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Red Sea: Why is it important to trade and could crisis increase prices?

The Ministry of Defence has launched fresh strikes against Houthi rebels due to attacks on ships in the Red Sea (LPhot Chris Sellars/MoD/Crown Copyright/PA)
The Ministry of Defence has launched fresh strikes against Houthi rebels due to attacks on ships in the Red Sea (LPhot Chris Sellars/MoD/Crown Copyright/PA)

The UK and allies have launched their latest round of air strikes against Houthi rebels in Yemen after weeks of attacks on international shipping in the Red Sea.

Foreign Secretary David Cameron said the attacks are designed to “send the clearest possible message” to the rebels that attacks on cargo ships are “unacceptable”.

It comes almost two weeks after strikes were first launched against Houthi targets.

Red Sea shipping attacks
Royal Navy warship HMS Diamond has been deployed to the Red Sea (LPhot Belinda Alker/MoD/Crown copyright/PA)

Here, the PA news agency looks at why the region is a key trade route and what the knock-on effects of continued disruption could be:

– What is happening in the Red Sea?

Since late November, Iran-backed Houthi rebels in Yemen have attacked container ships going through the Red Sea.

The attacks began in response to the conflict in Gaza, with the group claiming it has been targeting cargo ships with links to Israel.

In response, a number of countries sent naval vessels to the region in an effort to stabilise the situation.

However, earlier this month the US, UK and other nations started the series of strikes in a bid to stop the Houthis’ attacks on international shipments.

The UK Government said there have been 12 further attacks on ships by Houthi rebels since the attacks started as it continued with military action.

– Why is the region important to global trade?

DEFENCE RedSea QandA
(PA Graphics)

The Suez Canal is crucial for transporting energy, commodities and consumer goods.

About 30% of all global container shipping passes through the gateway between the East and the West, with it particularly being used to transport goods from Asia and east Africa to Europe.

About half of ships travelling through the canal via the Bab-el-Mandeb strait are containerised goods, while the waterway is also heavily used by oil tankers from the Persian Gulf.

Shipping firms having to reroute means sending vessels around Africa’s Cape of Good Hope, which is more than 3,700 miles (6,000km) longer and can add between 10 and 14 days to journey times.

Lengthier shipping times could result in pressure on European ports as well as soaring costs.

– How have shipping firms and businesses responded?

Some major shipping companies such as Maersk and Evergreen, and oil giant BP, have been forced to suspend shipments or reroute because of safety concerns.

The boss of Maersk has warned there are concerns it could take months to reopen the route and urged the international community to do more so that shipments can use it.

Air freight firms have reported a jump in demand, pushing prices higher, as logistics companies have sought to keep products travelling over Europe despite the diversion and significant delays.

Maersk stock
Maersk is among shipping firms to have rerouted vessels around the Cape of Good Hope (Andrew Matthews/PA)

– How could it affect UK consumers?

Some retailers such as Next and Ikea have warned that persistent disruption could delay deliveries and affect the availability of some products.

Supermarket giant Sainsbury’s has said deliveries of wine and some general merchandise products are facing potential delays.

Last week, Poundland owner Pepco became the latest business to warn that it has seen “additional surcharges” from some of its carriers due to rerouted shipments.

Companies have said disruption to products travelling through the trade route, from regions such as East Asia, could affect where they choose to source items.

Delays or availability issues could also mean retailers are forced to push up prices of their products as a result of increased shipping costs.

However, Ben May, director of global macro research at Oxford Economics, said that, while the recent wave of attacks has “major ramifications” for the shipping industry, it is not yet clear what the impact on consumer prices will be.

CITY BP
(PA Graphics)

– Could it worsen inflation?

It is predicted that redirecting ships will cost an extra one million US dollars (£790,000) for every journey between Asia and Europe, while insurance and reductions in supply thanks to longer journeys will also increase costs.

Specific products facing delays could therefore see price increases owing to more costly transport, causing inflationary pressure.

Analysts at Allianz Trade said shipping and container freight prices have risen by as much as 240% since November, but are still around a quarter of the coronavirus-driven peak seen in 2021 because of a weaker demand backdrop and high inventory levels.

Nevertheless, Ana Boata, head of macroeconomic research at Allianz Trade, said the disruption is currently expected to drive a 0.7% percentage point increase in inflation in Europe, and could push global inflation up by around 0.5% percentage points.

This increased inflationary pressure, which will dent hopes from policymakers to reduce interest rates, could also dampen economic growth.

– What does it mean for energy costs?

Around 12% of seaborne oil and 8% of liquefied natural gas (LNG) typically pass through the Suez Canal.

Oil prices have risen significantly as a result, with the price of Brent crude oil up by around 7% since attacks first started last month.

The price of Brent crude had settled in recent days but rose slightly again on Tuesday morning after the latest set of military strikes.

Gas prices have remained broadly steady because of inventories in Europe but could increase if further disruption continues.

Over the past year, energy and fuel prices have come down noticeably following a spike driven by the Russian invasion in Ukraine but both household energy and petrol costs could be affected by rises in commodity prices.