In today’s Finshots, we tell you how the Israel-Hamas war is disrupting global maritime trade and could increase inflation.
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The Story
MSC is the world’s largest shipping carrier. And one of their ships was attacked in the Red Sea on Friday.
What on earth is happening?
Well, it’s geopolitics!
You see, when ships engage in trade between Europe and Asia, they take a shortcut through the seas — they traverse the Suez Canal. Now this canal was initially a 164 km engineering marvel built in the 1860s. It cut through the Egyptian desert and connected the Mediterranean Sea to the Red Sea. If you want an idea of how useful it was to trade, just know that it cut travel time between London to Mumbai from 6 months to a mere 2 months back then. So you can imagine all the ships would’ve rushed to sail these waters and save precious time.
These days, 12% of international trade happens through the Suez Canal. Ships carry Ikea furniture, Nike sneakers, Lenovo laptops and a whole host of other stuff along this route. It’s a critical cog in maritime trade.
But ships are boycotting the Suez Canal now. They are ditching the shortcut out of fear.
Fear? Why?
Well, remember we told you that the Suez Canal connects to the Red Sea. This is a body of water sandwiched between the African coast and the Middle Eastern coast. And the problem seems to stem from one of the countries along this coastline — Yemen!
Now you definitely know that Israel is engaged in a war with the Palestinian group Hamas. But what you might not know is that Hamas is getting support from some quarters — including the Houthi Rebels of Yemen. Think of this as the anti-opposition unit in the country. Some label them as a militant organization too. And these Houthi Rebels have taken up the Palestinian cause and are launching attacks on ships passing along the Red Sea. They claim that they’re targeting Israel-linked units. But that doesn’t seem to be true. Ships of all stripes are being attacked. And MSC’s ship faced the brunt of an anti-ship missile recently.
Now if you’re a freight company sailing these waters, you’ll definitely be wary. You wouldn’t want to risk an attack on the crew or lose billions of dollars worth of goods on board.
So ships are looking at alternatives. They’re already turning to the routes from the pre-Suez Canal era. But that entails sailing down the Atlantic Ocean and taking a U-turn around the Cape of Good Hope in South Africa. And this journey takes more time — an extra two weeks. So spending more time at sea can add to the costs quickly. They’ll probably need to pay their crew extra. And the ships will need more fuel to ply the longer route. Also, it’s not just Nike-carrying ships that’ll have to tweak their routes. But even oil tankers will take this longer route. Supplies could be disrupted in the near term.
And oil prices have already shot up in anticipation of these events.
Now even if a few brave ones decide to risk going through the Suez Canal, insurers aren’t willing to sit idle. They’re reacting to these attacks. The folks sitting in London have already widened the area in the Gulf they consider risky. They’re factoring in the missile range. Insurers will then ask for more money to insure the goods on the ship too. Call it the ‘war risk premium’. And while this premium was less than 0.10% of a ship’s value a couple of weeks ago, it has already spiked to nearly 0.70%. That means freight costs will also be rising. In fact, it has already jumped by 12% in the past week.
You can be sure that increased costs will eventually be passed on to the final consumers. And maybe that’s why the US announced yesterday that it will do its best to protect the trade route. It’s setting up a naval coalition called Operation Prosperity Guardian along with the UK, Canada, Italy, and others to patrol the Red Sea. Yup, no one wants to see inflation rear up again.
And we’ll just have to wait and see how this all unfolds now.
Until then…
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