Spreading ripples: A container ship berthed in Singapore. An estimated 90% of container ships have rerouted to avoid the Red Sea since December. — Reuters
SINGAPORE: With the festive season around the corner and the Red Sea crisis still playing out, observers say prices of goods here could rise, fuelling inflation.
Still, the analysts said any impact on inflation will not be as severe as during the Covid-19 pandemic, while supermarket chain NTUC FairPrice has pledged to keep prices stable for as long as it can.
Maybank economist Brian Lee told The Straits Times that the impact of the Red Sea troubles on Singapore’s inflation could show up as early as January, if companies choose to pass on the hefty extra shipping costs to consumers.
He said additional shipping costs add to other rising operating expenses such as for labour, rent, utilities and raw material or ingredient costs.
“The impact may, however, be measured as businesses are likely more prepared to respond to the disruptions, compared with pre-pandemic.
“This includes better inventory management and more buffers in their supply chains, such as sourcing diversification,” Lee noted.
He added that the impact of the Red Sea woes on inflation should not be as bad as the pandemic, which affected all routes worldwide.
The Red Sea crisis affects the Suez Canal trade route, which accounts for about 12% of global trade.
The waterway is key to moving goods between Asia and Europe, but about 90% of the container ships sailing through the Red Sea have been forced to take another longer route since mid-December.
This is due to attacks on container ships in the Red Sea since mid-November by Iranian-aligned Houthi militants who are based in Yemen, in response to Israel’s military operations in Gaza.
The developments have resulted in ships having to take longer routes, leading to higher shipping costs, delays and rising container rates.
RBC Wealth Management said in a recent note that many container ships are being rerouted around the Cape of Good Hope and this diversion can add as much as 25% more time to trips.
Rates for ocean freight from Asia to Europe are rising sharply. The Shanghai Containerised Freight Index was 2,239 points on Jan 21, double the level in mid-December 2023.
Compounding shipping woes, freight vessels are also avoiding the Panama Canal where there is low water levels due to severe drought.
“The Panama Canal is also struggling, with unusually low water levels limiting the number of ships passing through. The reduced ship throughput is anticipated to remain at half the normal level through February 2024 at least, with repercussions set to linger well into the year,” said RBC.
Selena Ling, chief economist at OCBC, noted the double whammy as shippers increasingly avoid the Red Sea and Suez Canal with its implications for supply chains. But she said the risk of rising energy prices, for one thing, has been somewhat countered by soft demand conditions from major economies like China.
“A prolonged and pronounced crisis in the Middle East could play out differently for inflation down the road, but (this) assumes suppliers can pass on the higher costs and risk premiums to end-consumers,” added Ling.
“If inflation is adversely impacted, then this could complicate the picture for central banks, which were positioning for a pivot to potential monetary-policy easing later this year.”
FairPrice Group told The Straits Times that goods from Europe and the Middle East account for only a small proportion of what it offers.
It said: “At this point, additional lead time from these shipments have already been factored into our planning and in the near term, we do not see immediate price hikes.
“We are working closely with our suppliers to hold prices stable for as long as possible.” — The Straits Times/ANN
