John Whelan: Escalating Red Sea chaos set to hit consumers

It’s the smaller companies who will be hit most and many may not survive if the Red Sea route remains closed for any length of time.

One of four RAF Typhoon aircraft returning to RAF Akrotiri in Cyprus after joining the US-led coalition conducting air strikes against military targets in Yemen.

The escalation of US and UK military strikes against the Houthi rebels in the Red Sea in the past week will most likely have the effect of escalating this important global shipping route to war zone status, scuppering any diplomatic channels to prevent closure of one of the world’s most important shipping routes.

Over the past few weeks, the Houthi drone and missile attacks on shipping vessels have pushed many shipping lines to use a safer route. Last week’s missile attacks by UK and US troops directly at Yemeni stronghold targets, which immediately provoked the promised retaliation by the Houthi rebels, will have convinced any remaining ship owners that the route is too dangerous for commercial vessels to sail through.

The Red Sea and the linking Suez Canal has been the shortest and most economical route for Irish and other European businesses to import and export from Asia. The closure has and will continue to have severe consequences, as shipping lines rush to the much longer but safer route around the Horn of Africa, driving up the price of goods and bringing new inflation risk to the economy.

Charges for transporting a 40ft container from Shanghai to Dublin through the key waterway have surged to an average €7,000 at present, according to the Drewry World Container Index, which tracks container freight rates on eight major routes to and from Europe and Asia. That is a quad- rupling of the cost since October and will have a significant impact on Ireland’s €38bn of two-way trade with Asia.

Driving the cost increase is the much longer route that ships will now take around South Africa, and the cost of the vast increase in the number of shipping containers to handle the longer time at sea.

Shipping lines to Asia, such as Maersk which services Ireland, do a tran- shipment call at a European port first, offloading to smaller ships and then transhipping to Ireland. This effectively puts Irish importers and exporters at the end of a very long shipping process, increasing journey time by 50% to six weeks from Tianjin Port of Beijing to Dublin Port.

The immediate effect is to add significant costs to the direct exports of €19bn of goods from Ireland to Asia. More importantly the disruption of the €17bn of imports which include a wide range of parts and components which are essential to keeping Ireland’s factories open, will have much wider consequences.

Many factories will be in the same situation as the high-profile Tesla electric vehicle car manufacturer which last week announced plans to halt production at its only large factory in Europe for two weeks because of a lack of parts from China.

Large brand companies will bring more resources to overcome the situation, it’s the smaller companies which will be hit most and many may not survive if the Red Sea route remains closed for any length of time.

Some of the Irish-based exporters have taken early decisions with their shippers, such as Danone, (the French food group with factories in Ireland, which ships dairy products including infant formula to China) which said in December that most of its shipments had already been diverted, increasing transit times.

The current Red Sea crisis has many of the aspects of the covid crisis, which started with a rush for person protective equipment produced mainly in China, leading to shipping congestion and resultant shortages of shipping containers. A massive increase in shipping cost followed which led to general cost inflation in most commodities, hitting economies globally.

The indicators are this could be a long-drawn-out conflict. We can expect the Houthis to fire into the shipping lanes again, and for the US and UK to go on hitting launchers and missile depots in response, with the goal of imposing enough cost on the Houthi’s missile capabilities that it might eventually erode their will to continue.

Inevitably, consumers around the world will pay the price for the unfolding crisis.

John Whelan is an expert on international trade