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Since the end of February, the negative impact of the geopolitical situation in the Middle East on the macro economy has been well known: the Strait of Hormuz is closed or close to being closed, the supply of oil, liquefied natural gas, and urea fertilizers is difficult, the market prices of these raw materials have risen sharply, and major emerging economies in Asia are under tremendous economic pressure.
But there are other potential side effects associated with international trade that should be monitored closely. This relates in particular to international trade costs, particularly shipping and marine insurance costs. It is important to remember that much of global trade is carried out by ships, and rising energy prices and rising geopolitical risk premiums have led to increased shipping and marine insurance costs. This situation is likely to continue even if geopolitical relations between the United States and Iran improve.
Straits of Hormuz and Bab el-Mandeb: Insurance geopolitical risk premiums may remain high forever. The table below reminds us of the maritime straits most important to global trade.
How to measure shipping costs? There are two main indicators that can be monitored:
• Baltic Dry Index (BDI)
• Shanghai Container Freight Index
The Baltic Dry Index measures the cost of transporting bulk raw materials such as iron ore, coal and grains, making it an excellent forward-looking indicator of global industrial activity and supply chain tensions. The Shanghai Container Shipping Cost Index measures the cost of container shipping from China to the world’s most important economic regions and is of great significance for tracking the development of international trade in manufactured goods.
If these two indicators continue to rise strongly in the coming weeks, it means that geopolitical tensions are starting to have a permanent impact on global logistics costs. The danger lies in two factors: a slowdown in international trade on the one hand and a return of inflationary pressures on the other.
The chart below shows the weekly curve of the Baltic Dry Freight Index.
It can be seen that the Baltic Dry Freight Index is rising but has not yet reached 2021 levels during the inflationary shock caused by the global health crisis. The same is true for the Shanghai Container Shipping Cost Index. However, both indicators must fall before shipping costs are expected to cool, which is necessary to sustain the long-term upward trend in global equity markets.
The chart below shows the latest data from the Shanghai Container Freight Cost Index, the leading measure of shipping costs in China.
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