January 5, 2024
Understanding recent TEU rate increases and their global impact on prices and inflation
In the world of global trade, recent fluctuations in TEU (Twenty-foot Equivalent Unit) rates have sent ripples across industries and economies worldwide. The recent surge in TEU rates, the cost of shipping containers, is starting to raise eyebrows and concerns about its profound implications for global prices and inflation. Understanding these fluctuations and their potential impact is crucial in comprehending the current economic landscape.
The recent surge in TEU rates will directly impact the cost of transporting goods across borders. As a result, businesses are facing elevated expenses in bringing products to market. These increased costs are often passed along the supply chain, ultimately impacting consumers.
Source: https://www.drewry.co.uk/
Inflationary pressures and economic ramifications
The ripple effect of higher transportation costs extends to broader economic implications:
The increased expenses incurred by businesses are often passed on to consumers, contributing to overall inflation rates.
Industries heavily reliant on global trade may experience disruptions, leading to shortages and delays, further fuelling inflation.
Higher costs could hamper economic recovery efforts, affecting consumer spending and investment.
What is causing the surge in TEU rates?
The Red Sea, a vital maritime route connecting Europe to Asia and facilitating a significant portion of global trade, has unfortunately seen sporadic incidents of terrorist activities in recent weeks. The impact of these activities on marine shipping is demonstrating to be substantial and far-reaching:
Terrorist activities by the Houthis targeting shipping lanes in the Red Sea, are posing immediate threats to vessels navigating these waters. Such incidents resulted in temporary closures, rerouting of ships, or heightened security measures, and are causing disruptions to the normal flow of maritime traffic.
The heightened risk of terrorist activities in the Red Sea has prompted marine insurance providers to reassess the risk profiles of vessels passing through these waters. As a result, shipowners are facing increased insurance premiums, which are being passed on to the their clients.
Cargo shipments are just starting to experience delays, leading to increased operational costs and potential shortages of goods at their intended destinations. Businesses reliant on timely deliveries from these routes could face logistical challenges and increased expenses.
The Red Sea is a crucial maritime route for global trade, especially for the transportation of oil and goods between Europe, the Middle East, and Asia. The recent disruption caused by terrorist activities may have a cascading effect on global trade and the associated economies unless we have a united global response.
A needed global response before it’s too late
In response to the Red Sea terrorist threats, maritime authorities and governments will need to implement enhanced security protocols and diplomatic measures in order to reestablish the flow of marine transportation.
I’m not going to pretend to be an expert in international conflict resolution but it is obvious that addressing security threats posed by groups like the Houthis in the Red Sea to reestablish the flow of marine transportation requires a multifaceted approach involving regional cooperation, enhanced security measures, and diplomatic efforts.
If a global response does not crystallize very soon, we may start to fear a return to inflationary pressures which will obliterate the recent increase investor sentiment mirroring the second wave of inflation of the 1970s.
A second wave of inflation like the 1970s?
The second wave of inflation in the 1970s was largely attributed to a combination of factors that significantly disrupted the global economy and led to soaring prices and inflationary pressures.
There were several factors that contributed to the 1970s second wave of inflation such as higher oil prices, higher wages and increasing the money supply. Beyond the oil-related factors, there were disruptions in global supply chains due to geopolitical tensions, conflicts, and trade imbalances. These disruptions affected the availability and cost of various goods and commodities, contributing to inflationary pressures.
The supply chain disruptions of the 1970s and the disruptions caused by events in the Red Sea in late 2023 share some similarities in their potential impact on global trade and supply chains, despite their distinct triggers. Specifically, the security threats in the Red Sea:
can lead to disruptions in maritime transportation, impacting the flow of goods through a crucial trade route, potentially causing delays and increased costs.
could force ships to seek alternative routes, resulting in longer transit times and increased operational expenses.
could increase oil prices due to the increased transportation which could contribute to inflationary pressures across various industries.
businesses reliant on the red sea maritime routes may encounter difficulties in ensuring uninterrupted supply chains, potentially leading to delays and logistical challenges.
can pose risks to maritime trade, highlighting the vulnerability of critical shipping routes to geopolitical tensions.
The disruptions caused by both the 1970s events and the Red Sea marine shipping disruptions of December 2023 showcase how vulnerabilities in critical trade routes can impact global supply chains, leading to increased costs, logistical challenges, and inflationary pressures across industries. Adaptability, resilience, and proactive measures are essential to navigate and mitigate the impacts of such disruptions on global trade and supply chains.