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Impact of Red Sea Attacks: African Nations Brace for Inflation Surge

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Impact of Red Sea Attacks: African Nations Brace for Inflation Surge

African countries are poised to experience heightened inflation levels and sustained interest rate tightening throughout 2024 due to disruptions in global trade caused by attacks on shipping lines in the Red Sea by Houthi Rebels. This prognosis is outlined in a comprehensive report compiled by Afrexim bank, examining the repercussions of the Red Sea attacks on African trade and macro-economic stability.

The report underscores the mixed impact of the global trade disruption across the continent, with Egypt facing a notable reduction in traffic around the Suez Canal, while South Africa grapples with increased traffic and port pressure due to vessel rerouting through the Cape of Good Hope. Furthermore, the surge in freight costs is expected to permeate consumer goods prices across Africa, exacerbating already elevated inflation levels and potentially prompting further interest rate hikes by Central Banks, which could impede economic growth.

The disruption in the worldwide supply chain, coupled with soaring prices for food and energy, may incentivize local manufacturers to divest from the region if production costs surpass those of competitors in other continents, leading to a projected contraction in Africa’s trade volume by mid-year.

It’s crucial to note that the Red Sea serves as a vital global trade route, accounting for approximately 15% of global shipping traffic, connecting Europe, the Middle East, and parts of Africa. Since November 2023, Houthi Rebels have targeted commercial ships in response to Israel’s actions against Palestinian civilians, resulting in significant disruptions in international trade and the suspension of transit operations by major shipping companies like Maersk, Hapag-Lloyd, and MSC.

African countries have already been grappling with elevated inflation levels exacerbated by the ripple effects of the Covid-19 pandemic and Russia’s war in Ukraine. According to the African Development Bank (AfDB), around 18 countries on the continent closed 2023 with double-digit inflation, further straining consumer spending among vulnerable populations. In response, African central banks have embarked on a monetary policy tightening spree in 2024, with countries like Nigeria, Egypt, Kenya, and Zambia increasing their Monetary Policy Rates (MPR) as a measure to curb inflation.

In conclusion, the Red Sea attacks have triggered a cascade of economic challenges for African nations, necessitating proactive measures to mitigate the impact on inflation and economic stability in the region.

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Red Sea Global Trade Disruptions: How to Overcome the Chaos

Global trade has faced many recent disruptions lately due to chaos in the Red Sea, which started as a result of the attacks in Gaza. According to the Council on Foreign Relations, about 6% of global trade and 40% of U.S. container ships traverse the Panama Canal yearly. Per the U.S. Naval Institute, 12% of global trade travels the Suez Canal.

The Houthis, a religious movement, began carrying out attacks on cargo ships traveling through the Red Sea and the Suez Canal in November 2023. Vessels are avoiding these attacks in the vital waterway by sailing around Africa, adding time and cost to the trip. 

Perishable items are shipped in containers, but some items are switched to bulk carriers, which may make these items harder to handle at ports. Plus, container prices have risen by 25% or more. Perishable items have a limited life, so the lengthier shipping times can ruin them and make them unsellable. 

Ocean shipping rates are going up, and several carriers have added surcharges. Shipments are delayed, meaning orders may be canceled as customers become unhappy with shipping times. 

The Panama Canal, which could have been an alternative to the Suez Canal, is also experiencing cargo diversions because of the lack of rain, making the canal too shallow for large ocean liners. Authorities expect the canal will limit capacity to 18 slots per day, down from the pre-drought capacity of 30 ships. 

Significant challenges for international trade include: 

  • Restricted bookings on westbound routes have triggered a surge in freight rates, affecting regions in the Middle East, the Red Sea, North Africa, Europe, the East, the Black Sea, and the West.
  • Freight rates have seen a significant spike, with Asia-Europe rates surging 173%, exceeding $4,000/FEU compared to pre-diversion levels. Asia-Mediterranean prices have doubled, exceeding $5,000/FEU.
  • Carriers have introduced surcharges ranging from $500 to $2,700 per container, further driving prices higher. The FMC granted permissions for carriers to circumvent the 30-day notice for increasing rates, allowing them to bill surcharges immediately. 
  • Disruptions in one region can influence distant markets. Several EU-based auto plants have announced temporary production shutdowns due to delays in obtaining parts from Asia. 
  • Due to Panama Canal congestion, a route initially diverted to the Suez Canal will go towards the Cape of Good Hope, adding ten to fourteen days to the journey and extra costs. Shippers now face a dilemma between bypassing the Cape of Good Hope or returning to the Panama Canal with potential queuing delays.
  • Sea-Intelligence estimates a 5.1%-6% reduction in global shipping capacity, equivalent to 1.45-1.7 million TEU.
  • Companies may need to increase ship numbers on each route to maintain schedules.
  • The crisis prompts strategic reshuffling, reminiscent of past trends redirecting ships from European to U.S. routes during surges in freight prices.
  • The crisis could extend into the second half of 2024. The longer the war in Gaza lasts, the more extended shipping disruptions caused by missile attacks in the Red Sea will continue. 
  • Retailers that rely on sea freight could be more affected by the Red Sea disruption than those that source closer to home. Retailers may see longer lead times for specific products as the Red Sea situation continues. 

How to make global shipments happen

Shippers need to find alternative routes to make sure shipments happen. Routes bypassing the Red Sea might be longer but would avoid the crisis zone. Shippers must implement enhanced security measures for vessels, such as hiring private security firms or coordinating with naval forces for escorts. 

Shippers must be flexible as they navigate higher costs, longer transit times, and economic volatility. When risks like this occur, the ability to mitigate risks and deliver to customers is critical. Diversifying the supply chain to reduce reliance on routes passing through the Red Sea can mitigate the impact of disruptions in the region. Shippers must review insurance policies and risk management strategies to ensure coverage for potential regional disruptions. 

Supply chain networks may need to be redesigned with alternate logistics partners, sources, and suppliers. A supply chain network optimization solution answers “what if” scenarios to improve customer service, operational efficiency, inventory management, risk mitigation, and supply chain resilience. Supply chain network optimization solutions use data from across the supply chain to create a mathematical model representing the entire supply chain network. The model considers various constraints, objectives, and decision variables, including facility locations, transportation routes, inventory levels, and production capacities.

The Red Sea crisis is a wake-up call for companies to localize their supply chains. Shippers should have alternative sources of raw materials so they don’t have to rely on a single source for raw materials, which can make the supply chain vulnerable to disruptions. Having multiple sources allows shippers to negotiate better prices and hedge against sudden price increases from a single supplier. Because of the instability of the times, the availability of raw materials can be affected. 

Utilizing technology, such as tracking devices, predictive analytics, and communication systems, can help shippers better navigate high-risk areas and respond effectively to incidents. 

Seizing Opportunities Amid Uncertainties

  • The looming strike threat in the Eastern United States could expedite the return of cargo volume to the US-West Terminal.
  • Large importers may consider advanced shipment plans or opt for the West Coast route to mitigate potential strike risks.

Circumventing the crisis in the Red Sea requires careful planning, agility in your supply chain, and partnerships with logistics providers that can ensure shipments are shipped on time to the correct location.