Red Sea: Why is it important to trade and could crisis increase prices?

The UK and US have launched "targeted strikes" against Houthi rebels in Yemen after weeks of attacks on international shipping in the Red Sea.

Prime Minister Rishi Sunak said the UK will "always stand up for freedom of navigation and the free flow of trade" after conducting the strikes overnight.

Here, TheIndustry.fashion looks at why the region is a key trade route and what the knock-on effects of continued disruption could be.

What is happening in the Red Sea?

Since late November, Iran-backed Houthi rebels in Yemen have attacked container ships going through the Red Sea.

The attacks began in response to the conflict in Gaza, with the group claiming it has been targeting cargo ships with links to Israel.

The UK and US have carried out targeted strikes on Houthi military targets in Yemen.

The safety of UK vessels and the freedom of navigation across the Red Sea is paramount and that is why we are taking action.

As the UNSC has made clear, the Houthis must halt attacks in…

— David Cameron (@David_Cameron) January 12, 2024

In response, a number of countries sent naval vessels to the region in an effort to stabilise the situation.

However, on Thursday the US, UK and other nations took part in the series of strikes in a bid to stop the Iranian-backed group’s attacks on international shipments.

Why is it important to global trade?

The Suez Canal is crucial for transporting energy, commodities and consumer goods.

About 30% of all global container shipping passes through the gateway between the East and the West, with it being particularly used to transport goods from Asia and east Africa to Europe.

About half of ships travelling through the canal via the Bab-el-Mandeb strait are containerised goods, while it is also used heavily by oil tankers from the Persian Gulf.

Shipping firms having to reroute means sending vessels around Africa’s Cape of Good Hope, which is more than 6,000 kilometres longer and can add between 10 and 14 days to journey times.

Lengthier shipping times could result in pressure on European ports as well as soaring costs.

How have shipping firms and businesses responded?

Some major shipping companies such as Maersk and Evergreen, and oil giant BP, have been forced to pause shipments or reroute because of safety concerns.

The boss of Maersk warned earlier this week there are concerns it could take months to reopen the route and urged the international community to do more so that shipments could use the trade route.

Air freight firms have reported a jump in demand, pushing prices higher, as logistics companies have sought to keep products travelling over Europe despite the diversion and significant delays.

How could it impact UK consumers?

Some retailers such as NEXT, Marks & Spencer and Ikea have warned that persistent disruption could delay its deliveries and affect the availability of some products.

Supermarket giant Sainsbury’s also told reporters this week that deliveries of wine and some general merchandise products were facing potential delays.

Companies have said disruption to products travelling through the route, from regions such as East Asia, could affect where they choose to source items.

Delays or availability issues could also mean retailers are forced to push up prices of their products as a result of increased shipping costs.

However, Ben May, Director of Global Macro Research at Oxford Economics, said that while the recent wave of attacks has "major ramifications" for the shipping industry, it is not yet clear what the impact on consumer prices will be.

Could it worsen inflation?

It is predicted that redirecting ships will cost an extra one million US dollars (£790,000) for every journey between Asia and Europe, while insurance and reductions in supply thanks to longer journeys will all increase costs.

Specific products facing delays could therefore see price increases owing to more costly transport, causing inflationary pressure.

Analysts at Allianz Trade said shipping and container freight prices have risen by as much as 240% since November, but are still around a quarter of the Coronavirus-driven peak seen in 2021 because of a weaker demand backdrop and high inventory levels.

Nevertheless, Ana Boata, Head of Macroeconomic Research at Allianz Trade, said the disruption is currently expected to drive a 0.7% percentage point increase in inflation in Europe, and could push global inflation up by around 0.5% percentage points.

This increased inflationary pressure, which will dent hopes from policymakers to reduce interest rates, could also dampen economic growth.