Key Takeaways:
Geopolitical disruptions (COVID-19, Ukraine War, Middle East unrest, cyber-attacks) from 2020-2024 have significantly increased global shipping costs, exemplified by a 286% rise in the World Container Index from July 2023 to July 2024.
High shipping costs negatively impact core inflation, with the European Union expected to be hardest hit due to its high import dependence, complicating efforts to combat inflation and slowing economic recovery.
Industries with low profit margins, small businesses, and import-reliant sectors will face decreased margins and higher production costs, leading to sustained elevated consumer prices.
The continuation of high shipping costs is expected due to persistent geopolitical tensions and seasonal industry pressures, potentially prolonging inflationary trends and impacting global economic stability.
Background
According to the United Nations Department for Trade and Development, over 80% of all internationally traded goods are shipped by sea. Disruptions to this vital industry are therefore likely to impact global inflationary trends, especially in an era where inflation has again become an existential challenge for central banks and international regulators. Over the past four years, the shipping industry has been affected by a series of global events and geopolitical turmoil that resulted in a significant increase in shipping costs globally.
Taking the period 2020-2024, Covid-19, a deficit in semiconductors, and labour shortages were the main factors driving prices up in the early stages of the past four years. More recently, geopolitical tensions have worsened a sector that was already crippling. Worries over the price effects of increased geopolitical tensions on trade have worried global leaders like Christine Lagarde, who declared in an address to the European Central Bank (ECB) on July 18th that geopolitically-induced increases in freight costs may be a cause for the slow recovery from the current inflationary crisis. Insurance giant Allianz has also warned its costumers that high shipping costs are one of the top global trends to consider in its July 2024 report.
Available data confirms global preoccupations. The World Container Index developed by the maritime and shipping consultancy Drewry shows that over the last year, the price per 40 ft container has raised from about $1500 in July 2023 to $5800 in July 2024, thus recording a 286% increase. Some specific routes from Asia to Europe have experienced an even higher increase, with Shanghai-Rotterdam and Shanghai-Genoa increasing by 540% and 306%, respectively.
Between 2022-2024, the most relevant geopolitical events behind trade disruptions and rising shipping costs have been I) the Ukraine War II) the Middle East unrests including the Houthi attacks on Red Sea shipping and III) the increasing number of state-backed cyber-attacks directed at maritime trade firms and facilities.
The Ukraine War initially disrupted shipping routes by slowing down trade in the Black Sea and creating sanctions-related delays in a global supply chain context that was still recovering from the severe Covid-19-related impacts.
The conflict in the Middle East, as highlighted in one of KSG’s recent situation reports, is driving shipping companies away from the Red Sea due to the ongoing Houthi rebels’ attacks on international commercial vessels. These have been recorded as recently as July 29th 2024, and have increasingly also aimed at human targets. Shipping companies that would traditionally use the Red Sea as a route between Asia and Europe are now forced to circumvent Africa. This is driving up operational costs and creating congestions at African port facilities that have witnessed record transition figures to which they are not equipped for.
State-backed cyber-attacks are another increasing geopolitical threat that has affected the shipping industry. Research found that attacks have increased since the breakout of the Ukraine conflict in 2022 and they represent a growing challenge to an industry which has traditionally emphasised physical rather than technological risk in their threat models. KSG assessment and interviews with experts in this field revealed that the disruption to business operations from these cyber attacks can be very expensive, causing large and regular delays. Well-orchestrated and sustained cyber-attacks on Ports and transiting ships can lead to large back-logs over time.
Consequences for Regional Economies
The effects of the current geopolitics-induced increase in freight and shipping costs have serious implications for the global economy. If shipping costs stay high, KSG expects a slowdown in efforts to combat inflation. While the IMF said that when shipping costs began to rise amid Covid-19, economists failed to recognise the significance that the trend had for inflationary trends globally, the picture seems to be clearer now. Recent research has concluded that shipping costs tend to have significant negative impacts on core inflation. Additionally, shipping costs tend to have longer term effects on inflation than other factors affecting price levels, such as oil and food prices.
While high freight costs will likely have worldwide economic impacts, a regional analysis reveals that not all countries’ inflation trends will suffer equally from the current rise. For instance, recent econometric analysis demonstrates that the impact of higher freight costs for regions that have a high share of imports per GDP will be different than for those who have a more export-oriented economy. Therefore, based off of World Bank data on imports of goods and services as a share of GDP, the European Union will be worst hit by the wave of high freight costs by a margin. Europe should also worry due to its reliance on the Asia to Europe routes, which recorded a relatively higher increase than many other global trade routes. On the contrary, North America is better positioned to deal with this high cost crisis due to its relative low reliance on imports.
Region | Imports of goods and services (% of GDP in 2023) |
EU | 49% |
Latin America and Caribbean | 26% |
Middle East and North Africa | 30% |
North America | 17% |
South Asia | 23% |
Sub-Saharan Africa | 27% |
Source: KSG analysis of World Bank data.
Note that data also includes imported services, which are likely to be less impacted by increasing shipping costs.
Implications for business
Looking at industry impacts, high shipping costs are likely to bring some short-term financial gains for the freight and shipping industry globally. This can be clearly seen in the earning growth analysis conducted by Allianz, which shows that marine transportation is second-highest globally in terms of earning growth over the past 3 months.
However, the picture is much more complicated if one focuses on the impacts of high shipping costs for other industries and for consumers. A survey conducted by the booking and payments platform for international freight (Freightos) shows that across its client base, on average about 30% of respondents claimed that they saw their margins decrease as a consequence of increased shipping costs and supply chain disruptions.
Negative impacts of the current wave of high costs are likely felt more strongly amongst industries’ trading products with a low profit margin, as their profitability models make them especially sensitive to changing shipping costs. Small businesses are also among those that will likely be worst hit by the ongoing trend. A combination of weaker ability to absorb price fluctuations and a smaller choice of alternative shipping methods makes small business especially vulnerable to changing freight price points. Finally, businesses that heavily rely on imports to produce their goods will also be suffering from the current shipping trends.
In turn, higher production and shipping costs for businesses will contribute to maintaining elevated consumer prices across key affected industries and regions. One should also consider that while recent IMF analysis shows that the indirect effect of high freight costs on consumer prices is unlikely to be noticeable until 12 months after the increase, the fact that the rise in shipping costs has been a constant over past years indicates that the process of increase in consumer price is already well underway.
Future outlook
Given the current causes of increases in shipping costs, KSG considers it likely that this trend will continue, even if with small variations, for the remainder of 2024. Pressure over the Middle East, as discussed in KSG’s recent assessment, is likely to remain constant, if not increased, as signalled by the increased tensions and drone strikes involving Israel, Iran and Houthi rebels.
As we move closer to the U.S. presidential elections, shipping costs may undergo another wave of increase, as US and European companies are likely to accumulate critical goods. This is motivated by a fear of potential incoming disruption to global trade amid protectionist trade views expressed by Trump, who declared that he “will impose stiff penalties on China and all other nations as they abuse us” during a 2024 campaign rally.
While geopolitical tensions are by nature volatile, it is possible to predict variations in pressure on shipping costs from yearly trends in the maritime industry. KSG expects the third and early fourth quarters of the year to be the busiest due to ‘back to school and pre-Christmas’ increases in orders, which means that non-geopolitical pressures will also contribute to keeping costs high, at least until October 2024.
Given the above assessment, KSG expects secondary implications of high shipping costs, such as pressure on slowing down interest rate cuts and negative economic impacts concentrated in part in the European Union to be a likely scenario for the coming months of this year.
Overall, the link between shipping costs and inflation may mean that central banks’ efforts to cut interest rates, especially in the European Union, may slow down as long as geopolitics keeps pressure on the freight and maritime transport industry. In turn, this means that recovery from the recent inflationary crisis may be slower than expected, especially in certain economic regions. Additionally, if one adds to the picture the current rise in protectionist trends, the economic outlook that emerges is one of prolonged inflation which will keep goods and service prices high.
By Silvia Borin, Geoeconomics Analyst