Red Sea conflict weighing down on Europe-Asian trade
KUCHING: Analysts warned that the Red Sea conflict is starting to weigh down on the Europe-Asian trade.
In a report, the research team at Kenanga Investment Bank Bhd (Kenanga Research) said it downgraded its call on the sector to ‘neutral’ from ‘overweight’ as a prolonged war in the Middle East, particularly, the escalating Red Sea conflict of late, is weighing down on the Europe-Asian trade.
“Given the longer voyage around the Cape of Good Hope, the frequency of calls made to Westports (and all other ports in the region) by shipping liners servicing the route, which contributes to 30 per cent of global container volume, has shrunk.
“The World Trade Organisation (WTO) said in end-Feb 2024 that it is cutting its current projection of a 3.3 per cent growth in global merchandise trade volume in 2024, also quoting lower water levels in Panama Canal due to an extreme drought, which is disrupting the movement of shipping liners,” it said.
There are also stricter regulations on carbon emissions which might pose new challenges to global trade, particularly, one from the United Nations’ International Maritime Organisation (IMO) and another from the European Union (EU).
“While the exact implications of the regulation of IMO and EU’s Carbon Border Adjustment Mechanism (CBAM) on the seaport and logistics sectors remain unclear (especially for CBAM which is still pending finalisation), the volume of containers heading to the EU will certainly be affected (about 18 per cent of container throughput under Asia-Europe trade), especially those originating from China, which is a major exporter of iron, steel and aluminium to the EU.
“Under the new IMO rules, effective January 2023, all ships must report their carbon intensity and will be rated accordingly. The ships must record a two per cent annual improvement in their carbon intensity from 2023 through 2030 or face being removed from service.
“Meanwhile, the EU’s CBAM policy could disrupt the exports of certain commodities (iron and steel, cement, aluminium, fertiliser, electricity, hydrogen) to the EU. During the transition period between October 2023 and December 2025, EU importers must report embedded emissions in goods imported on a quarterly basis, as well as any carbon price paid to a third country.
“When the CBAM takes full effect starting 2026, importers will need to buy carbon credits reflecting the emissions generated in producing them,” Kenanga Research said.
On more positive note, it said it sees a bright spot in the domestically-driven third-party logistics (3PL) sector which is less vulnerable to external headwinds being buoyed by the booming e-commerce.
“Industry experts project the local e-commerce gross merchandise volume to grow at a CAGR of seven per cent from 2023 to 2027, with size reaching RM1.9 trillion by 2027 from RM1.4 trillion in 2023.
“The booming e-commerce will spur demand for distribution hubs and warehouses to enable just-in-time (JIT) delivery, reshoring/nearshoring to bring manufacturers closer to end-customers, efficient automation system including interconnectivity with the customer system, and warehouse decentralisation to reduce transportation costs and de-risk the supply chain.
“There is also strong demand for cold-storage warehouses on the back of the proliferation of online grocery start-ups,” it added.