This article first appeared in The Edge Malaysia Weekly on January 22, 2024 - January 28, 2024

CONTAINER shipping rates have been rising steadily in recent weeks as major shipping companies reroute vessels away from the Red Sea to go around South Africa’s Cape of Good Hope, as the crisis in one of the world’s main shipping routes plays out.

“It is a longer route, so shipping from places like the UK is not only more expensive but also takes more time now. Some of our customers who cannot wait that length of time for shipments to arrive have opted to use air freight instead,” says an executive in the logistics industry.

With shipping rates climbing and the situation at the Red Sea seemingly escalating, there are concerns over whether it would impact global trade and put the prices of commodities and goods under pressure.

Drewry’s World Container Index rose 23% to US$3,777 per 40ft container for the week of Jan 18 while rates were 82% higher compared with the same week a year earlier.

At US$3,777 per 40ft container, it is the highest since October 2022 and more than double the average 2019 rate of US$1,420, highlights Drewry.

The Red Sea is an important trade route that connects Asia to the Mediterranean, the East Coast of the US and Europe. It carries up to 15% of global trade. To the north of the Red Sea is the Suez Canal, while to the south lies the Bab el-Mandeb Strait — one of the busiest waterways in the world.

Traffic in these busy waterways has reportedly fallen more than two-thirds since the Houthi rebels in Yemen started attacking commercial ships passing through, says Moody’s Analytics in a Jan 17 report.

The attacks by the rebels in the last few weeks are in retaliation to Israel’s bombardment of Gaza. At the same time, Israel’s ally, the US, is responding with air strikes on the rebels. All these seem to have led to major security and safety issues for vessels passing through the Red Sea.

It is not only merchant vessels that are avoiding the Red Sea route, oil and gas tanker providers have also suspended their Red Sea operations, according to BMI Country Risk & Industry Research in its Jan 18 report.

“According to data from PortWatch, as of Jan 16, the number of tankers transiting the Suez Canal had declined by 36% since Hamas launched its attack on Israel on Oct 7 [last year], while tanker traffic through the Bab el-Mandeb was down by 57%,” says the report, adding that the number of tankers circumnavigating the Cape of Good Hope has increased by 64% over the same period.

At this juncture, most economists believe the economic impact of the Red Sea crisis has been muted.

Despite the abrupt rerouting of shipping, Moody’s Analytics says the immediate economic implications are limited. The research outfit points out that the current situation differs from what occurred during the Covid-19 pandemic, when trade and supply chains were severely affected. In this case, it says the disruption to the Red Sea shipping is localised and, more importantly, circumventable.

“The transit troubles in the Red Sea can be worked around. Shipping fees are rising but are unlikely to impact end-consumers immediately because shipping contracts are often negotiated long term. Moreover, we expect [the] Houthi attacks will be contained and that shipping disruptions will ease in the next few months,” Moody’s Analytics adds.

Brent crude prices, often the barometer for other commodity prices, have been holding steady within the range of US$75 to US$80 per barrel.

“What is clear is that container freight rates have certainly doubled or tripled, and that would eventually reflect on commodity prices. However, the extent of the price volatility is hard to determine,” says CGS-CIMB Research head of economics Nazmi Idrus.

He says, however, that the concern would be if the crisis continues to escalate with attacks becoming more frequent. That would eventually lead to more ships taking alternative routes, resulting in higher costs and supply chain issues.

As of now, crude oil prices could be holding steady because the demand for both oil and gas has declined in the wake of the slowdown in the global economy, says BMI. It is forecasting global real gross domestic product growth to fall from 2.6% in 2023 to 2.1% in 2024, led by developed markets.

“However, if similar disruptions were to spread to the Strait of Hormuz, we would expect to see significant gains in oil and gas prices,” warns BMI.

The Strait of Hormuz — the channel linking the Persian Gulf with the Gulf of Oman and the Arabian Sea — is a more strategically important choke point than the Red Sea, says BMI, with some 20% of oil and liquefied natural gas trade transiting the strait. The Strait of Hormuz also lacks alternative export avenues, compared with the Suez Canal and Bab el-Mandeb Strait.

“However, absent a full-scale confrontation between the US and Israel and Iranian-backed militias, we would not expect to see any meaningful reduction in oil and gas exports from the Middle East,” it adds.

With the rebels vowing to keep up the Red Sea attacks and the US retaliating with air strikes, the Federation of Malaysian Manufacturers (FMM) recently urged Malaysian shippers to refine their business strategies to safeguard their supply chains and reduce delays to better meet customer demand in order to reduce the impact of the Red Sea crisis.

One of FMM’s recommendations is for manufacturers to export and source from the Asean region, as it views that the move would not only save costs but also provide security to the supply chain given the current situation.

“As Asean supply chains are also deeply integrated with Northeastern Asian neighbours, Malaysian manufacturing companies can build resilience by working closely with our Asean counterparts, not only as a source for inputs and a market for Malaysian manufactured exports, but also to integrate deeper for trade and investment regionally by leveraging the Regional Comprehensive Partnership Agreement of which Asean is core and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which four Asean countries are members of,” says FMM in a statement.

In 2022, Malaysia’s top two trading partners were Asean and China. Trade with Asean was RM772 billion, accounting for 27.1% of the country’s total trade. China, on the other hand, has been the country’s largest trading partner for over a decade, making up 17.1% of its total trade in 2022 with a total value of RM487.13 billion.

Meanwhile, Malaysia’s trade with the US amounted to RM267.59 billion, about 9.4% of total trade in 2022, and Europe made up about 7.6% of the country’s total trade, amounting to RM216.53 billion.

While shipping rates to and from the West have increased significantly, some importers say that they have not seen a rise in the shipping rates for goods coming from China.

Given how trade between Malaysia and other Asian countries makes up a significant portion of total trade, the impact of the Red Sea situation on the country’s trade could be limited.

“During the Suez Canal blockage that happened for six to seven days, between March 23 and March 29, 2021, Malaysia’s export volume was largely unaffected. March 2021 export volume grew by 31.2% y-o-y and 19.8% m-o-m (month on month). Import volume also remained robust at 10.1% y-o-y and 16.1% m-o-m,” says CGS-CIMB’s Nazmi.

“This can be explained by the fact that Malaysian exports that may traverse the Suez Canal (meaning shipments to Europe) were only 8% of total exports in 2021, not significant enough to make a dent in the trade numbers given the relatively smaller share of shipments, and perhaps the short-term nature of the blockage in which delays were compensated for by more shipments after.

“We could say that the current situation is somewhat similar. The share of Malaysian shipments to Europe is still around 8% and as far as I am aware, not all shipments were affected.”

Having said that, geopolitical conflicts in recent years have grown. A widening of the conflict in the Middle East would be damaging to the economy.

“The biggest risk to the economy is the widening of conflict in the Middle East that could lead to oil supply disruption, resulting in a spike in oil and commodity prices. This could accelerate inflation again, that would potentially result in interest rates staying higher for longer. In that scenario, our current soft landing growth assumptions would need to be reevaluated,” says UOB Malaysia Global Economics and Market Research senior economist Julia Goh.

UOB forecasts growth momentum to improve to 4.6% in 2024, backed by a base case scenario of a soft landing for the global economy despite rising global uncertainties. 

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