Plotting a course to sustainable growth for maritime trade

By QBE Executive Director for Internationa Markets Kevin Shallow

The medium-term outlook for maritime trade is positive despite current Red Sea-linked disruption

Around four-fifths of the volume of international trade in goods is carried by sea, making maritime trade critical to the global economy.

Supply chains are finely balanced, relying on the efficiency of maritime transport as the means of moving goods at scale. The sector is supported by just-in-time scheduling, precise planning of port operations and onward transport of goods – which means that any changes to operations (including diversion from a planned route) have contractual and labour implications that can reduce this efficiency.

The ongoing situation in the Red Sea is a case in point, where from 19 November, the Yemen-based rebel Houthi movement has targeted shipping using a variety of tactics with increasingly unpredictable targeting. The impact on the Red Sea and Suez Canal route has been significant, with monthly transits through the canal down by 41% in January 2024, relative to October 2023.

Rerouting away from the Red Sea

Despite the increasing naval presence in the region which has to date been willing and able to intercept attacks alongside successive rounds of airstrikes on Houthi ground positions, the Houthi strikes continue. The effected area extends across the southern Red Sea, Bab el-Mandeb Strait and Gulf of Aden. The Houthis have diversified their tactics, including recently deploying an underwater drone which was intercepted by US forces.

In light of the security situation and significant changes to the costs of using the route (including increased insurance costs), maritime traffic in the Red Sea and Suez Canal is likely to remain reduced. The Houthis have stated their preferred targets as vessels linked to Israel, the UK, and US.

But even where transit is considered, decision-making (as it relates to the risk profile of any specific vessel) is complicated by the international nature of maritime transport where ownership, management, cargo, and crew are often linked to multiple countries.

Diversion from the Red Sea necessitates use of the only available alternative route – around the Cape of Good Hope (South Africa). Beyond the increased costs for crew and fuel provision and rescheduling of port calls due to longer transit times, diversion will drive further delays. This has included backlogs at intermediate ports for bunkering (refuelling) operations, with many not established as hub locations, and the need to adjust for scheduled crew changes.

The Red Sea route handles 12% of global trade but significant within this are the trade links between European and Asian markets. Rerouting away from the Red Sea exposes supply chains to increased pressure. For example, as the German construction, automotive, chemicals and machinery industries source inputs heavily from Asia they face delays and potentially increased costs.

Illustrative of this is that some automotive plants in Europe have suspended production as a result of delays in obtaining production components from Asia, examples include Volvo’s plant in Belgium and Tesla’s in Germany (as reported by Reuters, Bloomberg and the New York Times.)

The impact is demonstrated across various sectors; oil companies such as BP and Equinor are rerouting tankers, increasing transport costs and transit times. Should this result in energy supply disruptions it would impact commodity prices and have a ripple effect throughout the economy.

On the other hand, from Asia’s perspective, most of China’s intermediate goods imported from Europe include machinery and electrical equipment, chemicals, rubber and plastics, pharmaceuticals, and motor vehicles. The Chinese automotive, computer and electronics, chemicals, and machinery industries rely on these imports and could be impacted if disruptions to the Red Sea trade route persist.

Asia drives growth outlook

Nonetheless, global trade volumes are expected to pick up again. Despite a brief downturn in global trade in 2023, goods trade volumes are forecast to increase by 2.3% in 2024. Although sluggish, this is expected to persist over the next five years, contributing to growth trends in the maritime transport industry.

Globally the maritime transport industry’s contribution to GDP is forecast to grow by 4.5% this year ultimately expanding by 20.1% over the next five years. Most of this growth is anticipated in Asia, which represents 60% of the global maritime transport industry. Specifically, Asia’s maritime transport industry is expected to grow by 23.5% over the next five years.

In Asia, the industry is set to experience its most rapid growth in Vietnam (37.5%), Indonesia (33.7%) and the Philippines (32.7%) over the next five years, with China lagging behind. Chinese trade levels are on a negative trend, reflecting relatively lower consumer demand and the real estate crisis.

However, China is expected to remain a major driver in the region, contributing to over 40% of the growth in Asia’s maritime transport, mostly due to its substantial share of the region’s value-added output.

Most of the growth in Asia could reflect intra-Asian containerised trade, which has witnessed its share increase over the years. UNCTAD data reveal that intra-Asian routes serving intraregional supply chains exhibit the highest growth rates. This trend mirrors global manufacturing patterns, with China maintaining its position as a manufacturing leader, supported by neighbouring East Asian countries. It also reflects the growing participation of East Asian countries in regional and global value chains.

Sustainable growth on the horizon

Europe also boasts a significant maritime transport industry with a fifth of the global share and is poised for substantial growth which is initially expected to outpace that of Asia over the next four years. Denmark and Norway are expected to be key drivers, jointly driving 40% of Europe’s maritime transport industry growth over the next five years. Conversely, the Americas represent just under a tenth of the global maritime transport industry and are expected to grow at a slower rate of 7%, lagging all other regions.

Africa’s maritime transport industry is expected to grow by 18% over the next five years – the vast majority of which will be driven by Egypt. This largely reflects activity related to the Suez Canal connecting the Red and Mediterranean Seas. The canal handles approximately one-seventh of global trade and accounts for 2% of Egypt’s gross value-added output annually.

Despite international complexities contributing to immediate term challenges for maritime transport, looking ahead, the industry can take some relief that the medium-term economic forecast is for calmer seas with sustained growth on the horizon.

This article was produced by QBE with Oxford Economics and Control Risks