Looking through the glass darkly, JP Morgan sees shipping going through a rough patch
 The big difference between today's virtual closing of the Suez Canal, and its full closure in the 1967 Six Day War is the more risk averse world we now inhabit.
It doesn't take much more than a whiff of danger for a longstanding practice to come to a full stop today.
One might well regard such a development as a good thing as it lowers the level of threat and results in greater safety. For the safety-first-and-always crowd such a development is a triumph.
The fact that we can no longer do what we willingly did before is overlooked as a negative, as the new way can be seen as a good, if viewed through the lens of Diversity, Equity and Inclusion. Disallowing the few who are willing to take such risks, increases the number able to participate in such tasks now that the risk has been reduced. Only when the risk level is lowered will more people, rather than fewer, be able to participate.
Such a policy fits into widely approved standards increasingly adopted by the corporate world. If one bans tackle football, only allowing touch football, this increases the number of people able to play the game. So it is with many high-risk activities.
Now that Houthis are sending rocket and drone barrages into Red Sea shipping, which must traverse the Red Sea to access the Suez Canal, which up till this point been a reliable conduit of the Asia-Europe trade.
It is curious that the Houthis, who have occupied the Yemeni capital of Sanaa for nearly a decade are still called "rebels" when the so-called "government" is holed up in the coastal town of Aden, which it describes as its temporary capital.
One would have thought that possession of the capital for that length of time would have entitled the Houthis to call themselves, and be called, the Yemeni government.
There is a US-led naval force in the Red Sea that makes air strikes at unspecified "targets" and occasionally shoots down incoming missiles and drones. But it would seems that only boots on the ground and an attack on Sanaa will end the crisis and remove the risk to shipping in the Red Sea.
But with the West's Russo-Ukrainian War not going to plan, and with retreats from Afghanistan and Iraq behind them, US and UK forces are risk averse to say the least.
Given the risk averse nature of the world, diverting ships in the Asia-Europe trade - 30 per cent of trade worldwide - all containerships and bulkers have diverted to the Cape route around the southern tip of Africa as they did for nearly a decade after the '67 Six-Day War.
Today's crisis prompted JP Morgan bankers to set their analysts to determine what lay ahead, and found themselves most concerned with risk of inflation, as the Cape route would take longer and make things more expensive.
“As global goods disinflation has been the primary driver of lower inflation around the world, the recent reductions in global shipping capacity, at the very least, risks interrupting the disinflationary trend," they said.
At worst, the crisis will push trade goods prices higher for a period of time. While they did not expect a rise anywhere near as large as the Covid-era shock, even a modest rebound in goods inflation could render global core CPI inflation sticking around the three per cent mark, especially if services inflation stays above central bank targets, said their report, which appeared in Hellenic Shipping News Worldwide.
Overall, JP Morgan Research estimated the disruptions could add 0.7 percentage points to global core goods inflation, and 0.3 percentage points to overall core inflation, during the first half of 2024 if the recent jump in container shipping costs persists.
Instead, these vessels are being forced to reroute around southern Africa - a lengthy detour that adds 4,000 miles to each journey, vastly increasing transport times and freight costs. Will the crisis reignite supply chain issues and fuel inflation concerns?
With 30 per cent of global container trade passing through the Suez Canal, the Red Sea shipping crisis is upending supply chains. This is compounded by the ongoing shipping disruptions caused by blockages in the Panama Canal, which is experiencing one of the region’s worst droughts since the 1950s.
“The lengthening of supplier delivery times acts as an adverse supply shock. The rerouting of ships around Africa’s Cape of Good Hope equates to a roughly 30 per cent increase in transit times, and this implies a nine per cent reduction in effective global container shipping capacity,” said JP Morgan economist Nora Szentivanyi.
Already, several Europe-based auto plants have announced production shutdowns due to delays in obtaining car parts from Asia. Auto component makers - particularly those with high revenue exposure to exports from China to Europe and the US - have also been affected.
Said JP Morgan auto analyst Jose Asumendi: “The crisis is testing the resilience of the auto supply chain, particularly for new-energy vehicles (NEVs), which are a key part of the China-Europe trade. This is because China mainly exports NEVs to Europe, which are usually carried by sea. Depending on the situation in the region, shipping times and prices may change throughout the year. Traffic in the Red Sea may remain low for the foreseeable future.”
Looking ahead, shipping costs may remain elevated for some time yet. “The longer the duration of these disruptions, the more likely shipping rates will stay elevated - if not increase further,” said Ms Szentivanyi.
“The one potential silver lining is that there remains an excess supply of container ships globally, and many that were ordered during the pandemic continue to enter service. Thus, it appears likely that once the disruptions are over, shipping rates could lower fairly quickly,” she said.
The message from JP Morgan, and indeed from much of the corporate world, is to temporise with the barbarians of Iran, Hamas, Hezbollah and Houthis and hope they will go away over time. Fearing inflation in a world that fearlessly increases debt load, shipping majors bought new and bigger ships hoping to have assets of value from windfall profits reaped in the Covid scare as the dollars they possess become increasingly worthless. But such is the way of the world today. |
