2024-03-04 10:42:18
Since the “Iron Swords” war began on October 7, 2023, Israel is facing an additional security and economic threat to those arising from the conflicts with Hamas and Hezbollah, from the direction of the Houthi movement in Yemen. The Houthi movement, supported by Iran, has damaged the maritime traffic of merchant ships passing through the Bab al-Mandab straits on their way to the Red Sea. The Houthi threat was even realized several times when they attacked, and in some cases succeeded in hitting ships that they claimed were on their way to transport goods to Israel.
Although the merchant ships arriving in Israel from the continents of Asia, Oceania and East Africa usually sail through the Bab al-Mandab Straits, there is an alternative sailing route that includes a detour south of the African continent and entering the Mediterranean Sea through the Straits of Gibraltar. This detour leads to delays in transportation that last between 3-4 weeks per ship and therefore leads to the cost of marine transportation, among other things through increased fuel and lease costs. Also, the alternative of continuing the cruise through the Red Sea in the current state of affairs has also become more expensive due to, among other things, the increase in the war insurance premium (Surcharge Risk War).
Either way, as long as the Houthi threat poses a risk to merchant ships, the costs of transporting goods by sea to and from Israel will rise. This begs the question of the effect of the increase in sea freight costs on product prices for the Israeli consumer. The disruptions in the Red Sea led to a global increase in the price of sea transportation by about 163%. This increase in price is relevant for the four main types of merchant ships leading to and exporting from Israel (containers, general cargo, bulk, roller).
This development may have an impact on the level of prices in Israel, either directly through the increase in the price of imports to Israel, or indirectly through disruptions in the supply chains and a global increase in commodity and energy prices. From the review of the Chief Economist at the Ministry of Finance, it appears that about a third of the value of Israel’s maritime imports and about a fifth of the value of Israel’s maritime exports pass through the straits. There are industries for which the Houthi threat has a greater potential impact, including: machinery and electrical equipment, optical devices, chemicals and vehicles.
The cost of sea transport – 3% of the total import
Despite the aforementioned, it seems that the direct effects of the increase in freight rates are limited at this stage. Among other things, because the cost of sea transportation is only about 3% of the total value of imports, while imports make up less than 20% of private consumption. Thus, the cost of sea transportation is no more than 0.6% of total private consumption. Hence, even in the unlikely extreme scenario where the transmission is full and the demand is completely rigid and without indirect effects, it is expected that a 160% increase in sea freight prices will be reflected in a contribution of at most one percentage point to the consumer price index in the coming year.
The Treasury also writes that it appears that the indirect effects are also limited at this stage: there have been no substantial disruptions in the supply chains and so far no signs of a global increase in commodity and energy prices have been observed. In accordance with this assessment, inflation expectations for the coming year also remained essentially unchanged.
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