Beginning in the early days of Covid, supply chains around the world became snarled, making it difficult to find everything from couches to computer chips for automobiles. While inventory levels of most manufactured goods have since returned to normal levels, some supply chains are threatened anew by geopolitical and environmental stress in key shipping channels such as the Red Sea and the Panama Canal. As the Fed continues to wrestle with inflation, how much impact could these shipping disruptions have on inflation and the global economy?
Risks in the Red Sea
In November, the Houthi terrorist group began attacks on shipping vessels in the Red Sea in response to Israeli counter attacks to Hamas in the Gaza strip, disrupting maritime traffic and causing delayed shipping times. The Houthi attacks have forced shipping companies to either re-route their ships south around Africa, adding ten to 14 days to shipping times, or risk their ships being intercepted by the Houthis.
The Houthis occupy Western Yemen where the Arabian Sea meets the Red Sea. This is a major international shipping route that leads to the Suez Canal in Egypt which gives ships access to Europe from the Middle East / Asia. Fifteen percent of all international trade goes through the Suez Canal. Initially, the Houthis indicated they would only target Israeli vessels, but in practice they have fired indiscriminately at vessels unrelated to Israel. Since November, the Houthis have carried out more than 60 attacks in the Red Sea region.
Selected Commercial Shipping Routes, as of January 2024
Source: U.S. Energy Information Administration
Because of these attacks, the IMF says maritime traffic through the Suez Canal is down 37% so far in 2024 from a year ago. In turn, global container shipping prices have increased from $1,400 per 40-ft container in November to nearly $4,000 at its peak as of January 25. Although well below the extreme levels seen in the immediate aftermath of COVID, prices remain well above historical averages.
This has implications beyond shipping rates for container ships passing through the Suez Canal. Spot-market rates from Shanghai to Los Angeles have increased from $2,000 in November to $2,726 as of mid-January. Oil prices also initially spiked 7% to $83.25 in November after the initial attacks but quickly fell back down to $74.14 in December.
Drewry World Container Index Prices
Source: Kestra Investment Management, Bloomberg, Data as of February 29, 2024.
Companies are beginning to feel the impact of higher shipping costs and times. As of February 5, Amazon’s CFO has said the disruptions have not yet had a “material impact” on profit in the current quarter. However, many other international companies such as Tesla, BP, and Shell have felt impacts and have either paused all transits through the Red Sea or are coping with delayed shipments.
These disruptions have other downstream impacts. As European factories deal with delayed shipments and increased shipping costs, Europe-made goods are in turn more expensive once they finally end up on US shores. The impact on consumers has been limited thus far, but some economists forecast a 70bps increase to global goods inflation during the first half of this year, and shipping companies estimate this could be as high as 1-2% if the conflict is prolonged.
Drought in the Panama Canal
Another important shipping route is dealing with problems of its own: the Panama Canal, which handles about 3% of international trade. Panama is experiencing a serious drought that has limited the ability of shipping vessels to cross the canal. Newly imposed vessel limits are the strictest since 1989 when the US invaded Panama. Currently, about 24 ships can pass a day, nearly 40% lower than the pre-drought daily capacity, resulting in shipping delays on average of 20 days. Auction fees to secure a time to pass through the Panama Canal have gone as high as $4 million, compared to typical auction prices at or below $1 million in 2023.
While the impact of global shipping issues on consumers has been muted in the short term, prolonged drought conditions in the Panama Canal and continued conflict in the Middle East could frustrate the Fed’s successful efforts in combatting goods inflation, which has declined from a peak of 14% in March 2022 to 0.11% as of January 2024.
The good news is, after the supply chain bottle necks during COVID, freight companies expanded their fleets, while demand has also declined over the same period. These disruptions provide a keen reminder of how complex and global the supply chains are that produce many of the goods we buy. Investors should remain aware of these issues but remain disciplined in their asset allocation approach with a long-term focus in mind.
Until next time, invest wisely, and live richly,
Kara
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC do not offer tax or legal advice.
