Red Sea crisis runs risks of new inflation

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The disruption of cargo ships in the Red Sea caused by Houthi terrorists from Yemen is forcing global shippers to reposition vessels, perhaps leading to higher goods costs.

IKEA, the Swedish furniture giant, revealed this week that it was looking into ways to ensure the availability of its items, which are primarily supplied from Asian manufacturing to Western markets via the Red Sea and the Suez Canal.

“The situation in the Suez Canal will result in delays and may cause availability constraints for certain Ikea products,” Inter IKEA Group spokeswoman Oscar Ljunggren told Bloomberg. Meanwhile, Abercrombie & Fitch plans to switch from sea freight to air freight whenever possible to avoid interruptions, according to an email sent to suppliers.

Earlier this week, Danish shipping group Maersk said it had rerouted vessels around Africa via the Cape of Good Hope due to the heightened risk of attacks, reducing the effective capacity of an Asia-Europe trip by 25%. German transport company Hapag-Lloyd followed suit. However, sending vessels around Africa increases a round-trip journey by nearly two and a half weeks, inevitably lowering shipping capacity and raising costs.

The Suez Canal is a significant transportation channel that handles around 15% of global shipping activity, including over 30% of global container trade. The newest strikes, which occurred during Israel’s battle with Hamas, have sparked a fresh commerce and shipping emergency, reminiscent of the 2021 incident in which one of the largest container ships closed the canal for six days, costing world trade $9.6 billion per day.