Red Sea disruptions: Limited risks to exports

Red Sea disruptions could pose limit ed risks to ASEAN's exports

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After a severe downturn in global trade last year, ongoing Red Sea disruptions remind us of the acute impact of shipping disruptions on supply chains. Three months since tensions started, vessel transits through the Suez Canal are down more than 50% since early December, and spot container freight rates have tripled for Asia-to-Europe trade. Indeed, there is no need to spell out the significance of the Suez Canal, which serves as the choke point of the Asia-Europe trade corridor.

A cargo ship from Singapore to Rotterdam typically takes 26 days, but is now facing a 10-day delay to re-route around the Cape of Good Hope. However, ASEAN’s export exposure is not as large as one would have thought to affected regions, namely, the Middle East and Europe.

The former only accounts for a marginal share of ASEAN’s export basket, whereas the latter has seen its share dwindle to less than 9% over the years. Even in Vietnam and the Philippines, two economies with the highest export exposure, the share is not sizeable at 12% each. Indeed, the trend is clear: US, mainland China and ASEAN itself are all eating up more of the pie than in Europe. That said, pockets of vulnerabilities remain given the concentration of goods. It is important to take stock of the impact for different ASEAN economies, as the longer the Red Sea disruptions drag, the more disruptive it is to certain supply chains.

Textiles and footwear

Vietnam’s textiles and footwear shipments to Europe are worth watching. While the US is no doubt the sheer dominant buyer, Europe’s share of 20% still matters. Such exports to Europe have not yet been hit by the Red Sea disruptions, as reflected in a 30% y-o-y hike in its shipments in January.

However, trade associations warn of increasing difficulty in receiving orders from 2Q24 if tensions persist. In fact, some exporters have already sought alternative shipping methods as more freight companies secure air cargo space. Undoubtedly, this has pushed up goods volumes of air cargos along the Vietnam-Europe route in January, to a point even exceeding 6% of 2023’s peak.

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Auto-related exports

But not all goods are as lucky as textiles, which are small in scale and, thus, a good fit for air cargo. Car exports, on the other hand, are a clear reflection that some products can fit only into seaborne trade. Thailand, a leading exporter of cars and auto parts, may see potential disruptions. While a quarter of its auto shipments are intra-regional, the combined share of the Middle East and Europe amount to 20%, sizeable enough to let it feel the pinch from prolonged disruptions. On the other hand, the impact on auto parts may be relatively limit ed, as the combined share of the two regions is only around 10%.

ASEAN’s export exposure (2023)

Palm oil

What about the commodity space? If asked for the one commodity market where ASEAN has an absolute dominance, the answer would be palm oil. In 2022, Indonesia and Malaysia alone accounted for 80% of the world’s palm oil exports, a large part of which ship to Europe. Indeed, Europe’s reliance on ASEAN’s palm oil is huge.

While the reliance has reduced in the past decade, almost half of Europe’s palm oil imports still come from Indonesia and Malaysia. Thus, in HSBC’s view, trade route disruptions will likely have a bigger impact on Europe, as ASEAN has a well-diversified export profile. This is particularly the case for Indonesia, whose top three buyers (India, mainland China and ASEAN) took up close to 50% of its shipments. Malaysia, however, has a higher exposure to the Middle East, but not to Europe.

Electronics

When it comes to ASEAN’s largest electronics exports, the impact is also limit ed. Fortunately, intra-regional trade remains the dominant buyer, with a sizeable share of 70%. This is an acute reminder that the tech supply chain has seen “rejigging” within Asia, from parts of Northeast Asia to Southeast Asia.

“ASEAN’s electronics exposure to Europe and the Middle East only stands at 10%, though the ratio is higher in certain products, including exports of Vietnam smartphones (15% share) and Thai air conditioners (21% share)”, said HSBC.

Agriculture

A limit ed impact is also observed in ASEAN’s agriculture exports. Looking at the two notable agriculture exporters, both Vietnam (17% share) and Thailand (13% share) have limit ed exposure to the EU and the Middle East. After all, around 60-70% of their agriculture exports serve Asian customers. This is particularly the case for staple goods such as rice, where 50-80% of regional peers’ rice imports come from Vietnam and Thailand.

However, in HSBC’s view, other products may be more vulnerable. For example, almost 50% of Vietnam’s coffee exports are shipped to Europe. But fortunately, the recent rise in Chinese demand for Vietnam’s broad agriculture products can more than offset any potential trade disruptions.