanker is hit and there is a spill then all bets are off,” says Bockmann.

Everything depends on how long the attacks in the Red Sea last. Vice Admiral Robert Murrett, professor of practice at Syracuse University’s Maxwell School and deputy director of the Institute for Security Policy and Law, warns that they could easily drag on for the whole of 2024.

“In the mind of the Houthi, this is all connected to what’s happening in Gaza,” says Murrett. “And the operations in Gaza could last for the rest of this calendar year.”

Copyright : https://www.telegraph.co.uk/business/2024/01/05/red-sea-crisis-poses-a-fresh-inflation-headache-for-the-uk/

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