The economic impact of rerouting ships around the Cape of Good Hope due to the Houthi attacks in the Red Sea has been significant:

Increased Transit Times and Costs

Rerouting ships around Africa’s Cape of Good Hope equates to a roughly 30% increase in transit times, from 12-14 days to 16-18 days.

This implies an approximately 9% reduction in effective global container shipping capacity.

Shipping costs have surged, with the Shanghai-Rotterdam route doubling and the Shanghai-Genoa route rising 350% between December 1 and February 1.

Insurance premiums for ships in the Red Sea have increased 100-fold, and some insurers have stopped offering coverage altogether..

Trade Disruptions and Inflation Risks

Global trade fell 1.3% in December 2023 due to the Red Sea disruptions, with EU exports declining 2% and imports 3.1%, and US imports and exports down 1.5% and 1% respectively

J.P. Morgan Research estimates the disruptions could add 0.7 percentage points to global core goods inflation, and 0.3 percentage points to overall core inflation, during the first half of 2024.

The increases in shipping costs are likely to pass through into imported goods prices with a lag, depending on the duration and intensity of the crisis.

Impacts on Specific Industries and Regions

Several Europe-based auto plants have announced temporary production shutdowns due to delays in obtaining car parts from Asia.

The disruptions have put Indian exporters at risk of becoming uncompetitive in global markets due to the higher shipping cost.

Retailers have warned of potential product shortages and inflation, as the longer transit times reduce overall shipping capacity.

The crisis is testing the resilience of the auto supply chain, particularly for new-energy vehicles (NEVs), which are a key part of China-Europe trade

African ports like Durban and Cape Town are experiencing a sharp increase in activity, leading to port congestion.

The rerouting of ships around the Cape of Good Hope in response to the Houthi attacks has significantly increased transit times and costs, disrupted global trade, and raised inflation risks. The impacts have been felt across various industries and regions, highlighting the vulnerability of global supply chains to geopolitical conflicts.