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What are the current and potential risks to commodity markets from the ongoing crisis in the Red Sea?

Overview


As the disruption around the Bab el-Mandeb strait enters its third month, a rising number of bulk vessels are avoiding the region, creating ever broader negative impacts to commodity markets and the wider economy. To counter the threat, the US and UK conducted coordinated strikes on Houthi targets in Yemen earlier this month. This has not deterred the Iran backed Houthis with attacks on vessels persisting, most recently with a strike on the tanker Marlin Luanda carrying Russian naphtha, the most serious attack on a vessel to date.


Average daily Suez Canal transits by bulk commodity carriers hit a more than two-year low of 28 on 26 January. The recent strike on the Marlin Luanda highlights the ongoing risk to vessels and the likelihood that the current crisis will impact shipping and commodity markets for the foreseeable future. In this report, we highlight the current and potential risks to various commodity markets.



Macroeconomic


Escalating tensions in the Red Sea represent a risk to global disinflationary trends we've seen over the past year. Containership flows through the Red Se, in particular, have eased considerably with numerous containership firms, including Maersk, banning all Red Sea shipments indefinitely. This effectively pushes up the cost to ship goods from east to west amid longer transit times around the Cape of Good Hope. Higher freight costs are effectively passed through to goods prices.  Europe is the most exposed to rising costs due to its dependence on imports from Asia. The cost of manufactured goods from clothing to furniture is expected to jump in March and if issues persist in the Red Sea, rising prices could be a longer-run structural problem. Other regions, such as the United States, could also begin to feel knock-on effects as higher freight rates between Asia and Europe spread further afield. 


Geopolitical


Houthi actions in the region enjoy full Iranian backing. Tehran derives three primary benefits from these events: 

 

  1. A potential upward push on oil price

  2. Disproportionately higher costs for the US and the UK in intercepting Houthi missile. 

  3. An enhancement of its reputation in the Muslim and Arab world. Notably, a recent survey by the Doha Institute indicates a shift in perception, with the Arab world now viewing the US and Israel as the major threats to peace and stability in the region, providing Tehran with a significant political advantage.

Moreover, recent events, including Iran's seizure of the Suezmax vessel St Nikolas in the Gulf of Oman, pose additional risks to the freight market. The St Nikolas was laden with Basrah crude destined for Tupras’ Aliaga refinery. This incident, distinct from Houthi activity near the Gulf of Aden, has triggered potential consequences in the Iran-Turkey-Iraq relationship. Iran alleges that the vessel owner and the US had 980 kb of Iranian crude stolen last year, originally transported within the same vessel but eventually diverted and delivered to the US. A report from Kpler posted on February 02, 2024.



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