The Red Sea crisis, its inflationary shocks

KARACHI:

With the humanitarian crisis unfolding in Gaza on an hourly basis and the deafening silence in the global corridors of power, the assumption that the situation will somehow remain contained locally has been proven wrong.

The recent escalation of attacks on merchant ships by Yemen’s Houthi fighters has led oil giant BP (British Petroleum) and four of the world’s largest container shipping lines, including MSC, Maersk, Hapag-Lloyd and CMA CGM, to suspend transit through the Red Sea, meaning they must also avoid the critical Suez Canal.

The Red Sea shipping crisis has become a global focal point of concern, particularly because of its profound impact on the complex web of the global supply chain. This crisis, characterized by heightened geopolitical tensions, security concerns and occasional blockades, has disrupted the fluidity of maritime trade routes, creating a ripple effect that is spreading to various corners of the world, including Pakistan.

Understanding the multifaceted impact of this crisis and its specific implications for inflation in Pakistan requires a comprehensive examination of the interconnected dynamics at play.

At the heart of the crisis is the substantial delay in the transport of goods. The Red Sea, a critical passage that connects major trade hubs and accounts for 12% of global trade, has been witnessing outages that immediately hamper ship movement.

These delays, which permeate the supply chain, lead to bottlenecks that affect manufacturers, suppliers and retailers worldwide.

Businesses, already navigating the complexity of the post-Covid-19 landscape, face additional challenges in maintaining efficient production schedules and inventory management as goods take longer to reach their destinations.

Adding to these challenges is the increase in shipping costs associated with the crisis. Rerouting of ships, increased security measures and other operational challenges contribute to additional costs for the shipping industry.

As of last Tuesday, the price to ship a container from China to the Mediterranean was $2,413, having risen 44 percent in December due to the disruptions, after hitting a low of $1,371 earlier this year, said Eytan Buchman, Chief Marketing Officer Officer of Freightos. a booking and payment platform for international transport.

These increased costs are not borne solely by the shipping sector, but are often passed on to consumers. Consequently, this increase in shipping costs contributes to higher prices for goods and services worldwide, adding an inflationary dimension to the challenges facing economies worldwide.

Magnifying Pakistan, a nation heavily dependent on imported raw materials, LNG cargoes and finished products, the effects of the shipping crisis are palpable. The late arrival of essential goods, including raw materials and finished goods, disrupts the delicate balance of the domestic supply chain.

Reading More oil tankers are avoiding the Red Sea route

Industries that depend on timely imports may experience a slowdown in production, affecting economic activities and employment. Sectors such as manufacturing and retail, which rely heavily on just-in-time inventory practices, find their operational efficiency compromised. This will further worsen the already slowing large-scale manufacturing sector.

The inflationary effects of the shipping crisis have a direct and immediate impact on Pakistan’s economy. The country, like many others, is already facing inflationary pressures on several fronts.

The longer journey will cost up to $1 million in extra fuel for each round trip between Asia and northern Europe, according to estimates from freight platform Xeneta. Retailers and manufacturers will likely pass on the higher costs to consumers, potentially fueling inflation during a prolonged cost-of-living crisis.

The increase in shipping costs, combined with delays in the arrival of goods, contributes to the overall increase in the cost of living. Basic commodities, including food and energy, are becoming more expensive, affecting households and potentially leading to social and economic challenges.

In response to these challenges, Pakistani policymakers and businesses are being forced to reassess and adapt their supply chain strategies. There is increasing emphasis on building more resilient and diversified supply chains to mitigate the impact of future disruptions.

This includes exploring alternative trade routes, enhancing domestic manufacturing capabilities and fostering enhanced collaboration with international partners to ensure a more robust and adaptable supply chain.

In conclusion, the Red Sea shipping crisis has complex and far-reaching implications for the global supply chain, with direct implications for Pakistan. If the disruption continues, it could reverse the downward trend in inflation in the upcoming print edition and limit the central bank from being more accommodative in its policy to stimulate an already stalled economic growth engine.

Also, for the common man on the street, due to the sudden rise in energy prices, there is no relief in sight, at least in the short term.

THE AUTHOR IS A BUYER OF THE FINANCIAL MARKET AND IS FIXED WITH PAKISTAN STOCKS, COMMODITIES AND TECHNOLOGY DEVELOPMENT

Published in The Express Tribune, December 25^u2023.

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