By Ketki Saxena
Investing.com – Houthi-led attacks on container ships in the Red Sea (NYSE:SE), en route to the Suez Canal, have been making headlines with an increasing frequency in recent weeks.
While Canada operates a limited number of vessels in the Red Sea, knock-off effects from disruptions in a highly globalized supply chain are likely to have an impact on the Canadian economy.
Here’s an explainer.
Why are Red Sea cargo ships being attacked?
Since November, Yemen's Iran-backed Houthi group has been attacking commercial vessels in the Red Sea to protest against Israel's military campaign in the Gaza Strip.
The location of the attacks affects a route that accounts for about 12% of the world's shipping traffic, driving major container carriers to steer clear of the Suez canal.
What have been the implications for global trade and shipping?
The alternative, far longer route around Africa has much higher crew and insurance costs, and adds one to two weeks of the journey, driving up shipping costs.
As per data from Drewry, the average price of shipping containers has doubled since mid-December, when the attacks escalated.
The attacks also raised the prospect of major supply disruptions, and have led to the US leading airstrikes on Yemen.
What has been the latest escalation?
Over the weekend, at least four tankers carrying Qatari LNG were delayed as US and British forces carried out a series of air and sea strikes on targets in Yemen.
Houthi militants meanwhile say they will keep conducting attacks, and earlier today attacked a US owned ship with ballistic missiles.
How is Canadian shipping affected by the Red Sea attacks?
Port data shows that roughly two-thirds of the 43 ships scheduled to berth at the Port of Halifax during the remainder of January are expected to arrive behind schedule, with some ships running weeks late.
The delays will impact Canadian imports as the delivery of supplies to Canada’s Atlantic coast is limited.
However, these effects are somewhat mitigated due to excess capacity still on Canada’s West Coast, where shipping remains largely unaffected.
Implications of the Red Sea attacks on Canadian trade, inflation, and the economy
Earlier this month, Patrick Gill, a senior director at the Canadian Chamber of Commerce, noted that the Red Sea disruptions create “A domino effect in the supply chain and causes an increase in the final price of products in Canada”.
These further price increases, in turn “Will continue to dampen and temper Canadian consumer behaviour next year, which will again further slow the Canadian economy even more,” Gill noted in the interview to Global News.
The Red Sea attacks also appear to be a classic example of the inflation risks cited by Bank of Canada Governor Tiff Macklem in his year end speech.
In the speech, Macklem noted that “We could see an escalation of war in Europe or the Middle East, or new geopolitical tensions that divert trade and investment and disrupt supply chains”, posing a significant challenge to the BoC’s mandate to bring inflation back to the 2% target.